Analyst: Free Mountain Lion upgrade would be 'brilliant' Apple move

Changes in how Apple defers Mac sales revenue may hint at free deal, at least for users running Lion

Apple would be making a "brilliant" move if it decided to give away OS X Mountain Lion to Mac users as a free upgrade, an analyst said today.

One clue that that is a possibility was buried in a July 2011 filing with the U.S. Securities and Exchange Commission (SEC), in which Apple for the first time said it was deferring a small portion of the revenue from each Mac sale to account for "unspecified software upgrades and features free of charge to customers."

"I think it's a great idea," said Ezra Gottheil, an analyst with Technology Business Research when asked about a potentially-free upgrade for OS X users. "It would be brilliant."

Talk of a free upgrade to OS X 10.8, aka Mountain Lion, was kick-started by bloggers two weeks ago when Business Insider's Jay Yarrow brought it up. Yesterday, ZDNet blogger Adrian Kingsley-Hughes also weighed in.

Gottheil gave two reasons why Apple might drop the price of Mountain Lion to zero.

"One, just the general good will to customers as a way to ameliorate any negative feelings they have had about Lion," he said. "I don't think that was quite ready for prime time when it came out."

Apple launched Lion in July 2011 , and while the operating system now powers 34% of the Macs in use, some reviewers and users dinged it as a "mashup" of OS X and iOS , and for things such as unintuitive scrolling gestures and the ungainly Launchpad and Mission Control components.

"Two, by giving away [Mountain Lion], they get that operating system out to more users, which will have some revenue benefits," said Gottheil, pointing toward the upgrade's tighter ties to Apple's iCloud sync and storage service.

"We believe that there will be additional paid cloud offerings from Apple, so the more Macs that run Mountain Lion, the more revenue Apple can earn from those," Gottheil added.

At the top of Gottheil's list of new iCloud revenue possibilities was online storage, or as he put it, "Time Machine in the cloud."

iCloud offers just 5GB of free storage space, with surcharges starting at $20 annually for an extra 10GB and ending at $100 per year for 50GB more. Apple's default backup mechanism, Time Machine, does not currently offer an online storage option.

Gottheil also said that the more Macs Apple tied to iCloud, the more that run Mountain Lion -- which is borrowing more applications and components from iOS than did its predecessor -- the more iPhones and iPads the company would sell, as the cloud service is crucial to Apple's syncing strategy and overall ecosystem. The familiarity with, say Notifications and Reminders in OS X 10.8 could drive some Mac users to buy an Apple phone or tablet, which also sport the same functionality.

An Apple filing with the SEC last summer may hint that the company can offer a free upgrade to some, if not all, users.

"The Company has indicated it may from time-to-time provide future unspecified software upgrades and features free of charge to customers," read the Form 10-Q Apple submitted to the SEC on July 20, 2011.

To account for those upgrades and new features, Apple for the first time said it would from that point defer some Mac revenue.

Apple deferred $22 from the sale of each Mac equipped with OS X Lion to cover two potential scenarios, including "the embedded right ... to receive on a when-and-if-available basis, future unspecified software upgrades and features relating to the product's essential software," as well as "the online services to be provided to qualifying versions of iPhone, iPad, iPod touch and Mac."

An upgrade to Mountain Lion might fit the definition of the first, while iCloud enhancements would be a natural for the second.

Using Apple's sales figures for the fourth quarter of 2011 -- approximately 5.2 million Macs sold -- the company would have set aside nearly $114.4 million.

Follow-up 10-Q filings in October 2011 and January 2012 cited the same language, but added that starting in July 2011, Apple would also defer "all revenue from the sale of upgrades to the Mac OS and Mac versions of iLife," and account for the money on its balance sheet over a 36-month period.

The reason for that deferral, Apple again said, was to "include when-and-if-available upgrade rights" for the software.

Such language would seem to signal that Apple could offer a free upgrade to Mountain Lion, at least to those users who either own a Mac equipped with Lion, or have upgraded an older machine to the operating system.

Apple could deliver a free upgrade via the Mac App Store, which has been the primary distribution method for OS X Lion, and will be the sole channel through which it offers or sells Mountain Lion.

Although Gottheil admitted that the SEC filings made free upgrades "a possibility," he gave it long odds, noting that accounting practices encourage companies to defer revenue for software maintenance and upgrades even if they don't call it out explicitly in their 10-Q submissions, as did Apple.

Gottheil also did a quick estimate of what revenue Apple would take off the table by providing users a free upgrade to Mountain Lion.

"Assuming a 20% penetration of the upgrade, it would amount to $180 million to $200 million," Gottheil said. "That's not chump change, but it's also not something that Apple desperately needs."

The business case for a free upgrade are stronger clues to Apple's move than the SEC filings, Gottheil argued, but he also said the Cupertino, Calif. company may have one other reason. "It would be an 'in your eye, Microsoft' kind of move," he said, referring to the likely release of Windows 8 later this year, and Microsoft's inability as a seller of software, not hardware, to give away its wares.

Apple issued a developer preview of Mountain Lion two weeks ago, and at the time said the upgrade would ship this summer. The company has not disclosed the upgrade's price and exact date of availability; it will probably disclose those details at or after its annual developers conference in June.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer , on Google+ or subscribe to Gregg's RSS feed . His email address is .

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Copyright © 2012 IDG Communications, Inc.

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