Apple made its long-anticipated foray into generative artificial intelligence (GenAI) this week when it launched “Apple Intelligence,” which it described as a “personal intelligence system” for its portfolio of devices.
For the moment, Apple will offer this system for free.
This week’s newsletter looks at the role that “free” can play in the market for GenAI tools and explores whether the decision by Apple – the prototypical player of the Value Game – marks a shift to the Choice Game.
Why “free” is a wise price for Apple GenAI
When a competitor with deep pockets enters a market with their own free version of an existing product or service, it is easy to take that price point as an ominous sign. “Free” can be the first sign of a precipitous decline to commoditization, a dynamic that reduces viable stand-alone products to low-priced, me-too features of other products. “Free” can also trigger aggressive responses from more established competitors, who might slash prices or add extra features to their products with the hope of defend their market share.
But that shouldn’t happen in the market for GenAI tools and applications, for several reasons. The free price point for Apple’s initial launch is likely a temporary move to help Apple catch up. It could lead to a version of the Choice Game in the market with well-defined freemium models. There is also an argument to make that the free price point could end up accelerating innovation rather than commoditization.
In this article on GenAI pricing that my colleagues and I published in February, we recommended three “no regrets” moves for companies as they try to find the right pricing strategy for GenAI tools:
- Get crystal clear on what drives value and differentiation. The more differentiated the offer (in terms of performance, proprietary data, and domain specificity), and the more it augments rather than replaces the end user, the more you can price to value and use a subscription or outcome-based model.
- Go deep on your economics, now and in the future. Short-term economics are important but not sufficient to help firms make a strategic pricing decision. The cost-to-serve profile of GenAI-based solutions can vary dramatically, depending on the underlying LLM, user profile, and evolution over time.
- Play the right pricing game. Two factors will ultimately drive the best pricing model: the market structure—especially its growth potential and the balance of power among customers and competitors—and the differentiation of the offers. Highly differentiated offers with few vendors and many customers are best supported with what we call the Value Game (one unique offer) or the Choice Game (multiple players with segmented customer bases).
The fastest way for Apple to acquire its own understanding of what drives value and differentiation and close its gap to OpenAI, Meta, Google, and Microsoft is to attract as many users to a compelling product as quickly as possible. The free price point will encourage the kind of experimentation that will help Apple and its consumers discover what works well, how to improve features, and what ideas are dead ends. That will give Apple the data and insights it needs to write its own value equation for its next generation of GenAI tools.
The Choice Game says “Hello”
In Game Changer, my co-author Arnab Sinha and I drew a distinction between the Value Game and the Choice Game. The two games share several market characteristics, but the main difference is in the uniqueness or superiority of the offer (Value Game) compared to the intensity of the competition (Choice Game).
The market for GenAI tools seems to be on its way to becoming intensively competitive. Over time we also expect clear consumer segments to emerge. These are the ideal conditions for the Choice Game, in which we expect the major GenAI developers to introduce sophisticated freemium models or tiered pricing models that help consumers self-select their best option. Whether Apple eliminates its free tier or keeps it in some form is an open question that will depend on what it learns about how much consumers value its offering relative to alternatives.
And what should Apple’s existing competitors do? In Game Changer, we made two recommendations in the chapter titled “Free: Competing with the Most Magical Price Point.” The first was to avoid oversimplifying the motivating power of free, and thus avoid an overreaction. The second was to think more strategically about what the competing “free” option means.
The worst-case scenario for competitors is that Apple tries to turn personal GenAI assistants into enrichments of its offerings. To make that happen, Apple would need to sustainably outperform its competitors in terms of innovation. Major competitors are already investing billions into GenAI and it’s unlikely that consumers will accept “average” GenAI tools for free when other competitors have better value propositions supported by a freemium model.
In the article published in February, my colleagues and I also wrote that “the strategic pricing decisions that companies make today will have far-reaching effects that will determine how quickly the adoption of GenAI accelerates, who benefits from it, how much money organizations can reinvest into improvements and competitive advantages, and even the future of human-machine interaction.” If Apple’s free launch increases mainstream adoption and inspires a new wave of innovation throughout the market, it could indeed turn out to be a wise decision by Apple.
View this edition of The Game Changer Newsletter on LinkedIn