.Mac may prove a hard sell for Apple

NEWS

By imposing an annual fee on Web-based services that were previously free, Apple chief executive Steve Jobs is taking his company deeper into the murky waters of paid consumer services. Earlier this year, Apple made a modest attempt to reap some additional fees from its customers when it allowed Mac users to order photo albums via its Web site. On Wednesday, the company took another step by replacing its free iTools service with new suite called .Mac. For an annual fee of $99, customers can use Apple's servers to post personal Web pages, open email accounts and store files. The company also is moving into new areas, such as selling movie tickets through its revamped Sherlock 3 search engine. Apple senior vice president Phil Schiller said Apple doesn't expect to generate much revenue from .Mac. Instead, the services exist to enhance the whole Mac experience, and thereby indirectly drum up business by getting people to buy more computers. Charging will also allow Apple to continue to offer such services as well as adding new ones. "We couldn't invest even more into it without making it into a sustainable business model," Schiller told CNET News.com. Apple could eventually shift more of its software to the paid subscription model, including, for example, potential upgrades to the Mac operating system. "I'd love to say that for $9.99 (a month) you get everything we do. And we might," Apple chief executive Steve Jobs told reporters on Wednesday at the company's new store in New York. "Now that we are out of 'life is free' mode...it's a good deal." The history of paid services, though, is not a pretty picture. Customers have bristled when companies try to slap charges on previously free services. Some have succeeded but many have struggled, especially when free alternatives lurked elsewhere. In the early 1990s, Apple's efforts to form online communities and popularise search engines failed magnificently. Unlike other companies, Apple is trying to charge for all of its services in a bundle, rather than experimenting by selling a few premium services while giving away the rest for free. To its advantage, Apple has presented a fairly coherent and tangible set of services. And although its software division is far more organised than it once was, it's unclear how overwhelming demand will be. "It's probably worth it," said Kate Bornstein, a New York-based performance artist. "I use iTools and if they would give free customer service and fix a (Mac OS X) 10.1.5 issue with uploading video, I'd probably go for it." Schiller declined to say what Apple's internal target for converting its 2.2 million free subscribers to paid .Mac members. "In general people have seen a 10 percent (retention rate) moving from free to paid," Schiller said. "I certainly hope we do better than the industry average." At that retention rate, Apple's annual take from .Mac members would be $22m, a fraction of the company's annual revenue of nearly $6bn. Richard Doherty, an industry analyst with Envisioneering, said he believes Apple can easily convert 10 percent of existing iTools subscribers to .Mac but said convincing new Mac buyers, particularly students, may prove a tougher challenge. However, he said that even as it charges most customers, Apple has the opportunity to include free service with new Macs. "It gives them some wiggle room with promotions," Doherty said. Apple also has the ability to more tightly integrate services into its operating system. For one thing, it controls both the hardware and the software. Just as important, Apple has more freedom to partner with a single vendor for a particular service than would Microsoft, which raises competitive and antitrust concerns with every move it makes. Apple, though, commands only a sliver of the entire PC market, making it more difficult to spread costs. Both factors are evident in features such as the ability to order photos from Apple within iPhoto, or the ability to buy goods from within Sherlock. But Apple will clearly have some learning to do as it tries to find the right way to introduce fees for its services. With Wednesday's move, Apple is introducing a comparatively steep fee for the former iTools, while keeping its very popular programs like iPhoto and iTunes free. Also, the company is not offering a break to families that own Macs, who in many cases have signed up for multiple iTools accounts. Such families will have to pay $99 a year to keep multiple accounts ($49 for the first year). Apple does plan to give .Mac subscribers the option to buy additional email accounts for $20 apiece per year. Apple is giving existing iTools subscribers 75 days to mull whether to spring for the paid service and is crediting those who paid $49 and up for additional online storage for a full year's subscription. Doherty said that Apple isn't charging an outrageous amount of money, but it could have introduced the charges more gradually. "It is the suddenness of it that's got a few people talking about it," Doherty said. News.com's Paul Festa contributed to this report. Ian Fried reported from Macworld in New York.

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