A friend of mine recently asked me how Apple expected to continue making any money while giving away software that Microsoft charges $200 for. Understanding how Apple can give away their software and still make money comes in understanding Apple’s business. Apple pundits frequently circle back to the point that Apple is a “hardware” company. As it turns out, they are wrong. Apple is a “devices” company. What is unique about Apple is their view that a device is made up of hardware & software, and that these two are inseparable. Apple believes this is the best view if you want to deliver a superior experience to the users of your products.

If you look at Apple as a hardware company — which I believe is a mistake — they make better margins than any of their competitors. Following that flawed line of thinking, what they’re doing now is using that extra profit to subsidize the software side. This viewpoint only holds if you view the hardware and software sides of the business as separate entities though.

Apple has combined the two. You’re not buying hardware or software, you’re buying a device. What good is a microwave without the software that connects the buttons to the timer, microwave generator, etc? That’s how Apple views their devices. By making Mavericks and iWork free, they’re expanding their notion of the “post PC world”. They’re not just talking about iOS devices, they’re talking about their entire line up.

If you’re wondering why Apple’s “PC” sales continue to grow while everyone else is sinking, I think you’ve found your answer.