The $20 iPod touch upgrade: really for legal reasons or no?

So the rising discontent with Apple's new habit of selective feature enabling got us thinking -- while we're not experts on the subject, the generally accepted reasoning for the $20 iPod touch upgrade fee is the accounting requirements of the Sarbanes-Oxley Act: iPhone and Apple TV updates are free since revenue from those products is realized as a subscription over a period of time, but iPod touch updates can't be free since Apple just records that revenue directly. That certainly makes sense to us when applied to things like the 802.11n Enabler, which was trivially cheap and turned on unadvertised hardware features, but it strikes us as being a pretty big stretch when applied to a $20 package of new software applications. iPod name or no, the iPod touch is essentially a little computer, and the whole purpose of software is to enable "significant unadvertised new features" on a computer. For Apple (or anyone) to say that a mail app is a "significant new feature" for a computer is pushing the line just a bit far, and it makes us wonder how the company accounts for new versions of iTunes, QuickTime, and Safari, each of which add new features to already-sold Macs -- and how things are going to play out when the iPhone / iPod touch SDK is released next month. We've got a call into Apple to get to the bottom of it all, we'll let you know what (if anything) we find out.

Disclaimer: Although this post was written by an attorney, it is not meant as legal advice or analysis and should not be taken as such.

[Kizorblade @ Jan 21st 2008 4:52PM]

Good point. We'll wait for Apple to respond to Engadget's question then, because otherwise they'd be in deep shit. Apple usually takes their time with replies =(

[Geonerd @ Jan 21st 2008 2:46PM]

No A2DP Bluetooth no iphone no touch

[sk8rpro @ Jan 21st 2008 2:47PM]

I look forward to what they say.

I highly doubt it's for legal reasons. If they're right, then many companies (Sony's PSP) which offer major software upgrades are all in trouble with the government!

[Cameron Campbell @ Jan 21st 2008 2:48PM]

But are the updates being offered by Sony America or Sony Japan? And does that matter?

[Karan @ Jan 21st 2008 4:22PM]

any revenues that flow through Sony America would be affected by SOx. From this interpretation, Sony doesn't regard the new features as increased value of underlying product, and thus doesn't book them as revenue / profit.

(In summary: Apple are being arseholes.)

[ChillyWilly @ Jan 21st 2008 4:37PM]

Regardless of the reason they are charging for this, they really should offer some sort of explanation why current iPod touch owners need to pay $20 for the additional apps and why new purchasers get them for free. I understand the technical reasons why, but not the logical reasons.

[xbit @ Jan 21st 2008 5:57PM]

@Cameron Campbell

What about Microsoft and the Xbox 360/Zune then? How about every single PDA/cellphone manufacturer ever?

If this $20 is due to accounting, Apple must have some pretty dumb accountants.

[Charles Miller @ Jan 21st 2008 6:35PM]

"...[Apple] really should offer some sort of explanation why current iPod touch owners need to pay $20 for the additional apps and why new purchasers get them for free."

And tomorrow, they must explain why new Mac purchasers get iLife '08 and Leopard for free, when if I bought a Mac a year ago I'm stuck with '06 and Tiger.

Software costs money to develop. The return on that investment is realised through selling the software, or selling devices containing the software. You paid $300 for a device with a particular set of features, why should you expect it to magically have more features tomorrow?

In some rare cases it makes good economic sense to provide free upgrades: for example you already receive ongoing revenue from the device (iPhone), or you want as many people as possible to have access to the new features so you can make money on other services (Apple TV), or you're into releasing updates often enough that your market won't bear that frequent an upgrade charge (many small ISVs).

[Kelmon @ Jan 22nd 2008 5:35AM]

@Charles Miller

Here's the gig, Charles. Should I expect new software for free? No. Should Apple release this software for free? Absolutely. While this may sound like a contradiction the thing is that this announcement has only generated bad press for the company because a) new users get the software, b) other companies don't seem to charge for minor updates like this, c) the iPhone and Apple TV get updates for free, and d) Apple invested money to remove this software in the first place to differentiate that iPhone from the Touch. This is an unbelievably dumb move and, from a PR perspective, Apple would have done better to have done nothing.

I don't own a Touch but I would be pissed off with Apple if I did and that's never good. Again, it seems as though the early adopters don't get any love while other companies give this stuff away for free (what price is there on good will and loyalty these days?) despite having paid money for what we all accept is a premium device.

[Andrew @ Jan 22nd 2008 6:44AM]

More to the point (as far as I'm concerned) if this is to do with US legislation, why should I, sat here in the UK, have to pay £12.99 for the additional software? As far as I am aware (caution - not in any way an attorney,) there is no significant legislation on this side of the pond to require this.

[Cameron Campbell @ Jan 21st 2008 2:47PM]

Another question: If I'm buying the iPod touch upgrade through the Canadian iTunes Store, am I not paying money to Apple Canada? If so, does Sarbanes-Oxley Act apply?

[BS @ Jan 21st 2008 2:55PM]

Yeah it applies, since Apple Canda is part of Apple Inc. which is based in the US, for accounting purposes, all the transactions need to comply with US accounting regulations.

[Cameron Campbell @ Jan 21st 2008 2:56PM]

Thank you BS

[sinai @ Jan 21st 2008 2:49PM]

ridiculous. they're charging it because people (idiots) will pay for it.

[Jon @ Jan 21st 2008 2:58PM]

Apple do get away with plenty of feature penalties, it makes you wonder why.

No removable battery from new Macbook, 1 USB port, no DVD drive, $20 software upgrade for something that should have been there in the first place, no MMS/copy & paste/video recording/native apps in Iphone etc. etc.

If other companies adopt the same policies you will be sure that there would be far more complaints, but I find people here more willing to being screwed. But I guess they can afford it seeing that many seems to upgrade their Macbook/Ipod every few months...

[Carlos @ Jan 21st 2008 3:18PM]

Jon, all your nit picking just proves that you hold Apple to a higher level than other PC companies.
Other companies do the same thing Apple does and worse. No device is without its frustrations - I have to say that Apple devices get more things right than most, which is why they are so popular.

The MacBook Air battery can be removed by taking off a few screws, it was designed with an internal battery so that they could get it that slim. Really not a big deal. I rather have the 5hr battery tucked into the Mac Air than having a huge extended life battery pack sticking out like on ultra-portable PCs.

copy and paste is probably coming to the iPhone, remember this is Apples first cell phone ever and it has only been out for 6 months!! I would say this has been a pretty remarkable launch of a new hardware and software. How long has Windows Mobile been around and there are still frustrated users?

The $20 upgrade is probably for a reason, (Skyhook triangulation service in Google maps?) Even if its just for the upgrade thats a pretty good package for $20 - not to mention you dont have to buy it if you dont need it.

[Jon @ Jan 21st 2008 3:32PM]

No I don't. If a company do screw up I will complain. I just notice many Apple fans attempt to justify some of the very same design constraint that Apple applies to their products.

[Carlos @ Jan 21st 2008 4:19PM]

All companies create constraints on their products - when Apple does it its usually because of some outside force and they get blasted for it in public because people dont understand the full situation.

The Music and Film industry has put massive pressure on Apple to include DRM, the TV-out authentication chip on new iPods with video out, Apple TV not able to sync rented movies back to your PC etc.

With the MacBook Air I think the battery is a non-issue - they made it easy to replace and its already a long lasting 5hr battery.

This whole iTouch thing is bogus too - Apple is clearly giving a lot on functionality to the Touch for just $20. Just because this software was available to the iPhone doesnt mean that it was free - Apple has to pay its software engineers, google for google maps and Skyhook for the triangulation service. If you stop to think of all the work and polish that has gone into getting the iPhone and Touch to market that $20 doesn't seem like such a bad deal.

[Kizorblade @ Jan 21st 2008 4:19PM]

@Jon

http://www.engadget.com/2008/01/21/toshiba-adds-3g-to-the-featherweight-portege-r500/

I'm sure you've read it but frankly I see nearly nobody complaining about the lack of the optical drive in the upper end model. Why it costs 3k and 3.6k respectively.
There is obviously more people out to snipe Apple then they would admit.

[Steffen Jobbs @ Jan 21st 2008 6:14PM]

That's right, we'll pay, just like people pay for the rising cost of milk, transit fare, gasoline, fuel oil, etc. In a month the $20 will be forgotten due to a crapload of other price gouging. You probably think everyone's a fool for paying taxes, too. It's $20, dude. A few hot dogs at a major league baseball park cost that much. I suppose you hide franks in your pant's pocket and snicker at the people that buy them at the park. Cheapo tool.

[SteveMB @ Jan 21st 2008 6:33PM]

The Dell m1330 owns the Apple Air in just about every aspect. If you want a featureless, overpriced notebook that is very thin, then the Air is for you.

[sinai @ Jan 21st 2008 6:39PM]

way to exercise your critical thinking skills. how the hell do you compare an ADDITIONAL cost to something to the RISING cost of something?

it's more like having bought a quart of milk, and then having to pay for the carton, while everyone that buys the milk today already gets their carton for free.

[friko @ Jan 21st 2008 2:51PM]

Thanks Engadget, I completely agree with the whole post. I'll wait for Apple's answer.

[Eric @ Jan 21st 2008 9:27PM]

I'm on the other side of the fence. This interpretation is absolutely wrong. SOX was created in the wake of Enron & MCI to ensure the accuracy of financial statements (ex. that data flows through from the point of sale to billing to financial systems). SOX doesn't care what you charge for or not. All SOX cares about is if Apples charges for it, that every penny of that $20 makes it to Apple's financial statements.

[engadget.mlc @ Jan 21st 2008 2:52PM]

This is utter crap. One can write the value of this off as the intangible value of persisting the user expectation that Apple has capitalized on.

Users expect new features, so they buy a feature-limited iPod knowing that they will receive additional capabilities in the future.

Apple should be forced to kiss that sales technique goodbye, but I'm sure that the Apple faithful will still eat it up.

[Tim @ Jan 21st 2008 3:54PM]

Are you saying that since I bought my iPod Photo, knowing that a video version was likely in the works, that I should receive a firmware update to my iPod to play movies?

As far as I know, iPhones did what you wanted your iPod touch to do. You are crying that these features should be free, yet you saved yourself $100 and a cell subscription. Why are you complaining of spending $20 to have your iPod become more like the iPhone...? Sell your iPod touch and buy an iPhone.

[Simon @ Jan 21st 2008 4:25PM]

You don't 'save' yourself a subscription...You don't pay the subscription, so you dont get features like EDGE or SMS or calls. It costs apple nothing (in the grand scheme of things) to port the iPhone apps to the iPod, because its the same hardware and software platform, so that $20 is pretty much all profit. If it had just been $10 it wouldn't have been so bad. And the apps are being included on all new touches now, for the same price as previous touches. So that goes to show that apple doesn't really need your $20.

[YukonDawg @ Jan 21st 2008 2:53PM]

Hmm... Microsoft didn't charge me anything to upgrade my Zune 30GB to the newest firmware/features to make it equivalent to their latest Zune players. I just don't see the legal *or* marketing logic here from Apple's point of view.

[YukonDawg @ Jan 21st 2008 2:59PM]

p.s. I own both an iPhone and MacBook, so don't bash me as a hater ;p

[Whiners @ Jan 21st 2008 3:36PM]

Does Microsoft realize income of the Zune on a subscription basis like the iPhone? That would account for it.

[Paul @ Jan 21st 2008 5:04PM]

@Whiners, No, well, not necessarily. I believe that Microsoft does offer some sort of a subscription music service, but it is not required. Really you could use the same justification for the touch in that you can buy songs from iTunes and play them on the touch.

[Whiners @ Jan 21st 2008 5:10PM]

What? I'm talking about deferred revenue reporting, on a subscription basis, like Apple is doing with AppleTV and iPhone. Thats what the whole issue is about. Its not about "subscribing" to music. Its about how they report income. If Microsoft is accounting for Zune sales on a deferred revenue basis (over 18-24 months) then they could add features without having to account for them separately.

[iPoder @ Jan 21st 2008 2:54PM]

Look at it this way, all us none ipod touch owners can now go score one at Amazon.com for only $358 since the $20 price cut and already $20 Amazon price cut. This is the best thing that has happened to those of us in rural America that don't have WiFi access in a long time. I have mail and google maps streaming into my BB all the time via Verizon so why would I want it on my iPod.

Thanks Apple!

[Karan @ Jan 21st 2008 4:25PM]

Apple did that - they dropped the price of all current stock which doesn't have the new firmware so new buyers could go home and buy the update for the same price as a new one that does have new firmware.

[Kizorblade @ Jan 21st 2008 4:45PM]

@ Karan

And you made that up.

[DT @ Jan 21st 2008 5:52PM]

@ Kazorblade,
No, Steve Jobs announced that in his keynote. All current Touches will be dropped $20 to make them equivalent to the ones with newer software when you buy the update.

[iPoder @ Jan 21st 2008 6:04PM]

Actually I didn't make it up, check out the $358.99 price tag at Amazon, well worth getting the 16gb touch now if someone isn't interested in the newest features, after all you still get the update that allows you to customize your screen.

[Will Static @ Jan 21st 2008 2:54PM]

Yeah no kidding... explain to me how HP is allowed to provide free upgrades to their Windows Mobile handhelds? Or why Firmware for appliances such as routers can contain new features... sounds like hog wash.

[winchou @ Jan 21st 2008 2:55PM]

It seems to me that Safari, QuickTime, etc., updates always include bug-fixes to software that was *already* on the Mac - vs these new iPod touch apps which were not. Note that Apple is protecting the perceived value of their IP much like the music labels used to try to protect digital downloads -- tho that might not buy this argument much chase with your readers. No one gave the modders permission to distribute the iPhone mail app, and just cause someone posts it on a peer-sharing network doesn't make a a public domain property. If this "January Update" was post-SDK, and a third party created it -- with mail, maps, notes, custom screen -- would you pay $20?

[Kevin @ Jan 21st 2008 2:56PM]

This has nothing to do w/ Sarbanes Oxley. This is a SAB 104 (Revenue Recognition) and EITF 00-21 (multiple deliverables) issue. You cannot recognize revenue until delivery of the service/goods. They have already recognized the revenue from these ipod sales. If they were to give this update out for free, this would imply that they had not finished delivery and could not have recognized the revenue in previous period. This would require a restatement of prior periods' financial statements... which all of you apple stockholders would not be too happy about.

Maybe you should have a CPA write articles, too. Lawyers don't know everything.

[Dan @ Jan 21st 2008 6:02PM]

This really has nothing to do with Sarbanes-Oxley Act. It has to due with people are willing to pay the $15 becasue they have no other choice. Apple is good at one thing, and that is making money. Why do you think they sell their mp3 players for 2x the price of any other company?

[Nilay Patel @ Jan 21st 2008 3:02PM]

Heh, trust me, as a copyright attorney I deal with SOX once in a blue moon -- I'm more than willing to defer to someone more knowledgeable about it. However, Apple has stated numerous times that it defers revenue in this way specifically because of SOX, so I'm going to give them the benefit of the doubt until they say something otherwise.

[Kevin @ Jan 21st 2008 3:06PM]

Oh, I hope you know I didn't mean any offense. There's just a tendency to "overblame" SOX for things that are just standard accounting issues. The way SOX would enter into this is that a company could be foudn to have ineffective controls if they have a large restatement. The core of the issue is the basic accounting, though, I'd say.
I'm a fan of your writeups.

[Vidikron (FU) @ Jan 21st 2008 3:36PM]

But how does that explain how numerous other electronic devices get software/firmware upgrades that add new features without a charge to customers?

[William @ Jan 23rd 2008 6:51PM]

I am neither an attorney nor an accountant.

That said, I am confused as to how any law, SOX, SAB, EITF, or otherwise would affect the iPod Touch. How come Microsoft isn't charging for Zune or Xbox 360 updates? How come Sony isn't charging for PSP or PS3 updates? How come Apple doesn't charge for OS X updates in between major releases? [i.e., 10.4.11 or 10.5.1 for example]

[Kevin @ Jan 21st 2008 2:58PM]

It's the concept of materiality. I'm pretty sure that ipods are much more material to Apple's revenue than Zunes are to MS's revenue.

[Carlos @ Jan 21st 2008 3:05PM]

Another explanation could be that this upgrade does include Google maps with Skyhook triangulation for locating your approx location on a map.

Since Skyhook is a third party service I bet some if not all of the $20 goes to paying for this service.

Just for a comparison Navizon charges $25 for cell tower triangulation. Hacked iPhone users paid for this service a few months back just to get this feature on their hacked iPhone before the 1.1.3 release.

The bigger question is why is everyone getting pissed off about paying just $20 for all these new features. Mail, Google maps with triangulation, stocks and weather is a pretty good deal for a paid software upgrade. Is it that people now expect things for free if they complain about it enough? $20 seems nominal when you consider that Incase cover you bought for your touch was $30.

[Matt @ Jan 21st 2008 5:08PM]

Why not charge $20 for the triangulation feature rather than everything then?

[Paul @ Jan 21st 2008 5:12PM]

Does Microsoft, the king of capitalism, charge for dashboard updates for the xbox 360?

Do they charge for Service pack upgrades, that add completely new features such as the windows firewall (ok, the firewall sucks, but it is still free)

What about Sony and updates for the PS3? Games that you buy that get patches that add lots of new features?

Not only does Apple suddenly say, hey, this new software that we made for the touch, that should have been there in the first place, well, yeah.... I am going to need like $20 from all you early adopters. But you know what? Anyone who buys a brand new touch gets these programs free!

I think there would be less bitching if Apple charged $20 more for new touches, but they aren't. So if the Touch still costs the same for Apply to make with the new software included, why do they need $20 from all the people who just got the touch for christmas?

This is like that one friend you have who says that for all his new friends he is going to give free ice cream to, you say, hey! I want some ice cream, he says, Sure, brings you the cone, then just before he hands it to you he says, "Yeah.... and I am going to need $20 for this ice cream..."

[Carlos @ Jan 21st 2008 10:45PM]

Paul - did you not read my post?

Apple is providing Skyhook triangulation service that finds out where you are within Google maps based on the WiFi hot spots around you.

This service is not free to Apple - Google maps may not even be free to Apple.

The Software you described does not include any 3rd party elements that would cost MS money.