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 =(

[Ron @ Jan 24th 2008 1:22PM]

A couple of comments:

1) All of my iPods have a notepad. The fact that the Touch doesn't have a notepad was a complete surprise to me, and deserves to be remedied for free. The lack of the notepad is the ONLY reason I would need the upgrade, because I have no plans to use the email and the maps feature probably won't even work in my area anyways!

If I pay my $20 and the maps feature doesn't work, do I get a refund? What is Apple's return policy anyways?

2) If it was just an accounting thing, that Apple doesn't want to have to implement, then there would have been no reason they couldn't have charged 99 cents for the upgrade. Why $20?

3) If they are attributing it to "revenue over time" and comparing it to the Apple TV, then their argument is baseless. The AppleTV is not based on a subscription model any more than the Touch is. I can "optionally" order content on either of those devices, and neither of them requires that I pay Apple a dime after I buy the machine.

[Ron @ Jan 24th 2008 1:24PM]

Oh, and one more point:

4) Apple didn't have to put much effort into developing these features for the iPod Touch. They were already developed for the iPhone.

[Dipesh Panchal @ Jan 25th 2008 5:57PM]

If charging for update was to make money than it might be a loss making decision. iPod Touch was released near September, 2007 so who ever bought it in 4 months till December are required to pay for the update.

Most of the people would not care about update, even many iPhone users might not update phone at all even though it is free. Few people would buy and most people left who wants to buy would just wait that might be in February they come up with SDK and another software update and again charge.

I can go to individual email websites like GMail, Yahoo etc. and check email. But then I have 2-3 accounts on GMail, so you have to logout and login etc. Only for email application, so that all emails are at one place and updates automatically I went to buy update, but somehow it gave error that problem in iTunes with some error code and to try after some time.

So now I would wait till SDK release to see if any new update is coming or not. If not than I might buy update just for ease of use.

Now 8 GB model old model is available for $42.00 less than list price on Amazon.com. So all dealers/retailers has to get rid of old models for a discount. So instead of making $20/- iPod eco-system is losing $20/-.

Also now retailers has to promote two iPods. One with update and one without update. Any new users would not buy old model unless it has more than $20/- difference.

For Apple, they might have insider trading to get rid of all old models from factory store etc. and sell to dealers before announcement and then sell new models from website. Or they might be opening old models stock and updating firmware and then selling as new models. But due to this they are causing more concerns for retailers who are selling the product.

[Mac Lim @ Jan 28th 2008 3:37PM]

There are four main consumers of 'iPod touch-screen' updates - iPhone owner, iPhone new owner, iPod Touch owner, iPod Touch new owner.
To be 'fairer' (though still not), Apple should instead charge $5 for each of the above four customers equally.

Still, it is not right for Apple to charge this. When it comes to technology & technical stuff, this kind of definition becomes fuzzy.
But in principle, everyone knows, new significant upgrade comes every few years like XP to Vista, Tiger to Leopard, iLife 06 to iLife 08.
This is not a new leap of software upgrade. It is only a firmware.

Additional unrelated comments :)
#Steve Job, you ain't doing a good job! You're doing STIFF JOBS!
What's the big deal with iPod Touch? As the old ones, one still need to touch them to keep going. :)
Why did you ditch the camera connector compatibility with new iPod models?

[Brett @ Feb 1st 2008 12:04AM]

I bought an ipod touch yesterday (1/31/08) at the Rockaway Apple Store and was charged the full 399 despite it coming with the outdated software so apparently Apple is not being as progressive about this as Amazon is. I have an email into them asking for the free upgrade, if they don't come through I'll return it and buy one from Amazon.

[NoAppleFan @ Feb 14th 2008 12:59PM]

I for one have no real need for these new apps, however mail would be a nice rarely used feature for me to have.

My beef is that Apple Inc installs these apps on the ipod touch and the user cannot use them unless they pay the $20USD to activate these features. I do not want the precious little space I have hogged up with stuff I cannot use.

[Jackson @ Feb 21st 2008 6:43PM]

I am outraged that Apple is charging early buyers of the iPod Touch $20 for a system update that ought to be free.

While I understand Apple's decision to charge money for the new applications the new $20 "application pack" also includes a SYSTEM UPDATE in the form of the home page editing, web clips, and lyrics features. All of these are updates to the currently existing iPod Touch software and NOT new applications, which means that they ought to be free to all users of the iPod Touch.

Adding insult to injury these applications are all hidden in the 1.1.3 system update, a whopping 104.4mb file that all users must download if they want to fix bugs in the system. These applications can only be used when you pay Apple $20 to "unlock" them, but even if you decide not to buy them they stay on your iPod taking up precious space that could be used for songs, videos, or photos.

Apple is normally wonderful when it comes to providing system support and updates, but having them shaft early adopters and loyal fans like this is offensive and shows that Apple has absolutely no regard for the iPod Touch community.

You can leave Apple direct feedback here:
http://www.apple.com/feedback/ipodtouch.html

You can also sign this petition:
http://www.petitiononline.com/freeappi/petition.html

[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.

[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.

[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.

[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.

[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?

[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.

[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.