Apple pushes to change subscription accounting rules
By Nilay Patel 
posted Sep 14th 2009 6:58PM
posted Sep 14th 2009 6:58PM
Apple's pretty famous for using subscription accounting for the iPhone and Apple TV as a way to bend the rules and offer free software updates after purchase -- basically, instead of putting all the money from the sale on the books at once, the company's accountants spread the revenue out over two years, extending the "transaction" to cover upgrades. That's great for iPhone owners, but it's not so great for Apple or its investors, since the company's stock price doesn't always reflect the true amount of iPhone money coming in -- in fact, Apple earnings reports now include a second, unofficial balance sheet that does away with subscription accounting to show off the real numbers. Yeah, it's confusing, but it might finally be about to change, since the Financial Accounting Standards Board just tentatively approved new rules that could allow Apple to do away with subscription accounting and still deliver free updates. That means Apple's quarterly earnings will now feature much larger official revenue and profit figures -- last quarter's official revenue was $8.34 billion, while the unofficial number was $9.74 billion -- the lawyers and accountants will be happy, and we'll still get free iPhone updates. Good deal all around -- except for iPod touch owners, who will still have to pay $9.95 and not get a camera.[Via Yahoo]
I hope that Apple has made a decision that will be good for everyone.
Well, I for one hope they've made a horrible decision that will screw everyone.
Ball's in your field.
It's apple, I can't think of many times at all where their decisions are to benefit others.
The decision that "Apple" made was actually made by numerous tech companies in conjunction with Apple. You can BET that Motorola, Palm, Rim, etc were all part of this and eagerly await the final set-in-stone ruling.
So to summarize this article, Apple has decided:
1) iPhone updates will be free
2) iPod Touch updates will not be free.
So nothing really has changed lol. What's new?
Wow, apple made a decision that'll boost their revenue and profit numbers? What a shock. It's almost like being surprised that they charge for iPod OS upgrades and extra money for artist bios and pictures. Har har.
So in a free economy a company is not alowed to make decisions that will boost "profits" and create more wealth for it's investors? Hmm some of you sound like a bunch of communists, you feel Apple owes you for it's success when you haven't done anything but criticize it.
by everyone, you mean investors?
was supposed to be for DanielT.... whatever!
Pretty much. The summary is a little misleading. The concept of not reporting all the income from a sale immediately is a very common practice, and it's called unearned income. The idea is that part of the value in a sold product is post-sale support... and that value is unearned at the time of the sale. Thus, companies defer part of the income for a sale for a year or two, slowly trickling it onto the balance sheet. The company still has the cash in the bank from the sale, but they don't tell the investors about all the profit until all the post-sales support is finished. This is all well documented and well understood, and frankly it makes a lot of sense when you think about it. It's about maintaining a level of financial transparency so new investors don't get burned or swindled.
Apple's fame is that they do NOT do this with the iPod Touch, hence the upgrade fees.
The reason for reporting all your income upfront is to give your stock a short-term boost. Professional and institutional investors won't get caught by this since they understand the nuances of accounting, but a lot of individual investors will see a spike in profitability and buy in, even though that's only a phantom increase. Watch for a lot of stock sales from the executive team at Apple after the next earnings report.
wait! It sounds like some people are saying that apple NEEDS to charge for updates for the ipod due to accounting methodology whereas they do their accounting differently for the iphone in order to offer free updates. Is this what is being said? On the off chance it is, i doubt it but just in case, that is absolute horsesh*t. They charge for what they can get away with charging for and don't charge for things that would result in too big of a black lash. Very simple really.
-K
We (iTouch owners) do not have to pay ANYTHING. Just dont get the update. Simple as that Apple will have less sales in the application store of new apps that require the upgrade. Too bad...give it to me for free and i will maybe buy more apps...dont give it to me for free...no sales in app store. Steve sooner or later will do the math and make it free for iTouch owners as well. (Oh and iTouch... well see it as an abbreviation for IPod Touch.)
The protesting through abstinence thing never works, sooner or later you'll buy the upgrade, because you know what , you were "smart" enough to buy the iPhone :) weeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeee
The real problem is that the iTouch is such a small portion of their sales compared to the iPhone that they just don't care. I also think that they "believe" they are offering the iTouch at a discount so they feel "required" to charge thsoe customers for the update. In Apple's minds they are getting so much more money from the phone subsidies that AT$T gives them that updates can afford to be given away. Anyhow, most phones OS vendors already give updates for free so Apple would catch shit if they didn't.
Yea, firsts are good.
And you're not being counted! YAY!
Why is it that no other company has this problem?
Zune gets feature updates for free as do pretty much every other mobile device out there.
Wording of the contract. Apple implies there will be future upgrades but Microsoft promises you nothing... then again does M$ follow subscription accounting on the Zune?
Check out this article on the history and reality of the Zune HD hardware
http://www.appleinsider.com/articles/09/09/14/from_oled_to_tegra_five_myths_of_the_zune_hd.html
i never understood how this was any different from say, a service pack for an os. or an update to almost any other software. who says they can't give out features? they HAVE to charge for them? i think that's bs. just say you buy the product and software updates are free. i don't get why they can't do that.
Didn't you know that the SEC has a crack squad of highly trained lawyers just waiting to pounce the next time Microsoft releases a service pack? /s
Anyone who defends Apple's position as anything other than trying to make an extra buck (which isn't totally evil for a corporation) has got to have a mental problem. Show me the law that says a company can't offer free services. You better tell them about all these internet companies like google and stuff.
seriously...i dont get it. i've taken quite a few different accouting classes. And know the difference between some of the accounting standards used by corporations, and how it can help them front load, or back load losses or profits. But i've never heard of any damn system that says that you have to charge users for updates on CE devices. I've NEVER seen another company do this. Quite frankly its absurd.
> Good deal all around -- except for iPod touch owners, who will still have to pay $9.95 and not get a camera.
Not true to the first part. iPod touch Software Update is now $4.95 (http://www.apple.com/ipodtouch/software-update.html).
$5 they'll never get from me for my iPod touch 1st gen. Never before have I been charged multiple times for service packs to a device I outright bought. every other company in the world finds a way to not fuck their customers like this, apple hides behind their laywers. f u apple.
McPOW: "Never before have I been charged multiple times for service packs to a device I outright bought."
I don't recall ever *expecting* my walkman to suddenly get new features, unless I bought a new walkman for > $50. I think it's pretty cool that we even have the ability to get software upgrades, at $5 to boot.
Such a sense of entitlement nowadays... does the hard work and effort by the engineers at Apple mean nothing? Did you really expect to get the new 3.0 firmware for free, having bought a 2G iPod Touch RIGHT AFTER they charged $10 for 2.0?
Get over it, crybaby.
@ bondsbw
Actually, he's right. Most companies issue upgrades to firmware for free. Just look at Sandisk. They are second to Apple in the mp3 player market (yes, it's a distant second) and they actively update firmware for all their players adding new features, new codec support, and more, responding directly to the demands of the Sansa community. And they do so absolutely free of charge. How can a company with no where near the financial resources of Apple provide free firmware updates, giving people the features and compatibility they ask for, while Apple refuses to?
(Oh, and great example with the walkman! Let's compare firmware updates with something that didn't even have software!)
Er,
Keep up Engadget - the upgrade cost is 4.95 for iPod Touch owners.
Apple sucks, I will never download from itunes again.
What a worthless service. One time downloads.
Over hyped, over marketed bullshit!
The iPod upgrade is now $4.99 instead of $9.99. And perhaps I'm dense (likely), but who exactly is this post aimed at? Investors and Apple employees? None of that makes a difference to me, that I can tell, so I'm curious.
Why, because they want to deliver free updates without jumping through hoops in their accounting system?
Or maybe everybody's still a little sore after losing last week's Engadget podcast :(
Excuse me!! *Major* correction to make there -- iPhone OS 3.1 for the iPod touch is $4.95 and can be upgraded from 1.x or 2.x. Upgrade from 3.0 is free, but supposedly only 1% of all touch owners took that plunge $9.95 so that's why for the lower upgrade price now.
"Apple's pretty famous for using subscription accounting for the iPhone and Apple TV as a way to bend the rules "
Very misleading post. Apple isn't "bending" the rules. They are following GAAP when filing their revenue over a two year period. They're not the only company affected. Nor are they the only company pushing for changes to the rules.
Might want to read the original article.
Zune HD is much cheaper. They charge $0.00 for updates. The true cost for a Touch can get kinda high comparfed to a Zune HD.
Source?
We still dont know how much the zune HD games will be. Or if any will be free
"and we'll still get free iPhone updates. Good deal all around "
Erm, except for 3.1... that update has f*cked my 3G, unless playing dead is a new feature...
It seems I am not alone with this neat new trick either...
http://discussions.apple.com/thread.jspa?threadID=2151766&tstart=0
http://forums.macrumors.com/showthread.php?t=783122
Thanks for recognising this f*ck up Apple and moving so quickly to remedy the sit..... oh wait you have done nothing.
"and we'll still get free iPhone updates. Good deal all around "
Erm, except for 3.1... that update has f*cked my 3G, unless playing
dead is a new feature...
It seems I am not alone with this neat new trick either...
http://discussions.apple.com/thread.jspa?threadID=2151766&tstart=0
http://forums.macrumors.com/showthread.php?t=783122
Thanks for recognising this f*ck up Apple and moving so quickly to
remedy the sit..... oh wait you have done nothing.
Thankfully, many more people had no problem with the update than those that did. My update was flawless. I would be very pissed if the update had killed my phone.
I think its only screwing 3G and not 3GS users... right now I am carrying a phone that, from time to time, does a fantastic impression of a brick. Thanks god I dont rely on it for business.
One thing I haven't seen raised: iPhones that are no longer under a subscription still get free updates.
Because its a billing construct used to "charge" after sale support (in this case post sale feature/upgrade development) when you sell the phone..
its all accounting smoke and mirrors..
Somewhere in MS financials there are likely to be charges for zunesoftware/zune firmware development that are billed to the overall arm of MS that is responsible for the Zune..
AT apple.. they are charging say 500$ retail for a product, and reserving a portion of that revenue.. and instead of charging the iphone division for the entire team that works on upgrades to the iphone OS seperately .. they reserve say 100$ from each sold device (revenue) and use that to fund ongoing development of the platform (very very basic version of how subscription accounting works vs regular accounting)
In short they are funding development of the 3 year old devices.. off the sales of new devices.. and likely they are also using an internal EOL mandate that states at what point its acceptable for new features to not be backward compatible.. (some point after the initial subscription accounting is over for those devices..)
Also keep in mind that the funds for Iphone 1.0 continue to roll in until the last device is sold NOT 2 years after the first one is sold.. So if apple sells iphone 1.0 for 3.5 years.. that is a 5.5 year window of "updates/upgrades" for that specific model under teh subscription accounting they are using..
AGAIN this is all accoutning smoke and mirrors
The matter in question is subscription accounting, which is accounting for the revenue over the lifetime of the product rather than just at the time of sale. This has no relation to whether the customer has a subscription to anything.
I never understood why Apple has to do this funny accounting stuff. Blackberry never charges for new maintenance releases, or whole OS upgrades (4.2 - 4.5 - 5.0). Zune doesn't charge for OS patches and upgrades. I know that Apple wants to make a quick buck on the iPod Touch users (although basically no one bought that upgrade according to Apple). Shouldn't they just be giving this away because it unlocks better apps from the store? I was thinking of spending money on the MLB app or something, but when I found out I had to upgrade to 3.0, the cost was too high and not worth it.
In general, I don't advocate giving away software, especially software that your engineers have spent many hours on. However, when this software enables your customers to spend more money on your product, you have to consider giving it away. For instance: see Microsoft upgrading the Xbox for Netflix and movie downloads.
Again this is not a matter of giving away.. its a matter of recording income..and i believe the "rules" of accounting in this case have more to do with "best practices as defined by the SEC to keep things conforming to what they want" rather than any choice.. IE I do not think that apple has any choice in how they record the income on phones.. there choice has to do with the charging $$ for ipod touch updates for free rather than charging for them
Am I missing something, why do the spread out over 2 years at all? A free update is a free update, end of story.
Ha, ha! Suck it, iPod Touch chumps!
Oh, wait… I'm an iPod chump - twice over…
I made myself cry.
"last quarter's official revenue was $8.34 billion, while the unofficial number was $9.74 billion"
And next quarters official revenue will be $1.40 billion, while the unofficial number was $0.
Who cares except the accountants?
updates are fairly common for smartphones, I'm curious how other companies do it. Also how does apple account for the OSX updates? They are free, as far I can tell.
"...except for iPod touch owners, who will still have to pay $9.95 and not get a camera." I laughed so hard when I read the last part; love your sense of humor!
It's all gravy under the turkey. Investors will adjust and the market will correct itself.
What !?
What board !?
Are you saying it is illegal to give things away or provide free upgrades to existing customers !?
What the hell is going on here !?
Greedy bastards
As a business major I have always found Apple's accounting practices to be pretty self serving. They claim that they must charge to provide a software update to nlock new features because GAAP requires it, but none of their rivals charge for updates and they are just fine with the SEC. Charging for unlcoking hardware already installed on a MBP or adding features to your PMP is just plain crap. Microsoft can get away with updating 1st gen Zunes when the new version came out, Adobe adds new updates regularly to Photoshop to handle RAW files from new cameras, and neither of these two companies takes the cop out that GAAP requires them to nickle and dime their customers.
Apple updated iPods with new features without charge as well - more a of a Zune parallel. I think Apple felt they had to distinguish new software/firmware updates from updates that added functionality or enabled new hardware capability.
They've had a couple of small charges to enable wireless hardware changes on laptops before ...
Thanks Apple,
I'm working on my bachelors and gonna get my CPA.
More confusion = job security for a future accountant!
After all of this time, still no tech journalist can be bothered to actually investigate WHY Apple would choose to expose the selection between subscription and non-subscription accounting to the consumer. I can't think of another case, especially not for products as closely related in the consumer's eye as the iPhone and the iPod Touch which anyone could have anticipated would cause much angst and confusion among consumers.
No, just pasting a description of what subscription accounting is does not explain the cases where it was and was not chosen.
No, just squawking "SarbOx! SarbOx" does not explain anything either since SarbOx does not specify specifics like that.
I can't help but get the feeling that this is the equivalent of someone in the Apple finance department throwing a tantrum.
For the record, it's not really good new ALL around... Apple loses
the special treatment to "cookie jar" its current earnings for later
But then who cares about Apple?! Not a fanboy here
I read somewhere on TUAW or Engadget that the upgrade for iPod owners was now $4.95, and not $9.95??
Al long as there's injustice, there's a workaround to upgrade your iPod touch to
version 3.0 or 3.1 after that at no cost.
http://www.blogsdna.com/3706/how-to-update-ipod-touch-to-30-firmware-for-free.htm
"That's great for iPhone owners, but it's not so great for Apple or its investors, since the company's stock price doesn't always reflect the true amount of iPhone money coming in..." What? Not so great for the investors? Why do you think that the stock price doesn't always reflect the true amount of money coming in?
Any banker worth his or her salt knows that you use cashflows, not magical numbers concocted by accountants, to measure the worth of a company. It is called Discounted Cashflow Analysis. That is why earnings reports come with a cashflow statement... You know, the page that hides behind the income statement. That is what you actually use to value a company.
As my finance professor aptly put it, "cash is king". These accounting changes will have absolutely no effect on the value of Apple's stock.
A couple of comments from an app developer:
- Apple don't let me charge for app updates. Does this mean that the feds will be coming after me for false accounting? No, it doesn't. Apple could make iPod Touch OS updates free if they wanted to.
- The fact that they are not free makes life more difficult for me. About 5% of my app's users have not updated to 3.0 (presumably mainly iPod touch owners). So I can either make apps that are backward compatible (which involves a lot of extra testing), or I can drop support for those 5%. It's a hard decision.
I find the $5 for 3.1 especially annoying, since it has so few new features.