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Apple to incrementally deliver iCloud, additional new features for Mac and iOS users

post #1 of 20
Thread Starter 
Apple has announced plans to defer revenue from sales of new Macs running OS X Lion and new iOS devices to account for new features that will be delivered after their original sale, including iCloud services.

Mac OS X 10.7 Lion will become available through the Mac App Store tomorrow for $29, and also begin shipping with new hardware. To properly account for the value of features Apple plans to provide over the lifecycle of the release, the company will defer $22 of revenue on each new Mac sold with Lion.

This accounting practice will enable the company to release new features without requiring users to pay an additional fee. Apple previously deferred revenue collected from iPhone buyers to account for new features it progressively added to iOS to similarly meet legal requirements pertaining to the recognition of revenue for products that are improved or changed over time.

The company did not use deferred accounting on the original iPod touch however, instead originally choosing to provide new software features via updates that required a nominal fee to obtain. That practice not only confused customers but also prevented some iPod touch users from upgrading to the latest version of iOS.

Apple wants all of its Mac and iOS users to adopt the latest available version of operating software possible, as this simplifies the task of managing software updates and patches and makes Apple's development platforms as free from software platform fragmentation as possible.

Apple will be using deferred revenue accounting for both Macs and iOS devices in order to roll out new features that are broadly and quickly adopted by users (and developers).

Among the features Apple plans to add to both Mac and iOS devices is iCloud, an assortment of web services that include Photo Stream media sync; Contacts, Calendar and Mail; and "Documents in the Cloud," a new service third party developers can tap into to keep files in sync between a user's Macs and iOS devices.

By deferring revenue from both Macs and iOS devices (Apple said it will defer $16 for each iPhone and iPad sold, and $11 for each iPod touch), Apple will be able to incrementally add iCloud features and other significant functionality without worrying about running afoul of federal accounting rules.

At the same time, third party developers can be more confident that users will seek out and use apps with iCloud integration features, as buyers won't need to subscribe to a separate service as was formerly the case with MobileMe, Apple's previous incarnation of its online services, which attracted a few million subscribers but was not universally embraced by Mac or iOS customers.
post #2 of 20
[Apple plans incremental feature additions to new Macs and iOS devices][/QUOTE]

wow now thats something I would have never guessed .. !!
post #3 of 20
Quote:
Originally Posted by Rider View Post

[Apple plans incremental feature additions to new Macs and iOS devices]
wow now thats something I would have never guessed .. !!

GAAP requirements here, nothing to see, move along.
post #4 of 20
Is anyone a CPA that can explain Apple's accounting principals to me. It makes no sense to me that Apple would have to account for features it adds if it did not chose to. Why couldn't they simply have free updates with features?
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post #5 of 20
Quote:
Originally Posted by trevorlsciact View Post

Is anyone a CPA that can explain Apple's accounting principals to me. It makes no sense to me that Apple would have to account for features it adds if it did not chose to. Why couldn't they simply have free updates with features?

I believe the short answer is that it's a technicality: the money trail must be accounted for everywhere, and that includes where the income used to pay developers came from. Legally a product sale includes development and profit of the product at time of purchase, and future enhancements to that product will be a financial investment (paying developers, etc.) that must be accounted for.
post #6 of 20
Quote:
Originally Posted by trevorlsciact View Post

Is anyone a CPA that can explain Apple's accounting principals to me. It makes no sense to me that Apple would have to account for features it adds if it did not chose to. Why couldn't they simply have free updates with features?

It's not Apple's rules. It's all part of the whole GAAP thing. New features (rather than just fixing problems with current ones) creates a new product if you will and it gets messy when you cross quarterly and yearly lines. By deferring part of the profit to the quarters when the features release, Apple gets around those rules.

Don't trouble yourself too much over it cause in the end it means nothing to the users
post #7 of 20
Quote:
Originally Posted by Rider View Post

wow now thats something I would have never guessed .. !!

It's big news. OS X doesn't usually get feature updates over the life time of major releases. I thought they might do this. I think Lion is going to be around a long time and they're now going to add new features regularly with minor updates in the same way they do with iOS point releases now. Many of the new features will probably be timed with iOS updates, since the platforms are converging.
post #8 of 20
Someone is seriously leaping to conclusions here. Other than the usual updates that Apple has always offered (iOS 2, iOS 3, iOS 4, ...), this accounting mechanism doesn't necessarily mean that there will be "new features."

Deferred revenue is a little bit like depreciation, in that it is meant to spread a fixed dollar amount at a point in time over a longer period to more accurately reflect the expenses incurred or services delivered (don't get hung up on the depreciation word, it's just a loose analogy).

iCloud costs money to operate. Servers, bandwidth, electricity, staffing, etc. By deferring revenue from devices that are sold with "free iCloud" as a benefit, Apple can recognize that revenue over time to offset those ongoing expenses. It produces a cleaner (smoother) accounting picture of how the company is operating.

In a very real way, Apple is saying "we'll set aside $X from the sale of this device to cover the free services we expect to offer for the life of the device."

It's possible there's something else up with "new features", but I think my explanation is much simpler.
post #9 of 20
Quote:
Originally Posted by BrooksT View Post

Someone is seriously leaping to conclusions here. Other than the usual updates that Apple has always offered (iOS 2, iOS 3, iOS 4, ...), this accounting mechanism doesn't necessarily mean that there will be "new features."

This is how Apple has historically used their deferred revenue, so the "simpler" explanation would be AI's conclusion.

Other than to show the forum you know how deferred revenue works, I'm not sure why you described it. We all get that iCloud is a "new feature", and that it will be covered by this.
post #10 of 20
Quote:
Originally Posted by Matthew Yohe View Post

This is how Apple has historically used their deferred revenue, so the "simpler" explanation would be AI's conclusion.

Other than to show the forum you know how deferred revenue works, I'm not sure why you described it. We all get that iCloud is a "new feature", and that it will be covered by this.

Hey, no need to beat up on a guy when he says some true stuff that you already knew - save the vitriol for the folks saying crazy stuff
post #11 of 20
Quote:
Originally Posted by trevorlsciact View Post

Is anyone a CPA that can explain Apple's accounting principals to me. It makes no sense to me that Apple would have to account for features it adds if it did not chose to. Why couldn't they simply have free updates with features?

Here is my theory. I may be completely wrong.

The GAAP rule is pretty old. What caused Apple to use deferred accounting in order to offer features without charging customers was Sarbanes Oxley (SarBox). Also, note, that this is not standard practice, but Apple is playing it safe (probably because of the trouble they got into with the SEC with the backdating issue a few years ago).

Essentially, lets assume Apple sells Lion for $29, and after deducting costs of development, says in its financials that gross profit on each copy was $15. However, if they offer a feature in the future for free, that $15 figure would have been wrong, and should have been reduced by the per unit cost of developing the feature.

Now, normally this would have been just an accounting adjustment, but an investor can claim that the company was providing them with false info (the $15 net profit). Before SarBox this wouldn't have mattered. However, SarBox made the executives (rightfully, IMO) liable for the financial statements that a company presented. So post-SarBox, these execs could be sued by the investor and could face civil and financial penalties.

I don't think many other companies think that a future feature would be read as misleading financial statements, but Apple is playing it safe, and simply deferring the accounting of some of their profits on their books, and saying they are putting aside some money to develop features in the future, which they will provide customers for free. It doesn't make any physical difference, but is really just an accounting change. What it does do, however, is provide some transparency to the investor, who now knows that Apple will be investing some amount of money in the future to provide new features for free to the customer.

And, contrary to what some of the other commentators are saying, this is a big deal for Lion, because it means Apple can/will add features for free, like they do in iOS. (Don't forget the brouhaha over Apple's charging a couple of dollars for enabling 802.11n support for Macbooks a few years ago, a decision required by Apple's interpretation of the SarBox rule).
post #12 of 20
Quote:
Originally Posted by Matthew Yohe View Post

This is how Apple has historically used their deferred revenue, so the "simpler" explanation would be AI's conclusion.

Other than to show the forum you know how deferred revenue works, I'm not sure why you described it. We all get that iCloud is a "new feature", and that it will be covered by this.

No, Apple's previous deferred revenue policy was with regards to handsets sold with a carrier subsidy. See http://www.appleinsider.com/articles...es_iphone.html

The deferred revenue set aside announced on the call today wasn't for the addition of iCloud as "new feature", it was for the bundling of iCloud service for the lifetime of the device. AI's interpreation -- that it represents both iCloud *and* unspecified "additional new features" rather than just iCloud -- is most likely wrong. Sorry if I thought explaining deferred revenue would make that clear.
post #13 of 20
I don't know, but I read this as a rare opportunity for a company to do something that is both smart for its investors and good for its customer at the same time. Rare that a company can do this in a single move.
post #14 of 20
Quote:
Originally Posted by poke View Post

It's big news. OS X doesn't usually get feature updates over the life time of major releases. I thought they might do this. I think Lion is going to be around a long time and they're now going to add new features regularly with minor updates in the same way they do with iOS point releases now. Many of the new features will probably be timed with iOS updates, since the platforms are converging.

You make a good argument.
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post #15 of 20
This just proves one thing that I've been saying about accountants for years... they're pricks.

They are overly complicating what should be a simple affair. Why does accounting have to get involved in something that is being released for free? Budgets are a complete waste of time as well. They are always too low and never factor in inevitable unforeseen issues... mostly caused by budget constraints ironically.

Don't even get me started on the accountants who think the best way to make money is get rid of employees. How do they think the money is going to come in if there is no one to make the products?

Best way to save money is get rid of accountants and middle management in my not so humble opinion.
post #16 of 20
Quote:
Originally Posted by addicted44 View Post

Here is my theory. I may be completely wrong.

The GAAP rule is pretty old. What caused Apple to use deferred accounting in order to offer features without charging customers was Sarbanes Oxley (SarBox). Also, note, that this is not standard practice, but Apple is playing it safe (probably because of the trouble they got into with the SEC with the backdating issue a few years ago).

Essentially, lets assume Apple sells Lion for $29, and after deducting costs of development, says in its financials that gross profit on each copy was $15. However, if they offer a feature in the future for free, that $15 figure would have been wrong, and should have been reduced by the per unit cost of developing the feature.

Now, normally this would have been just an accounting adjustment, but an investor can claim that the company was providing them with false info (the $15 net profit). Before SarBox this wouldn't have mattered. However, SarBox made the executives (rightfully, IMO) liable for the financial statements that a company presented. So post-SarBox, these execs could be sued by the investor and could face civil and financial penalties.

I don't think many other companies think that a future feature would be read as misleading financial statements, but Apple is playing it safe, and simply deferring the accounting of some of their profits on their books, and saying they are putting aside some money to develop features in the future, which they will provide customers for free. It doesn't make any physical difference, but is really just an accounting change. What it does do, however, is provide some transparency to the investor, who now knows that Apple will be investing some amount of money in the future to provide new features for free to the customer.

And, contrary to what some of the other commentators are saying, this is a big deal for Lion, because it means Apple can/will add features for free, like they do in iOS. (Don't forget the brouhaha over Apple's charging a couple of dollars for enabling 802.11n support for Macbooks a few years ago, a decision required by Apple's interpretation of the SarBox rule).

Your theory doesn't add up.

Apple used to charge for iOS updates (like $10) for iPod touch users and pundits said it was Sarbanes-Oxley (SOX). It was subsequently decided that SOX wasn't the issue and Apple eventually got rid of the charge. Today, iPod touch users get iOS updates without paying a dime.

SOX has nothing to do with it.
post #17 of 20
Quote:
Originally Posted by lowededwookie View Post

This just proves one thing that I've been saying about accountants for years... they're pricks.

They are overly complicating what should be a simple affair. Why does accounting have to get involved in something that is being released for free? Budgets are a complete waste of time as well. They are always too low and never factor in inevitable unforeseen issues... mostly caused by budget constraints ironically.

Don't even get me started on the accountants who think the best way to make money is get rid of employees. How do they think the money is going to come in if there is no one to make the products?

Best way to save money is get rid of accountants and middle management in my not so humble opinion.

It's not "accounting" per se but "financial accounting", created to support public investment and "transparency". It is "financial accounting" in contrast to "management accounting" that has been implicated in the short-sightedness of US businesses and the lack of innovation.

We've even had comments on this site equating investment with expenses when the federal government/Obama wants to make investment outllays. From investors viewpoint, money spent on investment is money the investor doesn't get. This is especially a "problem" for publicly traded businesses paying dividends. When bean counters lead businesses (and investors are always bean counters) -- they're only good at "making money", not making anything else).

Just last quarter, Amazon was dissed by investors because they invested in additional warehouse space rather than showing a higher profit on their balance sheet.

See the seminal work "Relevance Lost: The Rise and Fall of Management Accounting", by Thomas Johnson.
post #18 of 20
Quote:
Originally Posted by BrooksT View Post

No, Apple's previous deferred revenue policy was with regards to handsets sold with a carrier subsidy. See http://www.appleinsider.com/articles...es_iphone.html

The deferred revenue set aside announced on the call today wasn't for the addition of iCloud as "new feature", it was for the bundling of iCloud service for the lifetime of the device. AI's interpreation -- that it represents both iCloud *and* unspecified "additional new features" rather than just iCloud -- is most likely wrong. Sorry if I thought explaining deferred revenue would make that clear.

There was in intermediate period of time, which you're failing to mention here... After the carrier subsidy stream of the original iPhone, but before today's announcement of deferred revenue.

When the iPad was first released, their quarterly financial reports revealed that deferred revenue was, in fact, being set aside for those devices as well. Even though the very first iPads were sold in a market where carrier subsidies simply didn't exist at all. Nowadays, iPads are sometimes sold in some jurisdictions with the option of a contract anfd a carrier subsidy, but that wasn't the case with teh very first roll-out, and the deferred revenue statement for iPads has been present all along. Therefore, the deferred revenues related to the original iPad have nothing at all to do with carrier subsidies.

They also disclosed, through quarterly reports, that around January 2010 they started using deferred revenue accounting on iPod touches - they hadn't done so previously. There are never any carrier subsidies related to the iPod touch. Coincidentally (I think not!), they only started providing free iOS updates to the iPod touch after they made the accounting change to start deferring iPod touch revenue.

This has everything to do with giving Apple the flexibility to provide incremental feature updates to already-shipped products without needing to explicitly charge their customers a corresponding incremental fee.
post #19 of 20
Quote:
Originally Posted by cvaldes1831 View Post

Your theory doesn't add up.

Apple used to charge for iOS updates (like $10) for iPod touch users and pundits said it was Sarbanes-Oxley (SOX). It was subsequently decided that SOX wasn't the issue and Apple eventually got rid of the charge. Today, iPod touch users get iOS updates without paying a dime.

SOX has nothing to do with it.

They only started giving away iOS updates to iPod touch users after they announced that they had made changes to their accounting practices, to start deferring some of their iPod touch revenues. Initially, they accounted for all iPod touch revenue up front (and software updates cost money). Then, they started deferring revenue (and software updates became free).

Cause -> effect.

SOX can still come into play here, if it can be shown that SOX imposes different requirements on business practices related to the ongoing treatment of products that were incomplete upon initial delivery (ie. incremental features were not yet present in the product when it was initially delivered, but were added to the product later), depending on which set of accounting practices (deferred or non-deferred) were used to report the revenue related to the product at the time of initial delivery.
post #20 of 20
Quote:
Originally Posted by cloudgazer View Post

GAAP requirements here, nothing to see, move along.

Except for the Apple defenders who previously claimed that Apple was forced to charge people for features and that there was no other way.
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