Thank you for clearing this up. This is precisely why Apple continues to provide margins that are very conservative but blow the hell out of water when they announce their results. When a company announces its revenues, a part of this has to be accounted as deferred revenue due to the GAAP-based measures that require the product or services to be fully delivered before being fully recognized. GAAP measures are in place as a checks-n-balances component for investors in the company. It is necessary but it tells people that Apple is valued at a lower valuation than it really is. Therefore, Apple actually makes more money but the GAAP accounting standards project it as if it made lower revenues.
A couple of things regarding this report
1. Not all apps that use the AdMob advertising network might have been successfully tested with OS 3.0. They might be in the approval stages or abandoned by the developers due to the hassles of upgrading. So seeing a small fraction is not uncommon. But it doesn't mean that iPod Touch users do not want to upgrade. I know I did and I am incredibly happy.
2. Most people seem to forget that the source of revenue for Apple's iPhone is AT&T. It is my belief that Apple was using subscription because of the fees received from ATT due to carrier fee participation and federal law that forbids a company from realizing income for something it has not delivered. As newer devices have emerged, Apple gets paid full price at time of sale and
no longer participates in carrier fees. This is why the big furore about AT&T offering higher prices and different dates for upgrading to iPhone 3GS was all about. Apple did not fully recognized the revenue and earnings from its sales of the original iPhone but this change with AT&T has actually resulted in them showing a higher revenue recognition. This is translated with increased sales and a bigger attraction with its high share price. Now, AT&T has to make up for its revenue given to Apple and so it charges higher for upgrading.
3. Related to point 2, the definition of a service for an iPhone and iPod Touch vary significantly. Not only does the Touch not have the phone component, Apple understands that the first major update is an incomplete piece of software. Hence, they charge for going from 1.1.5 to 2.0 but none for the subsequent updates to 2.0. "Service" for an iPhone includes voice and data services where iPod Touch has only data services. Therefore, the additional $10 charge for the update could be construed as making up for the "lost revenue" from voice services which it does not provide.
Originally Posted by dopik
The revenue accounting treatment for iPhone & AppleTV vs. iPod has nothing to do with SOx.
It is due to US GAAP on the following:
SAB 104 vs SOP 97.2
To make it simple, Revenue can only be recognized once the service has been performed. if one has to provide software update down the road, it means that at the time of purchase, the product was not fully delivered to the buyer thus revenue should not be recognized. US GAAP allowed to recognized a certain percentage if the seller is able to forecast a percentage of completion.
By recognizing the revenue on a subscription basis, Apple is saying that the product is not fully delivered at the time of sell. it is to simplify their accounting.