iPod touch How the hell can Apple CHARGE for firmware?

[BaldiMac]

When the people who have done the research on the issue all come back with the same conclusion (which is "based on the way that Apple decided to book the revenue for iPod touches, any update that adds major new functionality must be sold for a fee, per GAAP guidelines"), the only thing that seems questionable is Apple's initial decision on how to book iPod touch revenues, and even then, that's not clear cut as it seems that their position when the touch was first launched was that they were NOT going to update it ever to run third-party native apps. (i.e. the iPod touch would never be receiving updates containing major new functionality, nor would it ever have feature parity with the almighty iPhone). It wasn't until about three months of major uproar from consumers AFTER that decision that Apple did a complete 180 on their stand (on both the touch and the iPhone).

Again, what's to question? Based on the analyst reviews of the issue I've seen, Apple cannot undo the decision that resulted in them charging for iPod touch upgrades.

I think the main reason that Apple does not use subscription accounting for the iPod touch is that investors would see a massive decline in iPod revenues in the short term. A large percentage of investors are extremely reactionary, and (prodded on by people like Jim Cramer on CNBC) would not bother to investigate the logical reason for the decline. They would just freak out.

 

[IJ Reilly]

I think the main reason that Apple does not use subscription accounting for the iPod touch is that investors would see a massive decline in iPod revenues in the short term. A large percentage of investors are extremely reactionary, and (prodded on by people like Jim Cramer on CNBC) would not bother to investigate the logical reason for the decline. They would just freak out.

There would be no decline. The way I understand it, Apple would have to restate costs from previous quarters to comply with GAAP. The amounts would be relatively small, but having to restate costs every quarter would be confusing and presumably a bit of an accounting nightmare.

 

[BaldiMac]

There would be no decline. The way I understand it, Apple would have to restate costs from previous quarters to comply with GAAP. The amounts would be relatively small, but having to restate costs every quarter would be confusing and presumably a bit of an accounting nightmare.

The decline in iPod revenue that I was referring to was when the iPod touch was initially released. The first full quarter, they would have only been able to recognize 1/24th on the iPod touch revenues in total iPod revenues. This number would have been a significant decline in revenue over the year ago quarter.

 

[cmichaelb]

just to correct you, XP to Vista was a DOWNGRADE (not an upgrade!!)

Omg...excellent point.

 

[IJ Reilly]

The decline in iPod revenue that I was referring to was when the iPod touch was initially released. The first full quarter, they would have only been able to recognize 1/24th on the iPod touch revenues in total iPod revenues. This number would have been a significant decline in revenue over the year ago quarter.

I see. This type of accounting is essentially what they've done with the iPhone. It's come in for some criticism because it obscures the true revenue picture for any given quarter, mostly on the downside, which is why Apple also cites their non-GAAP revenues each quarter. However it does have a real potential benefit in a rough economic climate like the one we're in now, since it builds in a revenue stream that can pad out bad quarters. So I'm not sure a revenue decline would have shown up if sales of the touch were accounted for in this way.

 

[dejo]

I'm not sure you understand.

Oh, the irony...

 

[Tallest Skil]

Windows: Free updates / Service packs

Windows OS : Service Pack :: OS X :: 10.x.x release

In other words, you're not charged for 10.x.x releases and you're not charged for service packs. A complete OS update and a service pack are two completely different things.

This is completely unheard of on all other platforms:

Simple solution: don't get it at all. That way you won't pay for it.

Oh, and this is one instance where voting with your wallet won't do squat. People are going to buy it. Apple is going to keep charging for it. Sit quietly and wait to upgrade until you buy your next iPod with the software preinstalled.

 

[ChrisA]

How the hell can Apple charge for firmware on the ipod touch? It proves to me they must think their customer base are a complete load of idiots to me.

This came out of the over-zealots enforcement of accounting rules by the government. Apple was placing the money from sales on their balance sheet the minute the iPod was sold. But then if they deliver part of that product after the sale then they technically had to hold off crediting their account. So they said "we just will not deliver updates." the iPhones are sold on a subscription.

Based on the above, Apple if giving away updates that fix bugs and problems but charging when a new revision adds substantial new features.

 

[IJ Reilly]

This came out of the over-zealots enforcement of accounting rules by the government. Apple was placing the money from sales on their balance sheet the minute the iPod was sold. But then if they deliver part of that product after the sale then they technically had to hold off crediting their account. So they said "we just will not deliver updates." the iPhones are sold on a subscription.

You could balance everything I know about accounting procedures on the head of a pin and still have room for lunch. But even so, I think you haven't got it quite right. Apple can book the revenue from the sale, but if they give you an enhancement of that product later, then that enhancement has to have a value for accounting purposes. The way I understand it, according to GAAP, that enhancement has to be accounted for at the time the original item was sold. If they sell you the enhancement, then the accounting can all be done in the quarter it was sold. So that is what they are doing.

 

[apsterling]

Everything said asofyet involving the GAAP accounting for the iPhone versus the iPod touch is wrong. Apple is not under any requirement to restate its earnings or charge a fee to offer an update free of charge. Point in case lies in the Zune, Xbox360, PS3, Wii and other game systems, phones, mp3 players and etc.

They're hiding behind their accounting as an excuse. They don't have to force the iPod and iPhone updates to have a value, they choose to. They could offer them for free if they damn well pleased but the ultimate reasoning comes down to they didn't and we'll pay. I'm just tired of paying for the same functionality. There was a discrepancy between the apps at $20 and the 2.0 firmware for $10, getting more functionality for half the price, and at that point, I'm not sure if it's going to be worth updating to 3.0 for $10, but it wasn't at 2.0, when I was paying for functionality I'd already payed twice as much for.

 

[heaven]

Although I don't own an iPod touch, I would be upset paying so much money for an update. In order to avoid the serbanes oxley Act they could have also charged $0.01 and not $10.

 

[dukebound85]

op...if you researched this, youd know the ipod touch does not get free "x" upgrades...

seriously you are beating a dead horse

your ipod still works fine

 

[IJ Reilly]

Everything said asofyet involving the GAAP accounting for the iPhone versus the iPod touch is wrong. Apple is not under any requirement to restate its earnings or charge a fee to offer an update free of charge. Point in case lies in the Zune, Xbox360, PS3, Wii and other game systems, phones, mp3 players and etc.

They're hiding behind their accounting as an excuse. They don't have to force the iPod and iPhone updates to have a value, they choose to. They could offer them for free if they damn well pleased but the ultimate reasoning comes down to they didn't and we'll pay. I'm just tired of paying for the same functionality. There was a discrepancy between the apps at $20 and the 2.0 firmware for $10, getting more functionality for half the price, and at that point, I'm not sure if it's going to be worth updating to 3.0 for $10, but it wasn't at 2.0, when I was paying for functionality I'd already payed twice as much for.

That is highly illogical, Captain.

If this was true, then Apple would charge iPhone owners the same $9.95.

 

[retrac]

Just my 2 cents...

Okay, let me give my two cents:

1) By this point its a known fact that Apple charges for iPod Touch firmware updates. It was done with 1.1.3, it was done with 2.0, so it was bound to happen with 3.0. When 3.0 was first announced, I assumed that it was going to be a paid upgrade. At this point, anybody still complaining is just kicking a dead horse. Its just Apple's MO. By 3.0, you should know that.

2) As for charging for updates. Its more or less been confirmed that it has something to do with an accounting practice for iPods that Apple implements. Here are some valid arguments I have heard, though:

a) The accounting law does not state how much Apple has to charge. If they wanted to, they could charge 99 cents for the upgrade (not saying they should, I'm just giving a hypothetical scenario). I mean, any users who had the first-gen iPod Touch will have spent a grand total of nearly $40USD come this summer if they bought each new firmware as it came out.

b) You could argue that the iPod is a subscription service the same way Apple TV is. Especially since you can buy games and music directly from the device itself.

c) I could understand how some gen-two users feel cheated because Bluetooth was already there and now they have to pay $10 to use it. Technically, Apple didn't add the feature, it was always there but the feature was merely unlocked. Some will argue that cell phone companies do this but one doesn't justify the other, I suppose.

Okay, well, just wanted to throw that in there!

 

[chameleon81]

Well Apple can call it whatever they like, but it's clearly just a minor firmware upgrade to me. What worries me the most is that a lot of the Apple customer base are actively defending Apple, and evangelising about 'the apple way' like some kind of cult!



I think that's a safe assumption! Perhaps the gave it away?!

I also do not want pay extra money. Actually I do not want to pay money for nothing but this dream is not going to happen.

I is not a minor update they listed 100 new features. What do you want them to do so you can call sth as a major update?

 

[iMacmatician]

a) The accounting law does not state how much Apple has to charge. If they wanted to, they could charge 99 cents for the upgrade (not saying they should, I'm just giving a hypothetical scenario).

They charged $1.99 or so for the 802.11n enabler, which was covered under the law.

 

[Keebler]

Er, are you actually reading my posts? I'm not sure you understand.

Bandwidth - How does that make sense? I think you'll find the networks make the end user pay for that with their phone tariffs.

Developers - In my argument, I am the developer! Apple don't need to pay me!

Support - I don't want Apple to support my app thank you very much.

App Approvers - Let me get this straight. You think I should be ok giving Apple 30% revenue of my application to pay for their "App Approvers"? Are you for real?

happy meal, you are out to lunch in a big bad way. you need a big mac to slow the blood down in your veins.

"App Approvers - Let me get this straight. You think I should be ok giving Apple 30% revenue of my application to pay for their "App Approvers"? Are you for real?"

you're not just paying them to approve your app. Did you ever stop to think their small chunk is also to pay them for the use of THEIR storefront as a vehicle to sell YOUR app to the MASSES????

Do you think the owner of Ishoot cares that he's had to pay them 30% of that app's revenue when it's made (Last I heard) over $750, 000 (HIS share)?

I only watched a few minutes of the 3.0 presentation as I scanned for the hilights, but i saw they've sold 30 million iphones and ipod touches! 50, 000 dloads of their developer kit with 62% of those being first time developers!!!
with over 800 million app downloads!

how can you argue having that target market available for 30% of your app's purchase price??? You seem to be naive in running a business b/c your marketing is done; you don't need a sales team and tweaking your app later is easier b/c the heavy lifting is done.

30% of a sale, in my books, is NOTHING.

Seriously, re-read what i just said and think about it. It's really not bad at all.

now, onto the firmware update which is an incorrect term b/c it's a software update and not firmware for the phone - it's not mandatory. don't buy it then. As edesign said, it's not taking away functionality and to be honest, $9.95 isn't much for the supposed features it's going to pack. That's less than $1 per month.

I do question why iphone users don't have to pay for it. Maybe Apple gets a larger chunk from the phone companies to make up for it?

I would pay it if I had to however. The first thing the presenter says about 3.0 is that it's a major update.

Cheers,
Keebler

 

[michael.lauden]

are you guys going to cry yet? it's not that big of a deal. it was an iPhone software update event. if you are that upset. you can 1 wait for the torrent (which will be out the day 3.0 comes out) or you can jailbreak now and get 5/6 of the features.

 

[retrac]

They charged $1.99 or so for the 802.11n enabler, which was covered under the law.

Exactly. I just added that disclaimer because I didn't want another slew of fanboys to slam for saying that the OS is only worth 99 cents

 

[dcr]

Everything said asofyet involving the GAAP accounting for the iPhone versus the iPod touch is wrong. Apple is not under any requirement to restate its earnings or charge a fee to offer an update free of charge. Point in case lies in the Zune, Xbox360, PS3, Wii and other game systems, phones, mp3 players and etc.

I work for a largish company, and I have had first-hand experience dealing with our finance department regarding revenue recognition and delivering new functionality in a product outside of its original sales quarter. Unless you are using a subscription model for accounting, you are required by GAAP ("generally accepted accounting principles") to restate earnings if you deliver any significant functionality "for free" later. Investors do not look kindly when you restate earnings, especially when they go down. This is why iPod touch upgrades cost money, and it's also why Apple charged a small amount to upgrade the WiFi to 802.11n in certain notebooks a while back.

http://en.wikipedia.org/wiki/Revenue_recognition

In other words, you are wrong, and the original response is correct.

 

[BaldiMac]

a) The accounting law does not state how much Apple has to charge. If they wanted to, they could charge 99 cents for the upgrade (not saying they should, I'm just giving a hypothetical scenario). I mean, any users who had the first-gen iPod Touch will have spent a grand total of nearly $40USD come this summer if they bought each new firmware as it came out.

The amount they charge is not random. It has to do with the costs they are putting on the books to produce the new features.

b) You could argue that the iPod is a subscription service the same way Apple TV is. Especially since you can buy games and music directly from the device itself.

Subscription accounting has nothing to do with how a customer is charged. It is simply a way to recognize revenue in financial statements. An AppleTV is accounted for a a subscription basis over two years. An iPod touch is not. It has nothing to do with a subscription service or the ability to sell games and music from the device.

 

[apsterling]

I work for a largish company, and I have had first-hand experience dealing with our finance department regarding revenue recognition and delivering new functionality in a product outside of its original sales quarter. Unless you are using a subscription model for accounting, you are required by GAAP ("generally accepted accounting principles") to restate earnings if you deliver any significant functionality "for free" later. Investors do not look kindly when you restate earnings, especially when they go down. This is why iPod touch upgrades cost money, and it's also why Apple charged a small amount to upgrade the WiFi to 802.11n in certain notebooks a while back.

http://en.wikipedia.org/wiki/Revenue_recognition

In other words, you are wrong, and the original response is correct.

Okay, so this still doesn't explain why the Wii, XBox360, PS3, and other systems and devices are able to get new major functionality without requiring payment.

And by no means is this restating earnings, Apple could distribute this for free if they so chose to value the price of the firmware/software update at $0, but the case is they aren't and then they're hiding behind these laws that are nearly irrelevant as the excuse, which is rather misleading.

At this point I've spent $30 to upgrade my iPod touch to full functionality and realistically none of this opened anything they couldn't have done originally, especially the $20 I paid for the apps that were originally on the iPhone of virtually identical specifications- which I once again paid for in order to gain access to version 2.0.

I'm getting sick of this because it's utter extortion, in my opinion. And before an iPhone user pops in, it's not the same because the iPhone users are paying for cellular service, and that, in theory (plus subsidy for the 3G models) is all you're paying for monthly. So effectively we're getting shafted as touch users which I feel is liable to lose my money in their App Store, the firmware, and most likely my next iPod won't even be a touch.

 

[BaldiMac]

Okay, so this still doesn't explain why the Wii, XBox360, PS3, and other systems and devices are able to get new major functionality without requiring payment.

Because they are accounted for differently than the iPod touch.

And by no means is this restating earnings, Apple could distribute this for free if they so chose to value the price of the firmware/software update at $0, but the case is they aren't and then they're hiding behind these laws that are nearly irrelevant as the excuse, which is rather misleading.

The cost of the upgrade is not what would cause them to restate earnings. If they add significant functionality, they would have to go back to previous quarters and restate iPod touch revenues. Some of the revenue would have to be moved to the quarter in which the increased functionality is delivered. This would decrease revenue in the prior quarters. That would look very bad to investors.

At this point I've spent $30 to upgrade my iPod touch to full functionality and realistically none of this opened anything they couldn't have done originally, especially the $20 I paid for the apps that were originally on the iPhone of virtually identical specifications- which I once again paid for in order to gain access to version 2.0.

So basically, you believe that you are entitled to whatever you think Apple should have included?

I'm getting sick of this because it's utter extortion, in my opinion. And before an iPhone user pops in, it's not the same because the iPhone users are paying for cellular service, and that, in theory (plus subsidy for the 3G models) is all you're paying for monthly. So effectively we're getting shafted as touch users which I feel is liable to lose my money in their App Store, the firmware, and most likely my next iPod won't even be a touch.

How is it extortion to offer to sell something at a reasonable price?

 

[iSaygoodbye]

How the hell can Apple charge for firmware on the ipod touch? It proves to me they must think their customer base are a complete load of idiots to me.

This is completely unheard of on all other platforms:

Windows: Free updates / Service packs
Windows Mobile: Free updates. Free Apps and added functionality
Xbox Live: Free firmware for more functionality
Playstation 3: Free firmware for more functionality

I am seriously losing patience with Apple and the way they treat their customer base.

well, if you go by this. then how in the hell can apple charge for snow leopard? or how in the hell can windows charge for windows 7

 

[Impulse29]

Hi Steve. I am not "Anti-apple" per sé. I love the ipod touch, its sexy interface and sleek design. Who wouldn't?! I guess it's I just feel I have a moral responsibilty to warn less technical people about this company. The firmware charge is the final nail in the coffin really. My issue isn't with people that simply 'like' apple products. My issue is the way in which the company condition their fan base into a blinkered sect of evangelists that won't accept any form of critisism.

Simply looking at some of the posts on here scares me slightly. Such as some guy in the advice thread saying things like "How do I convince my friend it's better for him to buy a macbook instead of a vaio for $1000 more". Why should you want to??! Let people save $1000 if they want to!

Indeed, I have heard cases of some families on low incomes being given ambiguous reasons and just some plain lies, just so they spend £1200 on a mac when they could have been just fine with a budget pc for £300.

It's stories like this that cause me to greatly concerned. Being a 'fan' is fair enough, but this level of evangelism and consumer conditioning is getting a little out of hand.

I have a feeling that if Apple did any of the following, you'd still be pissed:
1. Stay at 2.2.1 ... no new features or functionality
2. Discontinue firmware updates for previous iPod touches (just like they stopped updating all previous iPod models...)

And to the person that said 3.0 looks like 2.0 so it should be free, well all the OS X releases look similar, but they still warrant an upgrade. Similarly, the search and several other options in 3.0 make it different from 2.0.