As the moderator of the Braeburn Group discussion community, I am in constant contact with members of our global network of independent analysts. For the active participants in the Braeburn Group, Apple analysis is its own form of a virtual full contact sport.
Since the release of Apple’s September quarter results and December quarter guidance earlier this week, discussions about Apple’s revised revenue deferral program and management’s decision to provide OS X upgrades and copies of the company’s Keynote, Numbers and Pages productivity applications free to iOS device and Mac owners have reached a fever pitch. Tracking Apple’s new deferred revenue program and its impact on each quarter’s results has its own challenges. Determining the rationale of foregoing revenue on OS X upgrades and sales of the company’s productivity apps is a sub-plot for conversation.
In this post I won’t go knee-deep into the analysis of Apple’s financial results or the fiscal impact of the company’s strategic decisions mentioned above. I reserve financial analysis for my Posts At Eventide blog. What I will mention in this post is a concept I’m calling Apple and the Renaissance of Hardware Monetization.
Apple’s New Deferred Revenue Scheme
During the September quarter conference call with analysts, Apple announced the company has increased the revenue deferred on each iOS device sold to as much as $25 and increased the revenue deferred on each Mac sold to $40. The revenue deferred on each iOS device sold will be recognized over 24 months and the revenue deferred on each Mac sold will be recognized over 48 months from the time of sale.
iCloud image courtesy of Apple
The justification for the increase in the amounts deferred on iOS device and Macintosh PCs is to better reflect the value of software and services provides to device owners at no additional cost and to reflect the value of the implied guarantee Apple provides to consumers they will receive free OS upgrades over the anticipated economic life of the devices they purchase.
Accounting rules require the deferral of revenue at the time of a device's sale when enhanced features and functionality are provided at no additional cost at a later date. From an accounting standpoint, Apple’s decision to defer revenue is sound and justified. The amount of the deferred revenue on each unit sold reflects management’s estimated value of the OS upgrades, software and services Apple plans to distribute to the device owner following the date of original purchase.
Keynote, Numbers and Pages
I am an active user of the Apple’s productivity apps. Keynote and Pages are excellent products and iCloud integration provides for seamless workflow across all of my Apple-branded devices. Under Apple’s product and services model, I can access, create and edit Keynote, Numbers and Pages documents on any of the devices I carry and I can drive presentations using the company’s productivity apps at any time from my iPhone, iPad or Mac. I also use Numbers exclusively in my analysis work. I’ve adapted to Numbers because of the way Apple’s spreadsheet solution integrates with Keynote and Pages. While in my view Numbers is an application in need of active development, I use it almost exclusively because of the seamless integration with Keynote and Pages and anywhere access to documents via iCloud.
