I estimate that iPod ASP’s in the ‘07 Dec qtr will be over $200, or at least 23% higher than Dec ‘06 qtr ASP of $163 (which was highly skewed by the $79 shuffle)

This will provide a very huge turbo boost to ‘07 Dec qtr’s earnings, on top of probably 25M or better iPod unit sales, for a total YOY Dec ‘07 iPod revenue increase of greater than 43%.

I’ll go with Tommo’s 30 million iPod estimate for FQ 1 ‘08. You’re right. Thanks to both the new nano and the touch, ASPs will indeed rise. But I’m not discounting the value of the shuffle for units. The importance of the high volume shuffle is that it helps keep iTunes in its prominent position for music sales.

iPod volume give Apple huge music industry clout. Thanks to the nano and the touch, ASPs will rise and Apple will gain music sales market share due to high volume iPod sales including the lowly shuffle.

[quote author=“DawnTreader”]I’ll go with Tommo’s 30 million iPod estimate for FQ 1 ‘08. You’re right. Thanks to both the new nano and the touch, ASPs will indeed rise. But I’m not discounting the value of the shuffle for units. The importance of the high volume shuffle is that it helps keep iTunes in its prominent position for music sales.

iPod volume give Apple huge music industry clout. Thanks to the nano and the touch, ASPs will rise and Apple will gain music sales market share due to high volume iPod sales including the lowly shuffle.

I too hope 30M iPod unit sales for Dec qtr happens. If ASP’s are close to $200 with that level of unit sales then ‘07 Dec qtr iPod revenues would see growth of close to 60%  vs. ‘06 Dec qtr. Possible, but may be too tall an order.

Assuming the above happens, ceteris paribus on my other projections, I expect Dec qtr EPS would then be $1.75-$1.90.

You’ll recall that amongst my first comments at the launch of the new iPods was were the huge implications they have for iPod ASPs, so I’m in full agreement with Quant on that front.

However, I tempered that enthusiasm by pointing out that the iPod touch will IMO probably also fall under Apple’s new amortised accounting scheme (I noticed a few other blogs picked up on the idea after I floated it). This will lessen the immediate benefit to quarterly earnings reports, although the cash will show up on the books nevertheless.

All I’m saying is don’t get too hyped up about Q1 08 earnings, because while we know sales are going to be fantastic, the revs and earnings from those may not be immediately visible.

[quote author=“Tommo_UK”]
However, I tempered that enthusiasm by pointing out that the iPod touch will IMO probably also fall under Apple’s new amortised accounting scheme (I noticed a few other blogs picked up on the idea after I floated it). This will lessen the immediate benefit to quarterly earnings reports, although the cash will show up on the books nevertheless.

I don’t believe iPod Touch will fall under any revenue amortization scheme.

The iPhone is, IMO, different from an accounting standpoint, as it contractually tied in to a SERVICE, that has a minimum contractual 2 year term. That 2 year minimum contractual term also produces a revenue stream from ATT, so from an accountant’s standpoint, that iPhone amortization scheme has a fundamentally different rationale for its accounting.

In my mind, moving iPod Touch to a similar scheme has less than a 25% probability. The hard accounting rationale is simply not there, IMO.

[quote author=“quantman”]I don’t believe iPod Touch will fall under any revenue amortization scheme.

The iPhone is, IMO, different from an accounting standpoint, as it contractually tied in to a SERVICE, that has a minimum contractual 2 year term. That 2 year minimum contractual term also produces a revenue stream from ATT, so from an accountant’s standpoint, that iPhone amortization scheme has a fundamentally different rationale for its accounting.

Please explain why the Apple TV fell under this scheme then.

Quant, the amortisation scheme has nothing to do with the provision of service TO the device (Apple TV, iPhone, touch, or anything else) or any associated contractual terms, but rather from the fact that Apple intends to radically update the feature-set of these devices over a period of time. There’s every reason to think Apple may decide to do this with the touch, although the decision (and option to do so or not) rests solely with them.

I’d say the odds are that they will do this with the touch, though its by no means a certainty. Just a strong probability, given the company’s now-obvious preference for such schemes. If you’re trying to peg Q1 08 estimates, you have to account for this possibility or risk miscalculating.

I hope I’m wrong though

[quote author=“Tommo_UK”][quote author=“quantman”]

Please explain why the Apple TV fell under this scheme then.

TOMMO, I think that is a very valid question. It was however a new line of business, as was the iPhone.

The iPod family also has been getting its software updates for many years. Since the Touch is part of the same family of iPods, I think if AAPL elected to amortize iPod Touch revenues, they will be hard pressed (from an accounting standpoint) to defend that, without also changing all iPod revenues to the same amortization scheme. This could also potentially result in having to change accounting for past results.

I believe the IRS may also have a say in this. Any revenue amortization scheme, postpones revenue recognition, and this in turn has the impact of reducing taxes. So, I believe the IRS will see a hit to their tax receipts and then ask for all iPods to then move to this same scheme, knowing fully well that AAPL would not want to do that, putting AAPL Finance in a predicament.

As for Apple TV, I believe this will soon move to a monthly subscription model for video rentals, and this may be the real reason for having introduced it with an revenue amortization model.

EDIT: If they don’t, I expect the IRS to challenge revenue amortization for Apple TV.

[quote author=“Tommo_UK”][quote author=“quantman”]I don’t believe iPod Touch will fall under any revenue amortization scheme.

The iPhone is, IMO, different from an accounting standpoint, as it contractually tied in to a SERVICE, that has a minimum contractual 2 year term. That 2 year minimum contractual term also produces a revenue stream from ATT, so from an accountant’s standpoint, that iPhone amortization scheme has a fundamentally different rationale for its accounting.

Please explain why the Apple TV fell under this scheme then.

Quant, the amortisation scheme has nothing to do with the provision of service TO the device (Apple TV, iPhone, touch, or anything else) or any associated contractual terms, but rather from the fact that Apple intends to radically update the feature-set of these devices over a period of time. There’s every reason to think Apple may decide to do this with the touch, although the decision (and option to do so or not) rests solely with them.

I’d say the odds are that they will do this with the touch, though its by no means a certainty. Just a strong probability, given the company’s now-obvious preference for such schemes. If you’re trying to peg Q1 08 estimates, you have to account for this possibility or risk miscalculating.

I hope I’m wrong though

The odds IMO slightly favour the straight line accounting method. Those blank spaces on the touch will be filled by apps some of which may be services that are paid by subscriptions. i.e. Live stock quotes

Subscription for live stock quotes on just a wi-fi enabled device? How many takers would this have?

Here’s my thinking on this (perhaps I am missing something?):

- I think Wi-Fi, for now, is largely targeted to the college crowd, since they spend a large % of their daily life in their limited ecosystem.

- The working crowd will use their desktops and laptops at work.

- The at home crowd will do the same.

- The mobile group will use their iPhone or other similar web enabled phones, and mobile PC’s with broadband, if they must.

- Wi-Fi use using iPod Touch will be a ‘good to have’ for the non-college crowd, and used primarily by most to access the wireless iTunes store.

Love to hear more about your thinking on this, because I not very sure-footed on this.

These (iPod, iPhone, ATV) are technically general purpose computing platforms, running a general purpose OS, capable of being sold like a PC. However, Apple intends them to be closed, with all supported uses provided by Apple updates. Apple does not want applications for these platforms to be sold separately, or to charge for upgrades to the software. Apple wants to say, in the strongest terms, these are not computers; you cannot buy software for them; they are the means to access certain services. But software updates must nevertheless be provided for them to keep them competitive. So Apple must provide updates free. So Apple must use subscription accounting. Otherwise they risk having these products regulated back into conformity with cellphones, audio players, and PC’s for user rights and accounting purposes.

In the future, giving away hardware and connectivity funded by location sensitive advertising is a viable business model for Google. To compete with that, Apple would “give away” hardware, paid for by service subscriptions, just as the cell carriers do already. Indeed, as the cost of building good-enough hardware continues to fall, simple hardware sales are unlikely to deliver the margins Apple requires, or allow the end-user customer relationship that is the heart of Apple’s business.

Making iPod touch the odd one out (without subscription accounting) just doesn’t make sense.

(Now Apple are going to prove me wrong )

Has Apple publicly stated deferred revenue recognition will be used for the iPod touch? It makes sense considering the similarities in functionality to the iPhone (the lack of cell service not ignored).

Trying to read Apple tea leaves is tough and as I said I think the iPhone accounting model for the iTouch is a slight favourite…I think that WiFi will eventually become more widespread in North America. We are third world in mobile communications compared to Asia and even Europe. Some form of WiFi should be ubiquitous. But a lot of people work and live in a WiFi enabled environment and having small pocket sized device that gives me stock quotes for example is something I would like instead of having to go to my computer every time I want to check on a price.. Outdoors would be a boon and now we can get up to 1000 foot reach with WiFi extenders. I would purchase such a service but it is sure possible I am in a distinct minority. But knowing Apple has a Wayne Gretzky philosophy*** maybe they think WiFi or WiMax will be the standard in the future

*** I go where to where the puck will be not where it is

subscription accounting

Too me, the solution is fairly simple.  If Apple were to do a Pro-Forma on a GAAP basis in conjunction with the normal 10-Q. using subscription accounting, it would basically take care of any concerns or misconceptions investors, especially those that are weak with accountings skills, may have.

In the event the Pro-Forma is opted against, then, investors are going to have to learn to look at the deferred revenue amounts and attempt to estimate a pro-forma based on that.  I feel overall, my take will be to adjust to a cash flow model rather than a p/e model. Probably makes more sense in terms of valuation schemes.  My opinion however, I feel continuing to use a P/E model, is the largest error the street makes in valuing Apple’s shares.

Re: subscription accounting

[quote author=“bern”]My opinion however, I feel continuing to use a P/E model, is the largest error the street makes in valuing Apple’s shares.

Bingo

[quote author=“sleepygeek”]Making iPod touch the odd one out (without subscription accounting) just doesn’t make sense.

(Now Apple are going to prove me wrong )

Ok, then, if that were the case, then ALL iPods would have to move to revenue amortization (BTW, I hesitate to use the term ‘subscription accounting’ for iPods as they do not have any subscriptions, whereas with Apple TV I believe that has been the intent all along).

I cannot see the IRS allowing only the iPod Touch to move to this accounting method. All Macs may also have to move to this same logic then?

bern, welcome to the AFB!