DawnTreader - 07 September 2009 01:49 PM

I understand your initial concerns and MiH’s points as well. But I’m not sure coverage of Apple would become anymore accurate if subscription accounting was not deployed.

I do find sleepy’s point appealing. For those of us who have taken the time to understand Apple’s approach to iPhone accounting, we do have a real advantage in seeing the company’s discounted share value and we stand to reap the benefits of the rising share price as this method of accounting is eventually understood.

Sure… and as a long shareholder I will reap the benefits as we all will here. I just hope they maintain the status of their consumer/customer and their experience with Apple products as paramount. For instance the care that Ive puts into a latch or the care in the display of fonts on screen are qualities rarely seen in other products. What other company actually cares about haptic quality?

Our benefit is only due to the special relationship that Apple has garnered with its customer over many years and that customer cares about quality and value.
In fact I think the average Apple consumer is highly value conscious. I am, I buy their products because they represent a good value proposition - I get good quality for what I pay for.

[Edited by DT to fix quote boxes]

Details related to Gene Munster’s comments at the start of this topic.  From Henry Blodget quoting Bill Shope of Credit Suisse this morning. 

IMO, the proposed solution is reasonable, but would require Apple to publicly put an estimated price tag and COGS on the software, since both estimated software expenses and revenue still would be recognized over the life of the product. 

http://www.businessinsider.com/henry-blodget-new-apple-iphone-accounting-change-could-send-profits-and-stock-to-moon-2009-9

The rule change would essentially eliminate any material differential in the numbers because the value of the software on a per unit basis would be miniscule. Unlike the clearly defined costs of hardware manufacture, the costs of software development on a per unit basis is miniscule. For example, let’s say Apple reports software development costs on an incremental enhancement to the iPhone OS of $100 million. Apple aggressively recognizes most development costs when incurred with the exception of the costs when the development reaches close to the the point of commercial readiness. But even using $100 million as the full cost of development and the cost amount to be deferred, $100 million divided by the number of units in the market (eligible for the upgrade) means a miniscule deferral of costs. Essentially the solution creates far more of an accounting footnote than it creates a material differential in the recognized numbers versus amounts to be deferred.

Further, it might free Apple to offer iPhone OS upgrades at no cost to iPhone touch owners since the fiscal impact of deferring the software costs on iPod touch sales (unifying the accounting approach between the two products) would have virtually no accounting impact and increasing the universe of handsets eligible for free upgrades would further debase the impact of deferring the software development costs over a two-year period on a per-unit basis.

Sarbanes-Oxley created this mess and the proposed (if the reports of the proposed rule changes are accurate) changes would essentially eliminate its impact.

DawnTreader - 12 September 2009 01:54 PM

The rule change would essentially eliminate any material differential in the numbers because the value of the software on a per unit basis would be miniscule. Unlike the clearly defined costs of hardware manufacture, the costs of software development on a per unit basis is miniscule. For example, let’s say Apple reports software development costs on an incremental enhancement to the iPhone OS of $100 million. Apple aggressively recognizes most development costs when incurred with the exception of the costs when the development reaches close to the the point of commercial readiness. But even using $100 million as the full cost of development and the cost amount to be deferred, $100 million divided by the number of units in the market (eligible for the upgrade) means a miniscule deferral of costs. Essentially the solution creates far more of an accounting footnote than it creates a material differential in the recognized numbers versus amounts to be deferred.

Further, it might free Apple to offer iPhone OS upgrades at no cost to iPhone touch owners since the fiscal impact of deferring the software costs on iPod touch sales (unifying the accounting approach between the two products) would have virtually no accounting impact and increasing the universe of handsets eligible for free upgrades would further debase the impact of deferring the software development costs over a two-year period on a per-unit basis.

Sarbanes-Oxley created this mess and the proposed (if the reports of the proposed rule changes are accurate) changes would essentially eliminate its impact.

I think as a first order of magnitude guess I would use the 4.95 per unit being charged for the Itouch.  I doubt Apple is trying to make a ton of profit on the Iphone OS upgrade rather they are building the customer relationship.  If we assume 1 major OS release per year then about $10 of cost over the useful life of the Iphone.

I have just come across this example that AAPL is still evaluated by its GAAP PE:

Will Party End for Flying Techs? : AAPL, GOOG, QQQQ, JNJ, PFE

The aforementioned stocks’ valuations appear to be slightly extended, but still reasonable, with Apple’s P/E ratio at 30.9x and Google’s at 22.4x (based on fiscal year ’09 earnings estimates).

Does FASB mean Apple no longer need to charge for OS upgrade for iPod touch?  If so, could impact sale of iPod touch and number of Apps downloaded.