Apple, the $20 iPod touch update and GAAP

Since my post yesterday about the $20 iPod touch software update several readers have contacted me to explain how Apple had to charge for this update because of generally accepted accounting principles (GAAP).  This issue, so I'm told, is much the same as the way Apple had to charge $1.99 the 802.11n enabler for the Intel-based MacBooks and MacBook Pros.  Personally, I don't buy this.  If this is going to be Apple's defense over the charge, then I say it's nothing more than a smokescreen.  Here's why ...

The accounting rules are complex but the issue here boils down to the fact that a company can only record the revenue associated with a specific piece when it is delivered to the customer.  But, according to experts it is important to note that there's nothing in the GAAP requirements that forces Apple to charge its customers for a software upgrade. The only requirement imposed by GAAP is that Apple must account for the separate value that the software brings.  OK, with that in mind, let's examine the case.

This isn't about accounting rules. Apple's carefully thought this through. I figured this out last night when I had to enter my credit card details into iTunes for the very first time to get my hands on the download. That's a pretty slick move on Apple's part.First off, put the iPod touch and the iPhone side by side.  Eliminate the cellphone aspect of the iPhone and what you have is an iPod touch with a camera.  However, the software apps available to the end user are fundamentally different.  Why?  Someone at Apple made the decision to eliminate a handful of applications probably so that the iPod touch and the iPhone didn't seem too closely related.  The idea that no one at Apple preempted the fact that iPod touch users would appreciate apps that made use of the WiFi connection to access online services is simply incredulous.  Had this been anticipated early on, Apple could have planned this into their accounting and been able to offer the software for free.

OK, so Apple didn't do that.  Right, let's look at the value offered by the software.  As I've said before, $20 buys you a lot of code nowadays so this charge for the addition of applications that were already developed and delivered on an almost identical platform seems awfully steep.  It's especially steep considering that the iPod touch runs code designed for the iPhone that's totally useless to it (for example, the iPod touch is running a Bluetooth stack all the time even though it has no Bluetooth capability).

But then again, maybe it's not the actual code we're paying for, but the value that it offers.  OK, let's see what we have.  Here are the new apps that have been added to the iPod touch:

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• Mail
• Stocks
• Maps
• Weather
• Notes

OK, Stocks and Weather offer little more than access to online services.  These apps are the iPod's equivalent of Gadgets or Widgets and are of negligible overall value (because if you're going to have to go down the road of saying that these have a $10 value, the cost of something like an entire operating system should be astronomical).  Then we have Maps, which seems like nothing more than a wrapper for Google Maps.  Again, try to put a price on that.  That leaves us with Notes and Mail.  To try to justify that any of this offers a $20 value is hard, especially when you consider the overall value that MacBooks and MacBook Pro customers got from the 802.11n switch on.  Over the life of a MacBook that has to represent more than $1.99 worth of value if I'm paying $20 for a few apps, does it not? 

If this trend continues, pretty soon all Apple products are going to feel like slot machines.Still not convinced?  OK, let's look at this a different way.  Let's say for that the bundle is worth $20.  Now, for simplicity let's just say that each app is worth $4.  Why not just let the end user decide which apps they wanted and which they didn't? 

Alternatively, why not open the platform to developers and allow others to offer low-cost/free software to users?  The community that's sprung up around hacked iPhones and iPod touches shows that people are willing to develop software for the platform for free.  That move would have had no GAAP implications whatsoever.

And finally, can someone please tell me what the difference is between the iPod touch upgrade which costs money and the Apple TV upgrade with is free and transforms an existing Apple TV device into what PC World is calling a substantially different product?

Nah.  This isn't about accounting rules.  Apple's carefully thought this through.  I figured this out last night when I had to enter my credit card details into iTunes for the very first time to get my hands on the download.  That's a pretty slick move on Apple's part.  Apple has managed to get millions of users onto a platform that was deliberately crippled and the company is now monetizing the slow uncrippling process.  My guess too is that this won't be the last paid upgrade for the iPod touch - customers will be asked to put their hand in their pocket regularly until the battery dies, then they get the opportunity to put their hand in their pocket a little deeper.  Apple will be monetizing the ownership of the product.  Finally, when the iPod is dead, you'll start the cycle all over again.  And don't think that this is limited to the iPod touch.  I'm pretty sure that the iPhone 2.0 will have some magic new that can be added to existing iPhones - for a fee.

If this trend continues, pretty soon all Apple products are going to feel like slot machines.

Thoughts?

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