During today's financial results conference call for the third calendar and fourth fiscal quarter of 2013, Apple CFO Peter Oppenheimer indicated Apple will continue to offer iWork, iLife, and OS X for free for the foreseeable future.
When OS X Mavericks was released last Tuesday, Apple announced that for the first time ever, OS X system updates would be available to customers at no charge. At the time, it was unclear whether the upgrade would be a one time affair or if the company would continue to provide OS X updates for free.
In addition to providing Mavericks for free, Apple will also give free copies of its iWork and iLife apps to users who purchase a new Mac or iOS device, and will continue to provide the software free of charge in the future as well.
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"We wanted all of our customers to have access to our very latest software so they can get the best features," said Oppenheimer. "We wanted to make it a part of the experience."
Apple's choice to offer Mavericks and its suite of iWork/iLife apps for free will contribute to a $900 million increase in deferred net revenue in the December quarter. Apple defers recognizing small amounts of revenue on Macs and iOS devices to comply with obscure account regulations over feature updates to purchased hardware. Deferrals will be recorded over two years for iOS devices and over four years for Macs.
Top Rated Comments
This is an accounting rule that states that if your price covers more than one product, such as hardware and software, then you have to bifurcate and allocate the revenue generated between the products.
But there is another rule whereby you need to recognize revenue as either current revenue or future revenue. This is determined by when you earn that revenue by delivering the good that is apart of the price paid.
So in this case, Apple would get the cash for the product sold immediately, but could only recognize part of it for the current hardware and software. They need to then estimate the value of their expected future updates and "defer" that revenue until they perform the work to earn it and thus recognize it.
Basically, they are holding a liability that is an Unearned Revenue account that gets relieved into Revenue as they perform to earn that revenue, the principle for this is because there will be expenses incurred to earn that revenue which they must match with the deferred revenue to recognize it.
This is not really an obscure accounting rule at all to a profressional accountant. I was really quite shocked when I saw Apple had to charge for past updates, I actually used it as an example in my accounting seminar courses at school.
A good example of this principle is magazine subscriptions. The magazine gets the money all upfront for the year, but it is considered a liability called Unearned Revenue, and gets turned into Revenue as they deliver magazines. This is intuitive because the company has an obligation to deliver those magazines once they collect the subscription or they would owe the cash back and is the reason they cannot recognize it immediately.
Sorry for the long explanation, but it felt good to finally get to contribute something from my profession! :)
What right do you have to complain about anything now? Less then you did before, because now everything is free. Removed features in iWork? Hey, it's free now. Buggy GM release for OS X? Hey, it didn't cost you anything.
This just seems like it's going to open the flood gates for even more of the same rubbish we've been subjected to recently, but now Apple can point at you and say "It's free, what more do you want?".
-SC