Apple's 802.11n accounting conundrum

(continued from previous page)

In order to figure out how much revenue can be booked up front, companies need what's called "vendor-specific objective evidence" of the value of the separate pieces of software. In other words, they need to prove how much each piece of software would be worth if it was sold separately, as opposed to how much it's worth in a package deal with other pieces of software.

The problem is you can't prove what some things are worth until you sell them. What's the value of a software upgrade to 802.11n on the open market? Apple isn't going to let any other company sell software that would upgrade a piece of its hardware, making it almost impossible to establish a market value for that software.

That means a company in this situation would have to defer all the revenue associated with the product until it can establish the value of the Wi-Fi upgrade, or until it delivers the complete set of software, said Brett Trueman, a professor of accounting with the Anderson Business School at the University of California at Los Angeles. So, Apple would have had to defer all the revenue for Macs sold with the 802.11n chips from September until it delivers the upgrade in February, and that's not a realistic option.

So now, Apple has to establish a value for the Wi-Fi upgrade in order to satisfy the requirement to separately account for the different pieces of software. One easy way to do that is to charge people for it.

There's absolutely nothing in the GAAP requirements that says Apple must charge its customers for that software upgrade. The only requirement imposed by GAAP is that Apple must account for the separate value of the 802.11n capability, said MIT's LaFond. It can do this by creating a value at the time of purchase or it can wait until it delivers that capability to record all the revenue associated with the product.

Another option, if the company had wanted to keep the 802.11n capabilities secret, is to create a "new arrangement" with the customer. Apple sold the customer a notebook in September, and is now selling the customer 802.11n capabilities for that notebook. These are two separate transactions that satisfy the need to account for the undelivered 802.11n capability as well as Apple's desire to book all the revenue for the notebook up front and keep the use of the 802.11n chip a secret.

Any of those options would satisfy Apple's need to account for the separate delivery times for the Macs and the 802.11n capabilities, according to several experts interviewed for this article. But simply blaming the fee on GAAP, or on the Sarbanes-Oxley regulations as some rumors have suggested, does not tell the full story.

"If I'm a company, and I want to give my customer something, GAAP isn't going to prevent you from doing that," LaFond said. But at a time when Apple's accounting practices are under significant scrutiny from regulators looking into the company's stock-options backdating practices, the company has to be extra careful about following the proper procedures while keeping financial analysts happy with strong earnings reports.

[Michael Bird]

uhhhh....

If you own a $2000 Macbook pro, and you're complaining about a $2 upgrade to your bandwidth, you are very, very, VERY stupid. My guess is MBP owners aren't penny-pinchers.

[marccooper]

Lets say you buy a $50,000 Lexus

Lets say you buy a $50,000 Lexus and the dealer asks you if you want a cup of coffee. Then he rings up your bill and adds $2 for the cup of coffee and says GAAP require it. Who wants to deal with a company that makes up imaginary excuses to charge you petty amounts after you have spent a fortune with them? This accounting rule thing is a complete fabrication. A company can do anything it wants for its customers that it sees value in. If Apple wanted to they could buy every Macbook Pro owner a lap dance, call it a customer loyalty promotion, and write it off without any fear of an SEC investigation. Companies do that, though usually it is with big business customers, so you would need to order 100 Macbooks for your branch office if you want the lap dance. But it would not be illegal in any way. They would not have to defer profits until you got the lapdance. They could get you lapdances whenever their sales and marketing team felt it would be profitable to increase your goodwill and loyalty.

[NeilKelty]

Windows Update

Why not just issue it as an update? Like windows did with SP2?

[MRMOAV]

Seems Fair enough

If they were able to keep the N draft chips a secret and then
said, hey for only $10 bucks we'll upgrade your wireless card,
people would be shouting for joy. But because we found out
some people are taking this like a bitter pill. I wonder how the
rest of the beige boxers are gonna handle this. I am so happy it
like Christmas all over again... only problem we are gonn see a
lot of firmware fried wireless cards. Apple is probably crossing
there fingers they are trying to do this for almost nothing but if
they get a lot of dead cards with the update, its gonna hurt.
Now if they would only release an 1.99 iphone upgrade for my
aging blackberry.

[djohnston89]

true but....

this would seem like the best thing to do, but, the $2 nominal fee
is really just to please the feds.

[Dr Dude]

You don't get it..

Now, accounting rules are very strange smetimes so I'll give you
a pass. The difference is that in your example, SP2 was an
upgrade to a prduct that M$ sold with no specific plans to
upgrade. The Macs shipped with the 802.11n but not the
software to run it. If Apple delivered the software later, in effect
they should have reserved sme of the revenue from the Macs as
"unearned", and only recognized it once the software was
delivered. A very cumbersome task.

The alternatives that the article states are ridiculous. Saying that
Apple could have just delayed the release of the new Macs can
only be suggested by someone that does not understand how to
run a busines.

[marccooper]

Would hack fix GAAP?

If Apple releases a $1.99 upgraded protected by four bit encryption or a secret password provided only to the purchaser that is just 'password' would that violate GAAP? This seems like a lame excuse. Tivo releases upgrades and doesnt charge. Motherboard manufacturers release firmware updates that support new processors, but they dont charge. GAAP does not prevent Microsoft from releasing an extra macro or plugin for Word. It does not prevent game manufacturers from posting new downloadable missions and characters. The idea that it is illegal to save the customer money is the kind of philosophy that makes Apple a bad company for consumers.

[marccooper]

Also, Why Doesnt Coke Defer Profits until I take a whiz, or charge me to

Also, Why Doesnt Coke Defer Profits until I take a whiz, or charge me to take one? They know that Coke has the capability to cause me to take a whiz, but I cannot take a whiz the second I drink the Coke. How can Coke stay in business if they just give away whiz?

[michaeljmac]

Who's complaining?

Exactly who is complaining about the $2 fee? They bought the
laptops and such without knowing they would be getting 'n'
functionality. So, they don't have to pay the fee. Only if they
want the 'n' functionality. It would have been different if Apple
had told them they were geting 'n' then tried to charge them for
the update. But since the buyers didn't know this update was
coming for their machines, they should be happy that they have
the choice to upgrade or not. Think about all those that don't
have that choice. It's just another stupid reason for people to
complain about a big company for no other reason than to
complain.

[jbyron00]

Re: Who's complaining?

Exactly. I don't know why this is worth fussing about. Apple never
advertised that these laptops are upgradable to 802.11n. What's
wrong for them to charge for the upgrade? People can choose not
to upgrade to stay with 802.11g that they knew they had paid for.

[lesfilip]

Apple Haters are complaining

I know a lot of Mac owners who are extremely pleased that they can
pay $1.99 to upgrade to "n" functionality. Not a single one that I
personally know has complained. It is most likely the rabid Apple
Haters that are trying to throw up a stink.

Have a nice day!

[Thought1]

Doesn't Add Up

The entire software world offers additional features through upgrades and downloads without charging users for features like this. Perhaps a patent royalty is at issue here. Perhaps royalties are due for use of this functionality and rather than pay on all systems shipped, Apple is using this download process to count users and reduce royalties.

[slimshady007]

Did you read the story?

Apple's options:
1) Delay shipping the hardware (unimaginable in the computer
hardware business).
2) Charge nothing and say that the software has no market value
(software worth nothing? ha!)
3) Charge nothing and defer the revenue (better than option 2,
but still bad for business)
4) Charge $2 to offset production, distribution, and support
possible costs AND keep the gov't lawyers happy since
everything Apple does is under such tight scrutiny now.

You are an Apple accountant. Which of the above do you do to
try to keep the company running smoothly while also staying in
the legal realm? You can't blame Apple for releasing the
hardware prematurely because it works with 802.11g (as
advertised) and coincidentally has the hardware capabilities to
run a DRAFT version of 802.11n. I don't think enough people
realize how expensive driver software is to make, distribute, and
maintain. I actually find it pleasantly shocking that so few
companies charge for "software updates" that are, quite
honestly, worth quite a few dollars to quite a few people. I guess
that companies have found that providing free updates is a good
way to keep customers happy. Could they charge if they wanted?
Sure! But they'd have to think about the consequences
(financially speaking, as well). I doubt we'll see Apple charge for
other software upgrades.

[markdoiron]

I Think You Do 3

I think you do 3--charge nothing and defer the revenue. As for how much the software driver cost (and therefore how much revenue would have to be deferred): $2/MBP sold.

With Apple reporting over a billion dollars in first quarter revenues this week past, I think that would have been the best answer. Perhaps not for the accountant--they'd have had to do their job--but for the customers. Except, it appears that Apple customers are willing to put up with more abuse than typical customers. Such loyalty doesn't stay that way forever. I'd be very surprised if Apple doesn't find an accountant that gives them a better answer next time.

--mark d.

[Macsaresafer]

I think there is an option 5.

5) Legitimately claim that the capability was delivered with the
computer, but merely turned off! We're talking about existing
hardware here, not a software upgrade adding new features.

Since the hardware came with the computer, there's no reason
Apple couldn't tell people how to turn it on, which is all the
software really does.

[lesfilip]

Option 6 - Free with Airport Express

You can't use the "n" capability without a new router anyway. Might
as well just buy a new Airport Express next month and get the
update free. You can also use the Airport Express in conjunction
with one or more hard drives for wireless sharing throughout the
area, including with Windows boxes.

Have a nice day!

[jhiph]

Cynical Times

We live in cynical times. Here is a story very clearly stated
accounting rules and Apple's options. Instead people are
ignoring that and assuming strange conspiracy theories. Sorry -
no conspiracy - its as simple as explained in the article. Let me
sum it all up - Apple could not release the 802.11n WiFi draft
standard because the WiFi 802.11n draft standard had not be
finalized. Instead of not including the hardware capable of this
new faster standard they put the hardware in the computers
without the software to run it. Because of the accountant
standards they need to charge something (not to make money
but to abide by GAAP). Apple did everyone with this hardware a
favor - would you rather they didn't include it, which they easily
could have. The people buying these computers didn't know
they where getting this feature. For a small fee of $1.99 you get
802.11n capabilities you didn't know you had when you bought
the machine - that's a nice gift for $1.99 - it's not some kind of
god given right to have 802.11n WiFi. I can sum up what I think
after reading the comments - we have too many wining cynical
wimps in the world. Do you realize some people are concerned
about where their next meal is coming from today - not if they
have 802.11n. Does anyone out there agree with me?

[BodegaBay]

Bravo!

This is one of the most sensible postings I've read in a long time.

[Steve Bryan]

Check assumptions

Your comment would be very sensible but I suspect you are making an incorrect assumption that the affected users are complaining at all. I've seen no indication that anyone actually affected by this policy has actually complained. Instead we seem to have a parade of oddball Apple haters using this as an opportunity to vent their impotent rage.

[aabcdefghij987654321]

Absoulte bull*hit - GAAP...lol

GAAP is a list of "principles" as it applies to accounting. When you do the books, you use GAAP so that everyone has the same point of reference. It is like saying that all DVDs come in the same shaped box so they can be stacked easily at Blockbuster. GAAP is a standard, and nothing more.

GAAP is not requiring Apple to charge this ludicrous fee, which ALL OTHER router manufacturers are EXPECTED to give for free. Outrageous the lengths Apple fanboys and their paid acolytes will go to.

[lesfilip]

Apple Hater

I wish it was free too, but you are just using this as an excuse to
dis Apple. $1.99 is nothing.

Have a nice day!

[gavin1e]

You don't know GAAP

True, GAAP does not "require" Apple to charge this fee. However, absent the fee, GAAP would require Apple to defer the revenue derived from these products until the upgrade is delivered. It would be lunacy for Apple to report in February the revenue from computers sold in November, December and January. Perhaps Apple could revise its statement to read "..to avoid recognizing revenue in a manner inconsistent with the fiscal reality of our business, GAAP requires that we..."

[wayland.ind]

Maybe a Windows update will fix this

maybe MSFT will make this possible with a windows update when
the standard will be approved. most MacTel owners have windows
installed anyway.
that way no $1.99 for Apple.

[lesfilip]

You may be right but...

Most people who already bought Macs are not worried about
sending $1.99 Apple's way.

Where did you get the idea that "most MacTel owners have windows
installed..."? I think you are making an assumption based on your
own preference for Windows.

Have a nice day!

[pjianwei]

GAAP do not tell you how to run the business.

GAAP only tell you how to account for the revenue you receive it. Ex a tv that sells with a 3 yr warranty worth $300, you only not told to recognise the $300 at once , but $100 a year for the next 3 years. You can give the warranty for "free" and recognise the cost of it, you are not told to charge for it.

[Sac Tinko]

Hello! It's only $2. What is the big deal?

If you spent $2000 on a new MacBook, is another $2 going to make
a difference. This is just silly.

[lkrupp]

It's about criticizing ANYTHING Apple does!

That's the whole point of this thread. If Apple had given the update
away the trolls here would come up with some reason to criticize
Apple for it. The guiding principal at c|net is "If Apple invented it,
manufactured it, sold it, updated it, upgraded it, or had anything to
do with it then it's bad, useless, substandard, lacking, a poor copy,
and most of all, not Windows.

This is what c|net and its lemming minions are all about. Period.

[kloudy0420]

$2 charge

The charge is BS it not the $2 it is the thought behind the charge how can they charge you when you allready paid for the draft now that is finalized they want to charge you for the upgrade.I will not do it.

[Vegaman_Dan]

Owning hardware you cannot use.

Why should you actually *own* the laptop you bought for $2000?

If Apple can charge you $2.00 for a hardware upgrade to a system you already own, why can't they then choose to charge you another few thousand to let you have the ability to save files to the hard drive? Or to have the screen come on? Or anything at all? I mean, just because you BOUGHT the hardware doesn't give you the right to use it.

This is a dangerous precedent to set. Start with this and we'll see all sorts of crippled systems being sent out that you can 'unlock' for a fee.

[Maccess]

Not the price...

even if it were $0.01, many of the MacBooks are used in markets/countries where buying something online is difficult or impossible. In the US, sure, no problem, but outside, where there is a lack of payment mechanisms, it becomes an impossible hurdle to using a feature that the Macbook already has.

I don't see why Apple did it this way, it could simply have been a software update to the Airport software. They release those all the time, I don't see why this had to be any different.

[mikeparsons]

Let's unlock it!

This crazy...wait till Feb and pay 2 bucks! Somebody please send me a fix:
http://www.mikeparsons.net/2007/01/unlocking-apple-wireless-80211n.html

[smithjones]

It's a 1.99 value meal...

For christ sake...., it's $1.99 You pay that for a value meal at a
hamburger joint. You pay that for 2 downloaded songs off iTunes.
I don't see the big deal here..., it's a non story.
It's not like they are hosing you? If you want a faster speed, pay it,
if not, don't... it's that simple.

[racassano]

What about the WiFi problem?

If you read the Apple MacBook Pro support forum you will see there are massive complaints about connecting to WiFi with new Macbook and Macbook Pro's.
In light of this, Apple should have used this 802.11n situation as an opportunity to fix this connectivity problem and give all MacBook owners the capability they paid for originally. I don?t think the SEC regulators and the Justice Dept are looking for $1.99 errors in Apple accounting. They are looking for fraudulent activity by the executives steeling from the shareholders.

http://discussions.apple.com/thread.jspa?messageID=3801533#3801533

[lesfilip]

Variety of different problems, not just Apple

Nice of you to bring attention to that thread, but it appears to be a
wide variety of unrelated issues. Some have to do with third party
software, third party hardware, drivers, kludges, and human
stupidity. And yes, a few actual Apple-related driver issues as well.
But hey, nothing is perfect, is it?

Have a nice day!

[racassano]

I agree, but...

Your post is well done. However, many who bought new MacBook's and MacBook Pro's since September have had very serious connectivity problems with home network routers. I wonder if their support forum complaints are because of this hardware, software issue. If this 802.11n software fixes the problem they should have it as a fix or patch for what they already paid for. Its not the $2.00 that counts here, but customer support by Apple for something sold that has a problem.

[lesfilip]

Two different things

Activating the "n" capability and fixing bugs are two totally different
things. No conspiracy theory required.

Have a nice day!

[mindtwitch]

Looking out for customers

I can see where people might turn up their noses at such things. Recent news about shady practices of corporations has sort of caused a loss of faith within the general public. The accounting standards however are created to help reduce these shady dealings and protect investors who has much more to lose than the customer who bought a $2000 laptop.

You can thank these types of laws, regulations and standards (as well as the dotCOM collapse) to software and technology companies big on ideas and promises but fell short on delivery. These companies inflated earnings by reporting revenue earned from the sale of software that wasn't even in development yet. Seeing these inflated earnings brought on investors who in the end lost a lot of money when the company wasn't able to deliver the final product.

Aside from the accounting practices, in my mind, Apple was actually looking out for customers by including the chips set before it was approved. Who had more of a risk in this? Apple. They included a chip set for a technology that could have easily been passed up in place of some other emerging technology. Sort of like the X2 vs. 56K modem deal for those who still remember modems in the 90s. So Apple included this technology instead of waiting and then adding it into laptops later, which would have raised even more eyebrows after somebody bought a $2000 laptop that would have obselete technology in it a month later. Apple isn't forcing the $2.00 charge on anybody. It is a feature that you didn't pay for when you bought the computer because they COULDN'T charge you for it. Now it is available to you IF you want it. The $2.00 charge is much better than the insane amount of money 802.11n cards are going to be running when first released. Remember DVD-Rs a few years back. You couldn't get one for under $800.00 and now they run for the same price CD-RWs did back then.

So why not do the $0.01 cell phone thing and be "cool" about it? Because for a company to charge a credit card a penny they actually lose money from transaction and processing fees. I don't care how noble you might think it is but no business is in the business of losing money.

In short, stop the "down with the man" complaining. Nobody is "holding you down" and nobody is twisting your arms or stealing your money.

And for the record, I don't work for, nor do I own a Mac so please keep the "fanboy" insults to a minimum.

Just my $2.02
_mt

[st.walters]

Where's the commercial about this one?

Hmm.. I wonder if Apple will make a new Apple ad saying that you can upgrade their computers without ever opening it, and all it costs is $1.99. (Yes, I've seen teh Vista commercial.. what a joke. They never mentioned that to upgrade from OS 9 to 10 most Mac users had to buy a new Mac because they PPC wouldn't run it)

I don't expect any different from Apple. The truthiness in their commercials is questionable at best. Now they're trying to fool eveyone into thinking they didn't know about this ahead of time and couldn't have just released the machines with a Beta firmware with the autonegotiate set to B/G and drivers that was later updated to the final one for free. This could have been included as an optional "install" on the system. (seperate disk, etc... hey we do this in the PC industry all the time and don't have to charge since the "product" is already sold.

This has nothing to do with the GAAP rules concerning this issue and a lot more to do with Apple's short sightedness in dealing with hardware they're not familiar with. It's sad that people who purchased this product now have to get nickel and dimed after spending $500 more on a PC than a PC would have cost them.

I know $1.99.. no big deal. In fact in the scope of the $2000 you spent on the PC.. err.. Mac... in the first place it's nothing. Not even worth mentioning. And you're right.. it's not. But that's not the real point. (if you're keeping track 1.3 million units x 1.99.. so it's not big deal... yeah... right... water drops arn't a big deal until there's a million of them falling on your head, then it's called rain)

Apple knew their hardware was capable of this when they built the machine. They could have opted for the Beta / Final release approach that most companies would have used to get around this, but they didn't.

We actually should be happy they fessed up before some hacker figured it out. If this had been a PC maker you'd have seen forum posts all over about how they were purposly gimping their computers (See story on HP VT Bios setting) I guess Apple has an advantage since most Mac users arn't computer users in the "geek" sense.

Anyway, like I said, nothing to do with GAAP that's just a good excuse to cover their mistake. Has anyone done any digging to see if any retail locations "accidently" listed the computer as being 802.11n capable prior to this?

[lesfilip]

Apple Hater

You are such an obvious Apple Hater. Even you said that $1.99 is
no big deal, but you still don't hesitate to try to make it a big deal.

Have a nice day!

[Shef Seattle]

It is milking time

I have been reading some comments and I can't believe how loyal the Mac owners (some the fanboy subset of them) are and how happy to see the farmer appearing at the door and remembering that it is milking time. What was that argument again? You get everything with a Mac and it just works.

So what is next? "Hey boys, we are sorry. Our new secretary made a mistake and you have to pay for the security fixes". Oh yeah, for those Mac owners who are still now aware of it, please search the terms "Apple security updates" in google.

[Steve Bryan]

Get real

Wow, a complete collapse to unadulterated trolling. Mac owners are aware of security updates because they are configured to automatically occur. That isn't the exciting part. What you might find interesting is that they have been effective which is in distinct contrast to the cesspool of malware that afflicts Windows. These updates are free and despite your trollish assertion there is no reason to assume this will be changing. Now run along and use your antivirus program to see if a rootkit has been installed recently.

[mindtwitch]

Bashing isn't a valid argument

1) Classifying people as fanboys doesn't validate your arguement that they are automatically wrong. One thing Apple does VERY well is building brand loyalty, so to say Mac owners are loyal is kudos to Apple for successfully mangaging their brand.

2) Security updates are a whole different ball game. A security update to existing, working and DELIVERED hardward, software, firmware or anything else that the user is currently using wouldn't fall under the same apple tree. You need to check the orange grove for that arguement. The 802.11n isn't a security upgrade, it isn't an "Ooops, we messed up so now you owe us $2.00" It is something that was included by Apple because they were forward thinking. They knew 802.11n was on the horizon and decided to take a change and implement it into their new line of computers so that their users could take advantage of it IF they chose to do so when it was approved and released to market. It is a charge that by law they could not charge at the time of purchase because it wasn't enabled and the user couldn't take advantage of it. Nobody knew it was there when they bought their computer so as one of the other user replied it's like an added bonus. Nobody bought their computer thinking it was 802.11n compatible and then Apple told them "Yeah...about that. We're going to need $2.00 from you." If the computer was "N" compatible and it didn't work or there were security holes in it then there would be no reason to charge because the technology was delivered, charged, payed for and claimed as revenue.

[Vegaman_Dan]

Dangerous Precedent

It doesn't matter what name is on the outside case of the computer. If Apple can get away with this, then they can then decide to charge you for anything at any time without any recourse.

A person buys a computer with a 200Gb HDD installed but it only has 100Gb available. Ah, so you want to use the rest of the drive's capacity? No problem- simply pay us an activation fee. Doesn't matter that you own the drive, you don't own the right to use it.

Want to have the color blue on your monitor? Pay us a fee. Doesn't matter that the hardware is already in place, you don't have the right to use it.

Want to use the letter 'e' on your keyboard? No... sorry, that isn't enabled by default. Please pay us a fee for the use of this hardware key on the keyboard.

It's a very slippery slope and if Apple can get away with it, then other manufacturers will be jumping on that bandwagon too.

[JScottK]

Accounting = ick

Wow, that explanation was painful!

Now I know why accountants are all evil trolls. ;)

[mighty.mouse]

802.11n was still sketchy 3 months ago

Look at it this way: You want to include the new capability, but
because the new standard is not yet approved (indeed, has gone
through changes) you have to decide whether to leave it out or
build it in and gamble that the way you've implemented is right.

Apple chose the latter path. But because they probably weren't
sure if their implementation was correct, they didn't say
anything about it. Because of this and the obscure accounting
rules you get the charge.

So why not just charge a penny for the upgrade? Once you
decide to charge for it, you need to track the charges, collect the
monies, etc. and all of that has cost associated with it. So you
charge enough to cover your expenses in collecting the money.

One other not the article left out: The "enabler" is free if you buy
one of the new AP Extremes. The only people that would actually
need to buy the enabler would be those using non-Apple
wireless routers.

[markdoiron]

Better Choice

There's a better choice. You do what wi-fi hardware companies have been doing for years: Sell the product with the draft spec implemented, and a promise of a free firmware upgrade when the final spec is released (if needed). Maybe Apple just needs some new accountants to tell them how everyone else does this.

--mark d.