Andy Zaky has an interesting article up over at Bullish Cross where he argues that by accounting for the purchase price of an iPhone over the course of 24 months, Apple is shooting itself in the foot as investors and analysts won’t fully appreciate Apple’s financials.
The underlying problem with the subscription method of accounting is that it makes Apple’s financials appear radically weaker than they actually are.
That’s a good point, but Zaky fails to take into full consideration the fact that if Apple recognized income from iPhone sales on a rolling basis, it would have to charge customers for significant iPhone software updates. The reason why is because there is an accounting requirement which dictates that non-subscription devices (such as the iPod Touch) are subject to a fee when upgraded. Apple has chosen to amortize the sale of an iPhone over a 24 month period on a subscription basis, and in doing so, it can provide iPhone users with new features without having to charge them. This also explains why iPod Touch users are forced to pony up some hard earned cash when a significant software update is released.
Again, Zaky is correct in pointing out that this method of accounting misrepresents Apple’s actual financial health, but Apple isn’t in the business of tailoring its business to the needs of investors. Rather, Apple is more concerned with keeping its consumers happy, and if they do a good job of that, business booms, profits go up, and last but not least, investors are finally happy.
If you focus on the consumer first, investors and analysts will eventually catch on once profits can’t be ignored. But if your adjust your business to keep short term investors and analysts satisfied, consumers will inevitably suffer as a result. Imagine the outrage if Phone users (who already pay a hefty data fee) had to pay 10 bucks every few months for a new iPhone software update. Apple decided to give its customers the best user experience possible at the expense of bending over backwards to make things easier for analysts. It might hurt Apple in the short term (as an investor), but investors aren’t Apple’s demographic.