Apple RedefinesSubscription

The "subscription" system in the CAD industry isn't.

In a real subscription system, you pay upfront for a year or three, and then regularly receive something for your money every few weeks or months. (The vendor has to sit on your money, because it cannot recognize it as income until it has delivered the goods. In the case of a monthly magazine subscription, the publisher gets to recognize 1/12th of your fee each month.)

The CAD world has perverted the word 'subscription' to mean reverse upgrade. You pay upfront, and then within a year receive something -- you don't know what ahead of time. In the meantime, the company gets to generate additional income from investing the money you've paid upfront. Think how much income a CAD vendor makes from investing several hundred million of deferred subscription income.

I like the upgrade system much better: I get to sit on my money, invest it, and then pay for the upgrade only (1) if I think it is worth it after learning about the new, changed, and dropped features, and (2) when I decide to purchase it.

Now Apple comes up with a third definition of subscription: pay upfront, get the product upfront, and get free upgrades for a couple of years. In the background, Apple is recognizes the income on a subscription basis.

The customer sees nothing different from today's practice of buying a piece of hardware and then downloading some driver or firmware updates for free. For Apple, the new system is a means of smoothing income over future quarters -- allowing it to make a quarter look better by (1) shipping a firmware update for iPhone and AppleTV and (2) boosting the quarter's numbers by recognizing a portion of the delayed income.

Comments

[Jason]

The subscription is for more than just software upgrades. You're paying for the tech support that goes with it for the year. Unfortunately cad companies don't separate the two.

We rarely use the tech support as I often know more than they do, so a less expensive option would be welcome. There is no "upgrade" pricing option so we're stuck with subscription.

[owenwengerd]

I fail to see why you view "free upgrades for a couple of years" as a new definition of "subscription". You get something up front and "free" upgrades for the period of the subscription in Autodesk's subscription program as well. What am I missing?

[ralphg]

That Apple is treating one-time income as subscription income for accounting purposes. This article provides an explanation:

"Apple's Revenue Deferment Program Will Lower FY08 Earnings"
http://ce.seekingalpha.com/article/34095

[owenwengerd]

So Apple is accounting revenue from hardware sales by using a subscription accounting model. While this may be unusual for hardware sales, it's a pretty typical accounting model for software sales. That is to say, I don't think it's a "different" subscription model at all -- it's just the standard subscription accounting model applied to hardware instead of software. Software companies were forced to use this accounting model several years ago with the implementation of new accounting rules from the AICPA that require revenue recognition to be deferred until the entire "product" is delivered (in other words, until all the patches are released). Apple is doing it of their own volition.

One could surmise that this move demonstrates Apple's confidence in the future of the company. It's a refreshing departure from the normal practice of shifting earnings up front and recognizing them immediately rather than banking on being able to deliver future value. Stated another way, Apple is investing in the future instead of cashing in now.