I am not misreading that line.
They are taking part of the revenue from the sale of the phone and calling it “service” revenue since the phone comes with free access to the service. The are also taking the costs of providing that “free” service and allocating it to the phone.
This has the effect of further reducing phone profitability and increasing service revenue. Since they are touting their move into higher margin services this makes their P&L statement look more attractive to investors.
Since I hold some AAPL I benefit from any increase in stock price. All I am pointing out is that they are shuffling revenue from an old, disfavored, product line into a new, more favored one, without actually making any substantive changes.
Over 20 years ago I put about 3 month’s salary into AAPL stock. So far it has made down payments on two houses, bought dozens of computers and electronics, paid for a year of college for my daughter, and 2 years of private education for my grandchildren. And I still have more than 90% of it left. Not a bad investment at all.
No, they are not. Nothing on the iPhone at time of sale is a "service," not even an an app that allows a user to access a service. Unless a user opts into a service the revenue stream and associated costs for that service cannot kick in. These are Generally Accepted Accounting Practices (GAAP) which Apple uses, which require such service type accounting. Apple is NOT diverting sales revenue from the hardware gadgets of the iPhone, iPad, or other products to "prop up" their service products.
As I pointed out, hardware sales are a discrete, one time event. An iPhone, iPad, or computer is sold only once. The revenue and costs (except as I said warranty liability) are a one time event. Service product cost and revenues are ongoing and require different, on-going, non-inventory type of accounting. There are built-in Apple apps that provide access to Apple services. . . But the gadget itself is not a service in-and-of-itself, so under GAAP rules it cannot be accounted for as a service revenue, nor can those included apps.
Apple has no incentive to "reduce iPhone profits" to enhance "service sector profitability." None. Margins are what they are. . . Moving profits around on the books doesn’t change the margins that create those profits just because you moved them from one product line to another on a P&L . . . Apple only reports to average margin for the entire company in any case, which as of this last reported quarter was around 38%. . . specific product and even product line product line margins are closely guarded trade secrets.
What you claim they are doing with revenue, unless there is a distinct pre-paid amount of the purchase price that is set aside as unearned income, I.e. amortized from the sales revenue to be booked as earned regularly by a future revenue stream from the user over a fixed future period of time during the expected life of the device, is simply NOT ALLOWED UNDER GAAP RULES and can be considered accounting fraud. There has to be a guanteed usage and agreement associated with any such future revenue stream.
I know about this because there was a court case that required such a thing early on in the iphone’s History with free access to streaming music, so Apple was forced to allocate some small portion of sales revenue to a "subscription escrow" account and book the income in 24 equal installments over a two year expected life of the iPhone to the initial purchaser (users who wished could opt for a couple dollar refund if they agreed not to use the streaming music service). . . until the ruling was overturned due to being found to not be in compliance with GAAP standards of all such similar product sales. The prosecutor and trial court had erred by creating a legal requirement where no statutory requirement or accounting practice ever existed. Once that court ruling was reversed, Apple no longer had to book ANY portion of their hardware sales future revenue stream subscription unearned income.
The services that exist on the iPhone are part of the entire widget. . . But they only incure costs. . . Costs that are part of making the iPhone attractive to buy.
That being said, internal Apple accounting certainly is kept on the percentage of costs the included Apple Apps, the expected future costs per unit sold to support each unit sold, and, yes, future service revenue streams anticipated for each unit sold. They may even allocate internally revenue from those included apps, but the GAAP accounting for the financial statement must be straight forward with no games played or Sarbanes Oxley can be invoked resulting in serious personal fines and prison sentences for the game players. You don’t shift costs or revenues between product categories as you seem think that REPORTER’S subjective note of group audio phone call says was said. It was not a verbatim quote by anyone at Apple but the reprter’s Ad hoc, on the fly, notes. I heard it live. It was in response to a financial analyst’s question. . .
And the actual 10-Q Financial Report to the Securities and Exchange Commission, which I’ve also read, says nothing about such a thing.
By-the-way, CurlyDave, the cited line does not say “revenue,” it says “value.” Then it goes on to cite “costs.”
“Value” and “revenue” are two entirely different concepts in economics. Value is a representation of an asset. Revenue is an incoming cash stream which may have value but that s yet to be determined by proper accounting. A properly applied asset with value can generate revenue. Revenue seldom generates revenue. . . It first must be converted to an asset. A company may not own their revenue. Other parties may have prior claims on it: creditors, judgments, taxing agencies, investors, etc.