Apple's $900 million moment

Will defer almost a billion dollars more in the fourth quarter to cover free OS X upgrades and iWork give-away

Apple yesterday put a value on its decision to give away future OS X upgrades to all Mac users and offer the iWork and iLife suites for free to new Mac and iOS device buyers.

Coincidentally, the $900 million that Apple will defer to account for the free software was exactly the same as the amount that its Redmond, Wash. rival wrote off its books in July.

But unlike Microsoft, which crossed off $900 million in revenue to account for an over-supply of Surface RT tablets, Apple's number was not a loss, but instead a long-term deferral of revenue: The money will eventually be recorded on Apple's books.

During an earnings call with Wall Street analysts Monday, Apple's CFO, Peter Oppenheimer, said that the company would defer an additional $900 million in revenue from the sales of Macs and iOS devices in the fourth quarter to account for the free OS X upgrades to the former, and free iWork and iLife apps for both.

"We are deferring a greater portion of the sale of each iOS device and Mac sold," said Oppenheimer. "We anticipate that the additional deferral per device sold, coupled with our sequentially greater unit volume expectations in the December quarter, will result in about a $900 million sequential increase in the net amount of revenue deferred for software upgrade rights and non-software services."

Later, in response to a question, Oppenheimer spelled out how much Apple would defer in revenue per device. "[For the] iPhone and iPad, we are deferring between $15 and $25. That's up as much as $5 per device. And Mac has been [increased from] $20 to $40, so up an additional $20," said Oppenheimer.

He also noted that Apple has been deferring revenue on iOS device and Mac sales, and that the $900 million was simply in addition to that. "As a result of an increase in the software that we are providing to customers for free, coupled with our sequential unit increases, we will defer, we think, about $900 million more in revenue," Oppenheimer summarized.

In previous filings with the U.S. Securities and Exchange Commission (SEC), Apple had said that it deferred $16 for each iPhone and iPad sold, $11 for each iPod Touch and $22 for each Mac. Those deferrals were to financially account for what Apple called "future, unspecified software upgrades and features relating to the product's essential software" and "the online services to be provided to qualifying versions of iPhone, iPad, iPod touch and Mac."

Among the things covered by the deferrals were iOS upgrades -- which once cost iPod Touch owners as much as $20 -- updates to the iCloud online storage and synchronization service, and new functionality added to iOS and OS X via updates between major releases.

Follow-up filings with the SEC said that starting in July 2011, Apple deferred "all revenue from the sale of upgrades to the Mac OS and Mac versions of iLife," a move that at the time seemed to hint at a free upgrade to 2012's OS X Mountain Lion.

The $900 million additional deferred in the fourth quarter will return to Apple's ledger eventually. According to Oppenheimer, the iOS revenue will be reported in installments over a two-year period; deferred Mac revenue will be restored over a four-year stretch.

Apple's $900 million may sound like pocket change to a company with nearly $150 billion in the bank, but the free software move affected the firm's projected margin for the December quarter by one to two percentage points.

Microsoft was faced with a similar decision earlier this year when it announced that it would offer Windows 8.1 to customers already running Windows 8. But Microsoft declined to defer Windows revenue, and in documents submitted to the SEC, explained that it considered Windows 8.1 an "update" rather than an "upgrade," and thus was free to give it away for, well, free.

While the difference may have been lost on customers, it was crucial for Microsoft: Calling Windows 8.1 an "upgrade" would have required it to either charge for the software or retroactively adjust Windows revenue to account for the deferral, lowering that division's earnings over several previous quarters.

Some analysts believe that Apple gave away OS X upgrades and its iWork software as a form of psychological warfare. The theory was that by offering free upgrades and productivity applications, Apple makes Microsoft's business model look "odd and strange and expensive" in the words of Patrick Moorhead, principal analyst with Moor Insights and Strategy.

Today, Van Baker of Gartner had another idea.

"I think there were two reasons why Apple did this," said Baker. "First, it was a shot at Microsoft, kind of like Apple saying, 'Come on, you guys, if you're going to do Office for iPad, do it.' Second, Apple's saying, 'If you're not, we're going to move forward and compete with you.'"

Mac owners with eligible systems can download OS X Mavericks from the Mac App Store.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at  @gkeizer, on Google+ or subscribe to Gregg's RSS feed . His email address is

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Copyright © 2013 IDG Communications, Inc.

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