Apple deferring iPhone sales revenue? Heresy!

[This post also appears on the Yankee Group blog at blogs.yankeegroup.com]


I've been tuning into the Apple earnings call, and have been amazed at how well they are weathering the current economic downturn (compare their results with Nokia's and you'll see what I mean). But on that call, I just heard one of the odder things I can remember, namely that revenue recognition for iPhones sold after March 17, 2009 will be deferred until the iPhone 3.0 software f is released. Let me say that again in a different way: From the point of view of its business accounting, Apple won't consider the iPhone 3Gs shipped to customers since March 17 sold until iPhone 3.0 comes out. For any normal hardware business, that would be highly unusual. For a consumer electronics company that lives on tiny margins, that's just crazy talk.

What I find simply astonishing is that none of the financial analysts are asking questions about this strange policy; they're doing their usual drilling down into the details of how the margins and ASPs of all the products have changed. But to me, the big news here is hiding right in plain sight: Apple expects iPhone 3.0 to have a big affect on its business results going forward. And three months from now, I expect people will be asking themselves how they missed it.

I said in my recent report that Apple is reinventing the mobile phone business by creating Anywhere experiences. I think Apple just told the financial analysts that it doesn't intend to rest on its laurels.


FOLLOWUP: Yankee Group director Josh Holbrook here noted that I had missed the fact that Apple did this last year as well with iPhone 2.0. Another commenter noted that Apple only moved the revenue from about 500,000 iPhones (the ones sold between March 17 and the end of the quarter) into the next quarter or two, resulting in only a few million dollars of revenue moved. All true.

But the reason that this has piqued my interest is that Apple already defers the majority of revenue on iPhones by spreading out the purchase price over 24 months. The reason it has given for this practice is to allow it to provide free upgrades. So why does Apple now feel it necessary to further defer revenue, when it already has an accounting model in place to deal with this issue?

Perhaps my befuddlement will make more sense if I ask a slightly different but related question: How many companies hit by the recession are trying to defer reporting revenue and profit they have already delivered on?

At the moment, I only know of one of them.

Apple pulls out of Macworld! And floppy disks are gone too!

The blogosphere is aflutter with the news that this year will be Apple's last Macworld event and that Phil Schiller rather than Steve Jobs will be doing the keynote. What could have gone wrong? Is Steve ill? Does this mean the end of Apple?

Get a grip people. The real reasons behind this move are exactly what the press release says (gasp! can you do that in PR?). Macworld, like most other trade shows, wasn't really working as part of Apple's marketing strategy, so they gave notice that they aren't going to do it any more. The reasons? It's actually pretty simple. Apple's annual Macworld extravaganza was:

• Expensive. Macworld Conference and Expo may be a cultural icon to some, but it is actually just a trade show organized by IDG. While that is a great business for IDG, it's a multi-million dollar expense for Apple, all to reach around 50,000 attendees. While that may be nice, it's about the same number of people Apple reaches at its Fifth Avenue Store in New York in a few days. Not exactly the best return on investment.
• Inconvenient. Let's see, what's the best way to annoy employees? I know, we'll make them work through the holidays to prepare for a big trade show on the first week of the new year. While all of the consumer electronics industry seems to honor this tradition for the January Consumer Electronics Show, that doesn't mean it's a good practice. Apple and its employees don't need the hassle.
• Way too predictable. There's no better way to ruin surprise and excitement than to schedule it months in advance (proof point: Microsoft OS launches). Pundits everywhere (myself included) now plan stories and research around the first week in January knowing that Apple must have something new to talk about. That doesn't fit with the amazingly great marketing Apple likes to produce. And yet the downsides of this predictability are huge: if the unthinkable should happen -- some technology is late, there's a new product production glitch -- Apple has to jump through hoops to deliver regardless or be painted as having "failed" because they didn't deliver in time for Macworld.

Despite the end of Apple's participation in Macworld, no one should think that this is the end of the Apple, new Apple products, or even Steve Jobs' famed keynotes. Instead, these will now be surprises, undoubtedly announced using Apple's now famous special event invitations emailed to attendees. And while Apple won't have the throngs of every day fans at those events, special store events will offer venues to reach that audience. People often forget that Steve Jobs shows up occasionally at non-Macworld events such as the opening of the Regent Street store in London; not doing Macworld will undoubtedly create new opportunities for other appearances. And no matter where he goes or what he does, he will still draw a crowd. And those who need a structured schedule and their annual fix of Jobsian presentation mastery, they can always attend Apple's World Wide Developer's Conference in the summer, where he will undoubtedly be doing keynotes and cameos there for years to come.

The bottom line: Apple has again figured out yet another way to "think different" by leaving something out, just as it did with the floppy disk. And just as with floppies, the rest of the industry will go through denial, rejection, and finally acceptance that it was the obvious thing to do. 2009 is already shaping up to be a very interesting year.

The Anywhere Network powers a new era in political campaigns

[This post also appears under my byline on the Yankee Group blog ]

President-Elect Barack Obama's campaign over the past two years has been historic. But equally as historic has been the transformational force that today's Anywhere Network -- the near-ubiquitous Internet and mobile connectivity we enjoy today -- played in Obama's march to the White House. Consider just some of these contributions that the network made to his election victory:

• Online contributions. Barack Obama raised more than $600 million in total for his campaign via barackobama.com, the vast majority of which was from more than 3 million Internet contributors. With money the lifeblood of politics, this ability to raise money in small amounts from a large number of contributors will force everyone to rethink political campaign strategies for years to come.
• Socially-networked organizing. If you consider Obama's net-based fund-raising organization as a Silicon Valley social-networking startup, it went from zero to 700 people and raised more than $200 million in revenue in the 12 months prior to June 2008, according to The Atlantic. And unlike most social-networking companies, this organization is making money -- lots of it.
• Text message announcements. Remember Obama announcing his vice-presidential pick of Joe Biden by text message? Not only did this initiative mark the campaign as net-savvy, but it also collected hundreds of thousands of phone numbers that could be texted again as the campaign wore on.
• YouTube videos. The Obama campaign wasn't content to simply load a ton of content onto YouTube and promote it; it created its own branded YouTube Channel at http://www.youtube.com/user/BarackObamadotcom. And of course, that YouTube site features a very prominent "Contribute" button as well (see first bullet about money being the lifeblood of politics).
• Mobile social marketing. The Obama campaign created a compelling mobile web site, Obamamobile.mobi, for its volunteers, voters, and donors and carried on the Democratic tradition started by Howard Dean. But the campaign's commitment to its Anywhere constituents broke new ground with mobile applications. As an example, the campaign created an iPhone application distributed through the Apple App Store that encourages an iPhone owner to call people from their address book in battleground states. The application not only suggests calls and logs calls you've made, but it also sends anonymized log data back to campaign headquarters so they can measure their outreach on this channel. The result: the Obama campaign created a viral phone bank army without spending a single dollar on office space, volunteers, or phones.
• A networked army of Obama workers. The same Atlantic article linked above notes that by June, Obama's social networking provided him with more than 750,000 active volunteers, 8,000 affinity groups, and 30,000 events. To put that in perspective, the Obama campaign manages more employees using its network than the employees of Toyota, General Motors, and Honda put together.

President-Elect Obama's campaign discipline and inspirational messages were the foundation of this 2008 election. But those messages would have fallen flat if no one had heard them. Obama funded, created, and distributed that message to millions of voters using our growing connectivity and did it in ways not thought of just a decade ago. Just as President John F. Kennedy did with television, Obama has transformed both the message and the medium of political campaigning.

Yet, these campaign innovations that touched so many people are just a harbinger of changes we as consumers can expect in the coming five years. Today, the United States is a transforming nation in the $580 billion worldwide Anywhere Economy, with slightly more than one broadband line for every two people. But by the next presidential election in 2012, the connectivity revolution in the US will have passed a new watershed, what we call the Anywhere tipping point of one broadband line per person. Connectivity won't just be frequent then; it will be everywhere.

As Obama's first term of office draws to a close and he runs for re-election in 2012, he will have the opportunity to change the face of politics again. That year, as the networked strategies of this campaign promise, he can and likely will become our first Anywhere president. And that is a change all of us can believe in.

Impressive analysis of Apple's current earnings

Bullish Cross has a very nice analysis of Apple's current earnings if you don't do subscription accounting for iPhones. The bottom line: if you turn off subscription accounting, the company is making about $7.50 a share and has a P/E of about 12. As noted in the article, Apple has more net cash than RIMM, GOOG, AMZN, and IBM combined. If it were valued at their P/Es, Apple's stock would be trading around $200.... But in my humble opinion, the financial crisis has encourage a "throw the baby out with the bathwater" mentality, hence the stock's current pricing. It's a delightful analysis; Apple watchers should give it a read, if for no other reason than the eye-popping nuggets of financial information.

Activation problems don't stop iPhone from being largest CE launch in history

[This post also appears on blogs.yankeegroup.com]

Josh Martin beat me to the punch with his post on the Apple press release this morning (curse you!), but I thought I'd add a bit more context to the story.

Those one million iPhone 3Gs sold this weekend provide a pretty good clue for why Apple and AT&T's activation servers are slammed and barely able to keep up. This was a big deal. Why? Because not only was it about 4 times more phones than Apple had to deal with last year at this time, but because it is probably the largest consumer electronics launch in history.

I noted when I was analyzing Apple at my prior company, the original 2007 iPhone launch was the largest first weekend consumer electronics launch in history as measured in inflation-adjusted dollars, garnering somewhere around $150 million in its first weekend on sale. That eclipsed the Microsoft XBox 360 ($128 million in the first weekend), Microsoft Windows 95 ($122 million in the first four days), and the Sony Betamax (not even close at $58 million in the first 7 months). But Apple just broke its own record. Assuming an average price after carrier subsidy of $433 (2/3 8 GByte models, 1/3 16 GByte models), Apple just posted approximately $433 million in first weekend iPhone sales. Said another way, if this had been a movie, it would have broken all box office records for a first weekend opening -- by a factor of nearly 3.

And the AppStore? That's harder to get a handle on. My estimate is that most of those downloads were free programs, and that Apple pulled in somewhere around $3.5 million in AppStore revenue, of which it got to keep just about $1 million (the other $2.5 million went to the pay application developers). But again, for a first weekend launch, that isn't too shabby -- it took the original iTunes store a week to reach the $1 million mark in revenue in 2003.

Now some will ask why we're gushing about the iPhone -- after all, it's just a phone. But from my personal point of view, it's important for a very specific reason: it's an Anywhere phone. What's an Anywhere phone? One that provides first-class, two-way, broadband access to both the world-wide voice and Internet networks. Most phones have been first class phones and second-class Internet devices; the iPhone has changed that, and done it in such a way that even my technology-phobic mother could use one. We shouldn't be surprised when good technology gets a good reception.

Yes, there were a lot of server and activation problems this weekend, and both Apple and its carrier partners should get their acts together. But making history is never easy or smooth. And Apple's competitors should be happy about the problems they had. Imagine how many iPhone 3Gs Apple would have sold if the launch had been problem-free.