Update

Accounting rules behind iPod touch update charge

The iPod touch software update released at last month’s Macworld Expo added applications that already appeared on the iPhone along with other new features. But it also delivered some confusion among iPod touch owners who wondered why they were being charged $19.99 for a software update.

It turns out Apple didn’t have much of a choice about charging for the iPod touch January software update, according to analysts familiar with accounting regulations.

“It’s an accounting requirement that if you upgrade a device that’s not on a subscription, you have to charge,” Needham and Company financial analyst Charles Wolf said. “Apple has a choice of what to charge, but they have to charge.”

The iPod touch software update added five new mobile apps—Mail, Maps, Stocks, Weather, and Notes. (All five apps already appear on the iPhone.) The iPod touch’s Maps application also includes the ability to chart your location as well as other features added in the iPhone 1.1.3 software update.

The free iPod touch 1.1.3 software update—which includes important security fixes—also includes all of the new software applications as part of its 165MB download. Purchasing the software upgrade from Apple actually just downloads a tiny file that unlocks the changes you’ve already downloaded onto your iPod. And interestingly, it’s not just the programs that cost money; without paying the $20 upgrade fee, touch users don’t get the ability to rearrange icons or view songs lyrics either, for example.

Both the iPhone and iPod updates appeared at the same time, yet only the latter featured a charge. However, that’s because Apple accounts for the iPhone on a subscription basis; it accounts for the iPod touch differently, and so it has to charge for an upgraded device, analysts say.

Adding to the confusion is the fact that Apple also announced an Apple TV software update at Macworld Expo that existing Apple TV owners will be able to download for free when it comes out this month. But Apple is able to release that update for free because, like the iPhone, it recognizes Apple TV revenue on a subscription basis. According to the company’s February 1 quarterly filing with the Securities and Exchange Commission, “For both Apple TV and iPhone, [Apple] indicated it may from time-to-time provide future unspecified features and additional software products free of charge to customers. Therefore, sales of Apple TV and iPhone handsets are recognized under subscription accounting in accordance with SOP No. 97-2.”

This isn’t the first time Apple has found itself in this situation. A year ago, the company began shipping 802.11n wireless base stations. At the time, Apple also released a software enabler that allowed users of Intel-based Macs to upgrade to the new technology. But existing users had to pay $1.99 for the enabler. Just as with this year’s touch upgrade, Apple cited accounting rules as the reason for the charge.

The difference this time around is that the charge is higher—nearly $20 as opposed to nearly $2. And it’s unclear why Apple charged that amount—the company declined an opportunity to comment on the reasoning behind the $19.99 charge for the touch update.

Ross Rubin, an analyst with market-research firm NPD, says that charging for the new functionality in the iPod touch may also be a way for Apple to recoup some of the costs associated with developing the new applications.

“Think of it like iLife,” said Rubin, referring to Apple’s $79 suite of digital lifestyle apps. “It’s free if you buy a new Mac, but if you already own a Mac, you have to pay for an upgrade.”

Updated at 10:50 a.m. PT to include information on the free Apple TV software update.

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