Apple 2011 Annual Report Download - page 51

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deliverable is the non-
software services to be provided to qualifying versions of iOS devices and Mac. The Company allocates revenue between
these deliverables using the relative selling price method. Because the Company has neither VSOE nor TPE for these deliverables, the allocation
of revenue has been based on the Company’
s ESPs. Amounts allocated to the delivered hardware and the related essential software are
recognized at the time of sale provided the other conditions for revenue recognition have been met. Amounts allocated to the embedded
unspecified software upgrade rights and the non-software services are deferred and recognized on a straight-
line basis over the estimated lives of
each of these devices, which range from 24 to 48 months. Cost of sales related to delivered hardware and related essential software, including
estimated warranty costs, are recognized at the time of sale. Costs incurred to provide non-
software services are recognized as cost of sales as
incurred, and engineering and sales and marketing costs are recognized as operating expenses as incurred.
The Company’
s process for determining its ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon
the unique facts and circumstances related to each deliverable. The Company believes its customers, particularly consumers, would be reluctant
to buy unspecified software upgrade rights related to iOS devices, Mac and Apple TV. This view is primarily based on the fact that unspecified
upgrade rights do not obligate the Company to provide upgrades at a particular time or at all, and do not specify to customers which upgrades or
features will be delivered. The Company also believes its customers would be unwilling to pay a significant amount for access to the non-
software services because other companies offer similar services at little or no cost to users. Therefore, the Company has concluded that if it
were to sell upgrade rights or access to the non-
software services on a standalone basis, including those rights and services attached to iOS
devices, Mac and Apple TV, the selling prices would be relatively low. Key factors considered by the Company in developing the ESPs for
software upgrade rights include prices charged by the Company for similar offerings, market trends for pricing of Mac and iOS compatible
software, the Company’s historical pricing practices, the nature of the upgrade rights (e.g., unspecified and when-and-if-
available), and the
relative ESP of the upgrade rights as compared to the total selling price of the product. The Company may also consider, when appropriate, the
impact of other products and services, including advertising services, on selling price assumptions when developing and reviewing its ESPs for
software upgrade rights and related deliverables. The Company may also consider additional factors as appropriate, including the pricing of
competitive alternatives if they exist and product-
specific business objectives. When relevant, the same factors are considered by the Company
in developing ESPs for offerings such as the non-software services; however, the primary consideration in developing ESPs for the non-
software
services is the estimated cost to provide such services over the estimated life of the related devices, including consideration for a reasonable
profit margin.
Beginning with the Company’s June 2011 announcement of the upcoming release of the non-
software services and Mac OS X Lion, the
Company’s combined ESP for the unspecified software upgrade rights and the right to receive the non-
software services are as follows: $16 for
iPhone and iPad, $11 for iPod touch, and $22 for Mac. The Company’
s ESP for the embedded unspecified software upgrade right included with
each Apple TV is $5 for 2011 and $10 for fiscal years prior to 2011. Amounts allocated to the embedded unspecified software upgrade rights and
the non-software services associated with iOS devices and Apple TV are recognized on a straight-
line basis over 24 months, and amounts
allocated to the embedded unspecified software upgrade rights and the non-software services associated with Macs are recognized on a straight-
line basis over 48 months.
The Company’
s ESP for the software upgrade right included with each iPhone sold beginning with the introduction of iPhone in June 2007
through the Company’s second quarter of 2010 was $25. Beginning in April 2010 in conjunction with the Company’
s announcement of iOS 4
for iPhone, the Company lowered its ESP for the software upgrade right included with each iPhone to $10. Beginning with initial sales of iPad in
April 2010, the Company’s ESP for the embedded software upgrade right included with the sale of each iPad is $10, and the Company’
s ESP for
the embedded software upgrade right included with each iPod touch sold beginning in June 2010 is $5.
The Company accounts for multiple element arrangements that consist only of software or software-
related products, including the sale of
upgrades to previously sold software, in accordance with industry specific
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