Technology News and IT Business Intelligence

In the last weeks of 2009, the Federal Communications Commission began a probe into Verizon Wireless’ hiked early termination fees for “advanced wireless devices.” The FCC was not exactly satisfied by Verizon Wireless’ explanation of the fees, and said its inquiry would continue.

Today, the next stage of the investigation into early termination fees has begun. The FCC has extended to the questioning to T-Mobile, Sprint Nextel, AT&T, and Google in addition to Verizon Wireless, and the charge is now being led by the FCC’s new Consumer Task Force.

FCC Chairman Julius Genachowski said today, “This inquiry is the first action by the FCC’s Consumer Task Force, which was launched last week to tackle these kinds of issues. I look forward to reviewing the responses to the letters and the recommendations from staff regarding next steps.”

All of the wireless providers were asked a similar set of questions: Which plans do your ETFs apply to? How much are they and what determines their price? How much are handsets discounted and is it possible to buy devices unlocked to avoid ETFs? Are ETFs prorated, and if so, in what way? How does your customer billing schedule work, and do customers have a “trial period” where they can cancel their plans without punishment?

Since Google isn’t a wireless provider, it was asked a different set of questions, mostly centering around the Nexus one and its “surprising” combination of early termination fees from both Google and T-Mobile.

The letter said, “The combination of ETFs from Google and T-Mobile for the Nexus One is also unique among the four major national carriers. Consumers have been surprised by this policy and by its financial impact. Please let us know your rationale(s) for these combined fees, and whether you have coordinated or will coordinate on these fees and on the disclosure of their combined effect.”

But combined early termination fees are not unique to Google. If you buy a new device from Amazon.com’s wireless section, you could also be subject to compound fees.

Excerpt taken from Amazon’s Terms and Conditions:

Note, should you cancel your service with the carrier within 181 days, you may also be subject to an additional fee in accordance with the AmazonWireless Instant Discount Terms and Conditions. When you purchase your device with service from AmazonWireless.com, we automatically pass along an instant discount from the carrier to you. This discount has been provided to you based on your agreement to activate a new, or extend an existing, line of service for this device with the carrier, and (b) maintain this service in good standing for a minimum of 181 consecutive days. If you do not activate or extend a line of service in connection with this device, or if your service is canceled/disconnected before 181 consecutive days, AmazonWireless.com will charge you $250 per device, plus applicable taxes.

Betanews spoke to FCC Consumer Bureau Chief Joel Gurin this afternoon to ask if this had been taken into consideration, and if other retailers could be subject to an inquiry from the bureau.

Gurin said, “We are not going to extend our inquiry into other mobile retailers. The ETF on the Nexus One is of specific interest to us because if a subscriber cancels between 14-181 days into his contract, the ETF is $550; effectively double what you might normally pay because it’s going to both Google and T-Mobile. This ETF is unusually high, and we want to understand the rationale behind it.”

For a month, I’ve grappled with the “Why?” of an Apple tablet. Why should Apple make a tablet? Why could Apple succeed in a category where so many other companies have failed? Why would I –or anyone else — want to buy an Applet tablet? No answer, despite all the plausible rumors about the device, could convince me “Why?” Until tonight. I thought of a “What?” that would make me interested in a portable tablet: Delivery of a unified content platform, mixing different media types and live information.

The rumors about Apple’s tablet have focused on disparate content consumption (or creation) — videos, music, ebooks and games among others. Big deal. These capabilities are available on PCs and smartphones or single-function devices. Disparate content on a slate does not excite my gadget geek cortex.

But what if all those functions were a single content platform, which, for example, the foundation already can be seen in AP and CNN iPhone apps, which mix together audio, text and video — or entertainment app Tap Tap Revenge, which mixes music and gaming. Another example: iTunes LP and iTunes Extra, which mix additional content or visuals with albums or movies. Now take these concepts and serve up a live, mixed-content platform that relies on a persistent Internet connection, GPS, accelerometer and compass for spatial and location information — what iPhone OS already offers to some extent today.

In this context, a digital astronomy textbook could incorporate typically static content with much more. Students could subscribe to various feeds, including Mars Rover videos on YouTube or astronomical Twitter accounts. Students from the same class could connect from a single Facebook group where to study and collaborate on research — all within context of the astronomy textbook.

A professor could assign the “Star Trek” movie as a class project about the science of science fiction, which students could download and watch on the tablet. They could snip up to 30-second clips to annotate their research papers. At night, a student could hold up the tablet running the astronomy textbook to the night sky, where the device’s camera, GPS, compass and accelerometer would orientate position for displaying a real-time constellations map.

What about biology, which was my field of study in college? Sociology, anthropology or literature? Why should a high school student use SparkNotes as opposed to reading the Odyssey, when the teacher could make the book so much more fun using supplemental materials all delivered to the tablet?

How about ebooks? Amazon has made a good business out of Kindle, but really how– by taking the analog motif and making it digital. The process of reading a Kindle book really isn’t that different from the physical object. Amazon failed to quantitatively improve the reading process through the digital medium. A tablet content platform could do so much more.

For example, a person buying Stephen King novella “Rita Hayworth and Shawshank Redemption” also could have option of obtaining the “Shawshank Redemption” movie and music soundtrack as a single purchase. Live feeds could connect the ebook buyer to literary reviews — both professional and casual — and online communities at Facebook, among other places. Instead of just reading the latest Stephen King novel, readers could get into the mind of the author through his notes and other research used during the writing. All this interaction would be good for satisfying fans and building brand loyalty around authors and publishers.

I could go on and on. Nothing I’ve suggested is dramatically original thinking. Content creators have been bringing bits and pieces of these concepts together for years. But no one has put them together into a single content platform. Apple already has in iPhone OS and App Store the foundation to mix together static and live content of various types into a single software/hardware platform. Now that would be truly imaginative and potentially world changing.

I don’t know what Apple will announce during its event later today. But I do know the world doesn’t need another tablet. Humanity does need a truly natural content creation and consumption platform — something that transcends the archaic printed page and makes content a seemingly living thing that responds to human needs for social interaction, entertainment and learning.

Now that’s a product I would buy.

Just one day before Apple is expected to unveil its magical new product, the tech media is absolutely infested with “news” and speculation about it. CNBC tonight spoke with Terry McGraw, Chairman and CEO of McGraw-Hill, the major textbook publisher and parent company of J.D. Power and Associates, who said that yes, there is a tablet coming tomorrow, and it does run the iPhone OS, more or less confirming earlier rumors.

McGraw’s quote in full:

“They’ll make their announcement tomorrow on this one. We have worked with Apple for quite a while, and their tablet is going to be based on the iPhone operating system, and so it will be transferable. So what you are going to be able to do now is, we have a consortium of e-books. And we have 95 percent of all our materials that are in e-book format on that one. So now, with the tablet, you’re going to open up the higher-education market, the professional market. The tablet is going to be just really terrific.”

After a few months’ development time, supporters of Google’s Chrome browser — based on the open source Chromium platform — have had only a narrow window to produce a full library of extensions and add-ons for the grand opening of Chrome’s new gallery. That apparently didn’t weigh too heavily on developers’ minds, as yesterday’s ribbon cutting on the first stable Chrome 4 release featured a very well-stocked gallery.

A

s I’ve stated here before, it’s Mozilla Firefox’s adaptability that gives users who work on the Web — as opposed to just browsing — the functionality they need to do their jobs. In the absence of a “professional” Web browser that caters to those of us who make the Web their virtual offices, not only Firefox’s extensions but its extensibility — as a JavaScript interpreter that runs on JavaScript itself — enables others to fill in the functionality gaps. That fact may be the only thing that binds me to Firefox, since the underlying chassis of Chrome has proven itself in my tests to not only be faster but more stable.

Up to now, it’s Chrome’s lack of extensibility that denies it a place on the online workbench. That may begin to change now that Chrome’s extensions emerge beyond the beta phase. Officially, Microsoft Internet Explorer has add-ons as well, but IE hasn’t garnered nearly the same degree of support and enthusiasm in the community as Firefox. If the early going for Chrome is any indication, Google is applying the lessons it’s learned from Android, and is well on its way to achieving at least par with Firefox in the extensibility category.

Browser extensions as “apps”

With Chrome, unlike Firefox, an extension is like an “app” on a handset. It has an icon and an assigned place on Chrome’s main bar, to the right of the address box — what Google calls the “Omnibox.” That’s Chrome’s single text box, which pulls double-duty as an address box and a search box; if you type something into the Omnibox that doesn’t translate as a Web address, Chrome sends it to Google (or your default search engine of choice) for processing there. Since Chrome is already a blazingly fast browser, there doesn’t appear to be any time lost while a search query defaults over to the search engine.

That said, I’ve never really taken to this double-duty approach, as efficient as it seems on paper. Perhaps I’ve just become accustomed to every function in its own place, and maybe in time, I’d grow out of that habit — I expect other users out there not to be as set in their ways as I am.

So the first add-on I began searching for from Chrome’s new Extensions library is something that could give me an exclusive search box. What I found was a third-party extension that, in the spirit of Google (straightforward with no gimmicks), is called Search Box. It adds a magnifying glass icon to the Chrome toolbar; click on that, and Search Box pulls up a separate search text box, not only for Google but for other general and specific search engines as well, including Bing and Wikipedia.

A more convenient option would be to simply add a permanent, separate search box — at least for me. But that’s not Google’s development model for Chrome: It wants extensions to be single-button icons, located in one row, that do discrete things. At one level, this simplifies things: Even Google itself has chosen to produce single apps, like Translate, on a one-click icon rather than enable a separate toolbar. With a modicum of fiddling around with third-party add-ons in Firefox, you could clutter the entire screen with separate, custom toolbars, hanging along every frame imaginable. Chrome steers developers away from that nightmare with the one-click approach, so even though it ends up adding a click to extensions like Search Box, it does help developers maintain their focus on single tasks.

Chrome also disables the ability for search engine competitors to claim large chunks of real estate in the browser, as all the major ones — Bing, Yahoo, Ask.com, and most successfully of all, Google itself — have a tendency to do. Quite a bit of freeware downloadable through Fileforum, for example, is supported through the inclusion of Yahoo Toolbar as a default download option; Google chokes off that chain of possible competition in Chrome. Independent developers appear to have come to competitors’ rescue here; for instance, there’s buttons for Yahoo Mail, Amazon, eBay, Facebook, and many of the Web’s other major brands.

Breaking free from the one-click model

Already, some of the first Chrome extensions have found a way to make their mark outside of their designated parking spaces in Chrome’s lone toolbar. One of them is a transport (not quite a direct port) from the Firefox world: Called FastestFox (previously known as SmarterFox, no relation to FasterFox), the developer’s first effort at moving this to Chrome not only pre-loads portions of pages from other hyperlinked pages into a separate cache, but it also can augment the content of certain pages, especially Google. For instance, FastestFox adds links just above Google’s search results, containing buttons for continuing your search on other folks’ search engines; and through options, you can control designate which ones.

FasterFox amends Chrome’s Google search pages with links to other search engines.

---

Chrome doesn’t give third-party developers much on-screen real estate to signal their presence, so FastestFox’s approach is not only direct but beneficial. On occasion, when conducting long searches on very technical topics, I’m not always certain Google has the most complete index. More often than not, I’m wrong, but when I’m up late trying to figure out why Exchange 2010 has installed more than one virtual directory for the Autodiscover feature, for instance, and whether other admins out there have the same problem, there are times when I simply need reassurance.

Also, if you highlight any text on any page anywhere, FastestFox will pop up a little “speaking bubble” that lets you search for more information on the highlighted text, from any of the search engines inside the bubble represented with icons.

This is some of the useful stuff that Chrome has been missing — the level of functionality that has made testers wish they could move over to Chrome, “if only.” Right now, there are a few flies in the ointment still (for some reason, you can’t control the search engines that FastestFox adds to your Google page). But throughout an entire day of testing, none of the most-wanted functions we saw actually crashed or presented so much as a cosmetic blemish — the first extensions we’ve played with today are pretty solid, even the ones with version numbers earlier than 1.0.

Overcoming the too-many-tabs problem

The problem with having more space is that you eventually run out of it anyway. Opera introduced the world to tabbed browsing, which made sense until we all started running out of tab space. Firefox has add-ons that offer users a few ways to overcome this dilemma — or more accurately, to buy more time until they encounter it again. But not only is Firefox functionally extensible, but structurally as well: add-ons such as Tab Mix Plus can actually replace Mozilla’s design with three rows of tabs, and other add-ons let users stack tabs up vertically.

For now, this ability to rebuild the proverbial airplane while it’s in flight, does not appear to be something Google wants to support with Chrome. So although Chrome 4’s frosted tabs are handsome, in a professional setting, as more and more of them are open, they become too small. Soon your tabs are all entitled M…, A…, R…, and so forth; and the only way to see which one means what, is to fish through them sequentially.

Already, there are three approaches to this solution for Chrome that address the overcrowded horizontal tabs in a vertical way. Presented in order from minimalist to stylized: Tab Switch Plus brings up a drop-down menu listing all the open tabs, with full and legible titles. Tab Menu adds the ability to rearrange the tab order in Chrome’s tab bar left-to-right by dragging and dropping them within the drop-down menu top-to-bottom, and also provides a text box for searching for text in open tabs’ title bars. And VerticalTabs 2.0 (pictured right) offers all these features, with a little more graphical polish. (In our tests, perhaps VerticalTabs could be improved by not doling out search text entries as individual letters, so that “Fastest,” for instance, doesn’t match an entry that happens to have an “F,” an “a,” an “e,” two “s’s,” and two “t’s.”)

A completely different approach to the tab management problem is offered by a very appropriately named extension, TooManyTabs. Another import from the Firefox world, this provides a graphically rich pop-up menu that depicts all your open tabs almost like school kids being lined up in assigned seats in a classroom. When your class is overflowing, as it were, you can actually take open tabs out of the lineup and stick them in a “Suspended Tabs” bar, almost like sending them to the principal’s office. This makes more space on your tab bar for tabs you’re using at the moment.

It’s a very un-Google-like approach to the problem, especially with its slick background colors that can be instantly changed using a palette in the lower left corner. Obviously, the design was originally intended for users who like to show off their browsers, which typically doesn’t describe the Chrome crowd. However, it’s Chrome that may benefit most from the type of functionality that TooManyTabs provides. It was a little wonky in some of our tests, sometimes freezing up and not responding to clicks. But it didn’t crash, nor take the browser down with it; all we needed to do was click outside the menu to close it, and click the extension button to reopen it. Chrome Showcase is a simpler alternative that shows thumbnails of open tabs in a box, and lets you click one to move it to the front.

The one category of Chrome extension we’ll keep our eyes on more intensely is session management, which I’ve said before Chrome severely lacked. Two in this category worth mentioning thus far is Session Manager, which is both plainly-named and plainly executed, but has received good reviews thus far; and Fresh Start, from the developer of TooManyTabs, which has a little more graphical polish.

The big buildup

The reason this is a category to watch is because session management becomes most useful — as is the case with Firefox — in recovering from crashes, which Firefox does with aplomb. If Chrome doesn’t crash as often as Firefox, the usefulness of session management is reduced more to: 1) re-opening pages you use most frequently, and 2) saving a session before logging off or shutting down your computer normally. So if neither FreshStart nor Session Manager (for Chrome) take off, that might not necessarily be a bad thing.

Thus far, Google has pulled off its first round of extensions for Chrome in its typical, unassuming Google way. Specifically, it’s dumped them onto the public like a boy turning over his box of Legos on the floor, and let users plow through the pieces to find the ones that strike their fancy. You’d think Google, of all companies, would refine the categorization and search experience here. But a search for Search Box in the new Extensions gallery pulled up Search Box only as item #15 in the list, on the second page; only by making the query into “Search Box” (with quotation marks) did it rise to #2. What’s more, user-defined themes are thrown into the mix with extensions, so when you go searching for one, you’re liable to find the other.

Mozilla’s add-ons gallery has been developed into an interesting browsing experience; Google’s version, by contrast, looks like a bargain basement blowout sale for socks. One more lesson Google could learn from its Android experience is that community is a feeling, and feelings are something that users have to be given continuously — it’s not something they just sign up for by checking the box on the EULA and clicking on “Install.”

Nevertheless, the official incorporation of add-ons to the stable version of Chrome does make it feasible, for the first time, for many regular users to build their browsers into the functional equivalent of what they use with Firefox. And that’s extremely important, because from the beginning, Chrome has appeared to have the more stable and faster chassis. If there’s still a functionality gap between Chrome and Firefox today, closing it entirely is no longer something that Google has to accomplish alone.

All the major home video game consoles offer downloadable games and add-ons that can be bought from a Web-based store, directly through the user’s console. But of the three major companies, Sony, Nintendo, and Microsoft, only Sony assigns actual dollar values to its downloadable content. Both Microsoft and Nintendo work on points systems where users must first buy a specific amount of credits that are then spent on new content.

A class action lawsuit regarding this point-based method of payment has now been filed against Microsoft in the District court of Pennsylvania. The suit has been filed “on behalf of several million US customers exposed to point fraud, following fraud, breach of contract, negligence, unjust enrichment, and unfair business practices on the part of…Microsoft Corporation.”

The allegation is that the Microsoft Points that users must purchase to then download games, videos, or bonus content, have been handled “fraudulently and negligently” since 2002.

Philadelphia-based attorney Samuel Lassoff filed the suit against Microsoft on his own behalf, which is a virtual repeat of what he did in 2006 with Google. At that time, Lassoff said he was “the victim of hundreds of dollars worth of fraudulent clicks,” where his bill for Pay Per Click advertisements was artificially inflated.

This time, Lassoff says that he received an invoice which said that he bought and spent Microsoft Points on Xbox Live which he claims he had not. He then tried to call support and received no response. Finally, he went to his credit card company to appeal the charges, but ultimately had to go to court.

Lassoff accuses Microsoft of not warning Xbox Live users that they will be charged for “incomplete and/or partial downloads.” All of his claims revolve around the fact that money was apparently taken and no goods or services were rendered.

Google’s revolutionary Internet phone, call management, and messaging service Google Voice has finally been reworked to fit within Apple’s strict iPhone guidelines.

Last July, Google Voice was launched as a mobile application for BlackBerry and Android, but the popular iPhone platform was not included in the launch. Apple had apparently rejected Google’s proposed app just like it had done weeks prior with Google’s social geolocation service, Latitude.

Though Apple denied it had turned down Google’s app in the ensuing FCC investigation, it seemed like the brilliant service was going to first have to be crippled to make it onto the iPhone. Like Latitude, Google Voice had to be shoehorned into the browser to be able to run on iPhone, and users of the service were limited in what they could do within Safari.

Today, Google debuted a revamped HTML5 Web interface for the service, which turns the otherwise weak browser-based front into something a lot more like a native application. Users have a new dialer screen and contacts list, and the mailbox displays missed calls, transcribed voicemails, and free SMS messages. The process for placing outbound calls has also been streamlined, so now the user’s Google Voice phone number actually shows up on the recipient’s caller ID, a feature which didn’t exist before.

But to avoid one of the issues that worried Apple in the beginning, some important functionality is still unavailable in the updated version. For example, there is no integration with the iPhone’s directory; any phone numbers or e-mail addresses used in Google Voice must be stored in the user’s Google account or entered on the fly.

Furthermore, The New York Times today quoted Vincent Paquet, senior product manager for Google Voice as saying, “We haven’t heard back from Apple on this,” meaning that Apple’s argument that Google Voice duplicates some of the iPhone’s core functionality could still stand.

Not since the Soviet Union, have I seen any entity so brazenly try to rewrite history. With today’s fiscal first quarter 2010 earnings announcement, Apple effectively changed its quarterly performance going back two years. In a quarter or a year from now who will remember the earnings results as they were actually reported? This blog and a few others like it may be the only record of what really happened.

But Apple did as much to rewrite the present as the past, by how today’s Q1 results were presented. The company gave no warning that it would adopt new accounting rules, which made what would have been slightly-better-than-expected results seemingly blowout. Fortunately, Apple’s rewriting the past — and its comparison to original earnings reports — sheds some light on the current quarter’s results and how Apple manipulated their delivery.

Subtle Manipulations

Coming into the quarter, Apple guided that revenue would be between $11.3 billion and $11.6 billion, with earnings per share ranging between $1.70 and $1.78. Wall Street consensus estimates were much higher: $12.06 billion revenue and $2.07 earnings per share. But Apple reported a staggering $15.68 billion revenue and net profit of $3.38 billion, or $3.67 a share. The huge disparity creates the perception that Apple had a helluva quarter. How could it not be when beating the Street by $3.62 billion revenue and $1.60 earnings per share? It could be because Apple changed its accounting, choosing to do so without warning.

Apple had been reporting results as GAAP, generally accepted accounting principles, as required but separate non-GAAP results since fiscal fourth quarter 2008, too. Some analysts prepare guidance as GAAP and non-GAAP, but the GAAP numbers are used for estimating revenue, net income and earnings per share. Today’s change effectively eliminates Apple’s non-GAAP reporting.

There is nothing I can see under current disclosure laws that would have prevented Apple from issuing some statement about the accounting change, as long as the information was given out to everyone. Select disclosure to some Wall Street analysts would rightly draw fire from the US Securities and Exchange Commission. By Apple announcing the reporting change before the earnings announcement, Wall Street analysts would have been able to appropriately revise their quarterly revenue and earnings estimates upwards. But Apple didn’t give them that chance. Now why is that?

As I’ve long asserted, in business perception is everything. Apple’s unannounced accounting change has created the perception of well-earned record revenue and earnings. That’s the way many blogs and news sites first reported the results and continue to do so. But an examination of actual product sales shows a strong quarter, but not a colossal one. The big boost came from the accounting change, which gave Apple another boost: Perception about its performance.

It’s the only way I can reconcile Apple’s behavior. If the company had any interest in transparency, Wall Street and shareholders would have received notice of the accounting change. By withholding the information, Apple got a big perception boost and some after-hours lift on the share price.

Questioning Record Performance

As soon as Apple issued its earnings press release, I IMed Betanews founder Nate Mook: “Apple earnings seem too high. I’m going to hold off posting anything until [the] con call. Could be they changed reporting.” The change in reporting wasn’t immediately obvious from the press release.

By waiting, many Apple blogs and news sites got up a report before me. But I didn’t want my reporting to be unduly manipulated. So I waited, for which my only regret is how much misinformation is already out there. But some financial news sites are doing the story right, like story “Apple just makes target, once you look under the hood,” by Therese Poletti, for MarketWatch. She writes:

Apple’s quarter was actually pretty much on target, when one looks at the unit sales of its devices. IPhones, iPods and Mac computers sold pretty much in line with analysts’ forecasts for the period.

Apple’s 8.7 million iPhone shipments actually fell short of analyst consensus estimates. The 3.36 million Mac shipments were slightly above analyst consensus, while the about 300,000 sequential unit increase is inline with holiday quarter expectations based on continually consistent growth rates. According to IDC, in the United States, Mac shipments grew 31 percent year over year. Competitors did better: HP growth was 45.1 percent. Toshiba, which pushed Apple from fourth place to fifth in market share, delivered a whopping 71.5 percent growth. But iPhone and Mac shipments are receiving credit for a quarter where reporting changes matter much more.

Changing the Present

In fairness, there is nothing untoward in Apple’s accounting change. In September, the Financial Accounting Standards Board revised GAAP to Apple’s benefit. Under older rules, Apple had to defer most iPhone, iPod touch and Apple TV revenue for 24 months. Subscription accounting rules mandated that Apple had to recognize most of the revenue over time rather than in the quarter realized from sales. According to Piper Jaffray analyst Gene Munster, Apple reported $78 per iPhone each quarter, deferring $595 per device per quarter. Under the new rules, which must be adopted before 2011, Apple could realize most of the revenue during the quarter of sale. Apple plans to defer $25 per iPhone and $10 per Apple TV per quarter.

Apple is following the new GAAP rules as it is required to. There is nothing wrong with Apple’s new reporting method. It’s what the company is supposed to do. The problem I see: How Apple took advantage of the change to boost earnings perceptions.

During yesterday’s Apple earning conference call, BMO Capital Markets analyst Keith Bachman asked Apple CFO Peter Oppenheimer: “What revenue and EPS would have been under the previous accounting policy for the December quarter?” Oppenheimer responded: ”Keith, actually, I did not say that. That’s actually not something that we have the time to try and figure out.” He dodged the question!

But Apple’s changing-the-past ways give some insight into just how much the accounting change affects the Q1’s reported results. By far, iPhone contributed the most to the quarter’s results as reported: $5.6 billion, or nearly 36 percent of total revenue. Assuming Apple would have otherwise deferred $595 per iPhone, for 8.7 million units that works out to $5.2 billion. Munster’s numbers work. Assuming Apple defers $25 per iphone that’s $648 per 8.7 million iPhones or $5.66 billion, or fairly close to reported revenue. I’ll let the number stand at that, but there are dots I would connect with a bit more information.

Changing the Past

Apple’s revision of past quarterly results offers some insight into the accounting change’s impact. For example, during fiscal fourth quarter 2009, Apple reported $9.87 billion revenue and net profits of $1.67 billion, or $1.82 a share. Apple shipped 7.4 million iPhones, with reported revenue of $2.9 billion. Under Apple’s revised earnings, by retroactively applying the new accounting rules, revenue jumps to $12 billion and net income to $2.52 billion, or $2.77 a share. Apple’s revenue jumps by $2.13 billion with the accounting change. Meanwhile, net profits increase by $850 million and earnings per share by 95 cents.

Another example: The year-ago quarter, when Apple reported $10.17 billion revenue and net profits of $1.23 billion, or $1.35 earnings per share. Apple shipped 4.36 million iPhones, with reported revenue of $1.25 billion. Under the revised results, Apple revenue was $11.88 billion and net profits were $2.26 billion, or $2.50 earnings per share. Apple’s revenue increases by $1.71 billion, net profits by $1.03 billion and earnings per share by $1.15.

One more: Fiscal Q4 2008, when Apple first starting reporting non-GAAP results alongside GAAP results for iPhone. Apple reported $7.9 billion and net profits of $1.14 billion, or $1.26 earnings per share. Apple shipped 6.9 million iPhones, but only reported revenue of $806 million. The revised figures raise revenue to $11.52 billion and net profit to $2.25 billion, or $2.48 earnings per share. The difference: $3.62 billion revenue, $1.11 billion net income, or $1.22 billion. But the differences between the reported and revised figures leave something out. Apple acknowledged deferring $4.6 billion from iPod 3G sales.

Apple justifies the past revisions as making  quarterly comparisons more accurate. There’s sense for one year, but two? The bigger accomplishment: Apple’s past quarterly results look much better today than they did yesterday, and for a company so hellbent on perception, on marketing, on looking good, the revised results are a helluva makeover.

Surely, some Apple fans will defend the past quarterly revisions — the changing of financial history — arguing that it’s what the company would have made anyway. But Apple didn’t report the revised results in those past quarters. You can revise the historical record, but you can’t change the past or the decisions Apple investors made three months or eight quarters ago.

Apple kicked off its 2010 fiscal year with strong first fiscal quarterly earnings — less than two days before announcing its “latest creation” that bloggers, the news media and the tech community can’t seem to stop blabbering about.

During a conference call today, Apple CFO Peter Oppenheimer described the quarterly results as Apple’s best ever. However, Apple instituted new reporting rules for this quarter’s results. The accounting change gave Apple’s results huge lift, which many news sites credited to record Mac and iPhone sales. Apple sales were inline with analyst expectations and recent growth trends. If not for the accounting changes, Apple’s results would more likely have come in slightly above Wall Street’s consensus estimates.

Previously, Apple deferred a significant portion of iPhone, iPod touch and Apple TV revenue under older  subscription accounting rules. The Financial Accounting Standards Board revised the rules in September. The accounting change means that Apple can immediately recognize iPhone/iPod touch and Apple TV revenue rather than deferring much of it for 24 months.

The new accounting method explains why Apple exceeded analyst consensus by such a huge amount — more than $3.5 billion. Apple revised two years of results in support of the accounting change. This revision added at least another $110 million revenue previously deferred over the past 24 months. So the quarter got two lifts:

• Previously unrecognized revenue calculated at $25 for every iPhone sold over two years, according to Oppenheimer (He didn’t say how much total for Apple TV, just $10 per unit).
• Revenue recognized in this quarter that in the past was deferred. By comparison, Apple revenue jumps dramatically, but it’s more because of accounting.

Q1 2010 by the Numbers

For fiscal first quarter, Apple reported $15.68 billion revenue and net profits of $3.38 billion, or $3.67 a share, under the new reporting method. A year earlier, Apple reported revenue of $11.88 billion and $2.26 billion net quarterly profit, or $2.50 per share. Fiscal first quarter ended Dec. 26, 2009.

Three months ago, Apple forecast revenue between $11.3 billion and $11.6 billion, with earnings per share ranging between $1.70 and $1.78. Analyst estimates were much higher than Apple guidance: $12.06 billion average revenue consensus and $2.07 earnings per share. Apple blew past the Street.

For fiscal 2010 second quarter, Apple forecasts between $11 billion and $11.4 billion in revenue, with earnings per share ranging between $2.06 and $2.18.

In a statement, Apple CEO Steve Jobs declared “if you annualize our quarterly revenue, it’s surprising that Apple is now a $50+ billion company.”

Apple’s gross margin was 40.9 percent, up from 37.9 percent a year earlier. International sales accounted for a stunning 58 percent of revenue. Apple ended the quarter with $39.8 billion in cash, up from $34 billion three months earlier.

Q1 2010 Revenue by Product

• Desktop: $1.7 billion, up 62 percent from $1 billion a year earlier.
• Portables: $2.76 billion, up 9 percent from $2.52 billion a year earlier.
• iPod: $3.4 billion, up 1 percent from $3.37 billion a year earlier.
• Music: $1.16 billion, up 15 percent from $1.01 billion a year earlier.
• iPhone: $5.6 billion, up 90 percent from $2.9 billion a year earlier.
• Peripherals: $469 million, up 21 percent from $387 million a year earlier.
• Software & Services: $631 million, up 4 percent from $606 million a year earlier.

iPhone. Apple shipped — what company executives really mean by sold — 8.7 million iPhones worldwide during fiscal first quarter. Apple shipments into the channel are usually several million units higher than numbers released by Gartner, which measures actual sales. A year earlier, Apple shipped 4.4 million iPhones. Wall Street analyst estimates ranged from about 8.8 million (consensus) to over 9 million units — meaning iPhone shipments fell below expectations. However, iPhone revenue rose 90 percent year over year, giving the biggest boost to Apple’s quarter. The smartphone accounted for about a quarter of total Apple revenue, with a chunk of the lift coming from the implementation of the new accounting method.

Interesting aside: After more than 2.5 years of nearly continuous marketing, Apple stopped airing iPhone TV commercials coming into 2010. The marketing change could signal a new advertising campaign either related to the rumored tablet, new iPhone OS version or both.

In a blow to Apple, today, IDC predicted that Nokia’s Symbian OS would lead in global market share in 2013, while Google’s Android — and not iPhone OS — would come in second. IDC predicted that Android shipments would reach 68 million units by 2013, up from 690,000 in 2008. Global smartphone shipments would reach 390 million units. However, IDC’s data doesn’t account for other devices running iPhone OS — the iPod touch and, presumably, Apple’s rumored tablet.

Q1 2010 Unit Shipments by Product

• Desktop: 1.2 million units, up 70 percent from 728,000 units a year earlier.
• Portables: 2.13 million units, up 18 percent from 1.8 million units a year earlier.
• iPod: 21 million units, down 8 percent from 22.7 million units a year earlier.
• iPhone: 8.7 million units, up 100 percent from 4.4 million units a year earlier.

Computers. Once again, Mac sales continued to defy the economy’s downward pull — and that of Windows 7, which Microsoft launched in late October. Apple shipped 3.36 million Macs during the quarter, up from 2.5 million units a year earlier and 3.05 million units during fiscal Q4 2009. Wall Street analyst Mac shipment projections ranged from about 2.79 million to 3.32 million shipments worldwide.

Nearly two weeks ago, analyst firms Gartner and IDC reported strong sequential declines for US Mac market share. In the United States, Gartner said that Apple shipped 1.48 million Macs, up 23.3 percent year over year. Market share declined year over year and sequentially — dramatically. IDC put Apple’s US share at 7.5 percent, down from 8.8 percent in fiscal Q4 2009 and 7.7 percent in fiscal Q1 2009. Both analyst firms ranked Apple fifth in US market share, a one-rank decline below Toshiba. The numbers suggest that at least in the United States Windows 7 sapped some Mac sales momentum during the holiday quarter.

Q1 2010 Revenue by Geography

• Americas: $6.09 billion, up 15 percent from $5.3 billion a year earlier.
• Europe: $5.02 billion, up 40 percent from $3.6 billion a year earlier.
• Japan: $783 million, up 57 percent from $498 million a year earlier.
• Asia Pacific: $1.81 billion, up 142 percent from $750 million a year earlier.
• Retail: $1.97 billion, up 13 percent from $1.7 billion a year earlier.

iPod. Apple shipped 21 million iPods during fiscal first quarter, down from 22.7 million a quarter earlier and, unsurprisingly, up from 10.2 million in fiscal Q4 2009. Analyst consensus for Q1: 20.4 million units. While units decline, revenue rose 1 percent year over year, suggesting a higher sales mix favoring iPod touch, which sales grew 55 percent.

Q1 2010 Unit Shipments by Geography

• Americas: 1.9 million units, up 30 percent from 912,000 units a year earlier.
• Europe: 1.07 million units, up 6 percent from 795,000 units a year earlier.
• Japan: 105,000 units, up 6 percent from 99,000 units a year earlier.
• Asia Pacific: 313,000 units, up 54 percent from 203,000 units a year earlier.
• Retail: 689,000 units, up 34 percent from 515,000 units a year earlier.

Retail. Revenue rose 13 percent year over year, with Apple retail stores selling 689,000 units, compared to 515,000 a year earlier. Apple opened 10 new stores in the quarter, for a total of 283 retail outlets in 10 counrties. There was an average 278 stores open in the quarter, with average revenue of $7.1 million compared to $7 million a year earlier.

The fabric of the original World-Wide Web is HTML, and perhaps no one now can deny that if anyone who ever wrote an HTML document owed someone a licensing fee, the Web might never have come to fruition. But as the concept of the Web broadens and becomes, even in several specific respects, cloudier, a showdown is brewing among proponents of two equally arguable trains of thought: One side believes that as the Web evolves to encompass broader forms of media, the technologies that enable that media to be shared and distributed, should themselves be shared and distributed and not bound by proprietary arrangements.

The other side believes that too much of the world’s intellectual property is already bound to high-bandwidth digital media, particularly video; and if all video were as openly distributable as text, what’s already happening now to The New York Times Company will soon happen to Sony and NBC. If Web media is too free, no one can build a business around its creation and distribution.

The debate is coming to a head now as Mozilla Firefox, the browser that showed the earliest support for built-in video support in HTML 5, wrestles with a new problem: new Web sites launched last week that would support Firefox’s built-in video feature, but using a proprietary video codec Mozilla doesn’t want.

Collection of the ammunition for the powder keg began last year, amid arguments that at the time sounded more like whimpers than bangs. A dispute had emerged among the developers of technologies for the built-in video processing component of HTML 5, the next version of the Web’s fabric. For video to be supported as part of the Web, as the W3C had envisioned, it must be available freely, and the technology that reproduces it must also be royalty-free. Current W3C policy clearly states that membership in the Web’s engineering body presumes that each member must confess every technology that it owns and that it may charge license fees for, in order that the W3C may avoid incorporating them into standards that all the other members would suddenly be charged for.

The problem there is this: The development of video technology is a business, and few developers have the incentive to generously release the fruits of their labor unto the Web in the name of openness. When the W3C developed a long-promised <VIDEO> tag for HTML 5, it was with the expectation that someone would jump at the chance to produce the single, universally-accepted standard codec, perhaps using that momentum to construct a powerhouse video distribution platform.

But there already was a powerhouse video distribution platform: YouTube, owned by Google and already well invested in Adobe’s Flash video technology. While Flash was already well on its way to becoming ubiquitous, YouTube effectively cemented its status for the next several years. With Google already distributing its own Web browser, it had no interest in fouling its own nest by making room for its own competitor.

That competitor was Ogg Theora (or just Theora), the open source video codec built for the open Ogg platform using technology released to the community by On2. Last July, Google’s campaign against Theora began with a public badmouthing of its performance, with a lead Google engineer claiming that if YouTube were to deploy the open codecs used by UK-based DailyMotion, the jump in bandwidth discussion would stifle the entire Internet.

While Theora’s proponents accused Google of managing a FUD campaign, the company turned around and purchased On2, the company whose release of its own grip over VP3 made Theora possible in the first place. Then last Wednesday, Google stunned everyone by launching an experimental YouTube site that claims support for the <VIDEO> tag.

That depends on how one defines “support,” however. While YouTube engineer Kevin Carle stated at the time, “We are very excited about HTML 5 as an open standard and want to be part of moving HTML 5 forward on the Web,” the codec YouTube will use is H.264 — a package that contains proprietary technologies whose implementers pay royalties to the MPEG Licensing Authority. Leading online HD video competitor Vimeo followed up with its own H.264/HTML 5 trials launched the following day.

Mozilla Chief Evangelist Mike Shaver responded on his blog last Saturday rather delicately, starting by pointing out the common ground between Mozilla and Google, and emphasizing that in some respect, both are pursuing the same goals. But the two have made very different decisions, Shaver went on: “Some companies pay annually for H.264 licenses, which they can pass on to users of their software. Google has such a license, but as they have described, it does not extend to people building from their source or otherwise extending their browser,” Shaver wrote. “Personally, I believe that it is completely their right to make such a decision, even if I would prefer that they made a different decision. Mozilla has decided differently, in part because there is no apparent means for us to license H.264 under terms that would cover other users of our technology, such as Linux distributors, or people in affiliated projects like Wikimedia or the Participatory Culture Foundation. Even if we were to pay the $5,000,000 annual licensing cost for H.264, and we were to not care about the spectre of license fees for internet distribution of encoded content, or about content and tool creators, downstream projects would be no better off.”

Mozilla contributor Christopher Blizzard, however, issued language that was a bit more pointed in his own post yesterday: “These moves by Google and Vimeo (and before either of them, DailyMotion) show that things are changing for the better, and faster than I think anyone could have imagined. The players from Google and Vimeo do present a pretty serious problem, though. Each of these require a proprietary H.264 codec to be able to view them. These codecs aren’t compatible with the royalty-free web standards that the rest of the Web is built on. The fact that they are being so unabashedly hyped along with the new darling of the Web — HTML 5 — means that most people don’t understand that something very dangerous is taking place behind the scenes.”

Google’s move last week had an immediate impact, Blizzard argued, on how other video services perceived the development of Web video, as evidenced by Vimeo’s follow-up the very next day, and other moves sure to follow elsewhere. It is already being seen as the chairman of the board voting in favor of H.264, and a redirection in the concept of openness away from non-proprietary, and toward the advancement of someone else’s platform. Already Mozilla — once perceived as the pre-eminent leader in promoting free and open Web video — is being cast as a stalwart, behind the times. As Daring Fireball’s John Gruber chimed in very succinctly last week, “Get with the program, Mozilla.”

A similar move was tried a decade ago, when Microsoft advanced ActiveX as a Web standard — a move which another Mozilla contributor, Robert O’Callahan, points out today went down to an historic defeat.

“I’m not suggesting that the consequences of exposing system codecs to the Web would be identical to exposing ActiveX,” Callahan wrote. “That’s unlikely, and unknowable. But favoring our principles over short-term gains for users is nothing new for Mozilla, and when we’ve done it in the past, history shows it was the right thing to do.”

Today, the first major carrier of phones with Android support, T-Mobile, announced that doubleTwist media manager is now available across all of its Android smartphones, and that the music, video, and photo sync software can now be downloaded directly from T-Mobile for Windows XP and above and OS X 10.5 and above.

Users who come to the Android platform from iPhone frequently complain about Android’s lack of desktop sync and the ability to create music playlists. In fact, the quality of the music ecosystem in general is one of the top ten complaints about the Android platform.

But with the free doubleTwist software installed on the user’s desktop, media sync and playlisting are integrated into Android and the Amazon MP3 store (Android’s official music download partner).

While doubleTwist is actually supported by nearly every Android device, (and practically every current mobile ecosystem) T-Mobile’s partnership with doubleTwist gives T-Mobile subscribers a customized version of the software to make the process of syncing and integration more “simple and accessible.”