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Why Do iPod touch Software Updates Cost Money?

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July 2012 Update: The practice of charging upgrade fees has ended, thanks to a change in rules by the Financial Accounting Standards Board, according to Inc. As noted below, it ended with iOS 4.

June 2010 Update: The upgrade to iOS 4 is free for owners of the second and third generation iPod touch. It's unclear whether future upgrades will be free as well.

Owners of an iPod touch know something that few other iPod or iPhone owners know unless they pay very close attention when Apple releases new software for these devices: major software upgrades that are free to iPhone users cost US$10-$20 for iPod touch owners.

The question many iPod touch owners ask is: why?

The answer has to do with U.S. accounting and financial regulations.

The need for the charge, according to Apple and a number of analysts interview by various new outlets, has to do with how Apple recognizes revenues derived from the iPod touch in its financial statements.

It records revenue from the iPod touch at the time it is taken in and treats the device, rightly, as a non-subscription product. Non-subscription products have to have the revenue they generate reported when it hits the books to avoid running afoul of the law, according to an article on this topic by Macworld.

Apple doesn’t have to charge for iPhone or Apple TV software upgrades because it accounts for those two devices as subscription products, according to the same Macworld article and the company's SEC filing for the quarter that ended in Dec. 2007, meaning that it puts the revenue they generate onto its books over time, rather than all at once.

U.S. accounting law requires that non-subscription devices that are upgraded have a fee associated with the upgrade under Apple and many analysts' interpretation of the law. The upgrade to version 2.0 of the OS cost US$10, as did the upgrade to 3.0.

It's a very, very complicated area of accounting and securities law. AppleInsider has the best and most detailed explanation of the situation I've read, for those interested in digging into the history and details.

Some more suspicious observers have suggested that Apple charges the fee because it doesn’t make ongoing revenue from iPod touch users as it does on iPhone users, where it gets a share of the user’s monthly AT&T bill thanks to the terms of its exclusivity agreement with AT&T.

While this idea has a vague ring of plausibility, I haven't come across anyone with deep knowledge of accounting and financial regulations putting any credence in this opinion.

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