Business: February 2007 Archives

The culture of sales organizations and salespeople is a fascinating thing. I started getting into sales around 10 years ago (the I Hate Selling book was useful to me), but only recently have I witnessed sales management culture, the relentless pressure, and the personalities.

Sales people have such a unique role and set of responsibilities that few can handle. Examples include:

• accountability to make committed sales projections,
• pressure from customers,
• dealing with support for products that don't always work,
• choosing pre-sales engineers that don't always fit the situation,
• dealing with screaming, crying, scheming, and outbursts of emotions both inside and outside the company,
• handling pipeline pressure from management (who typically manage pipelines statistically via spreadsheet, even though sales is a very empirical, situational process),
• and , in the end -- deal closing, which involves fighting with finance and legal to insist that you're not trying to bring down your own company or the customer's company, you really just want to sell some software and/or services.

There's also three fabulous movies to see to understand the culture. Wall Street, Glengarry Glen Ross, and more recently, Boiler Room. They're dramaticised into moral fables about greed & corruption, but the pressures and personalities of different types of sales superstars and managers are spot on.

Some wonder if sales is even necessary -- if marketing can make products "sell themselves", or if the world will become dispassionate logical evaluators of purchases, or that legal & financial negotiations will become manageable by small companies. Somehow, I doubt it.

Apple is charging $1.99 to activate the 802.11n support in select products, a feature that was left dormant to date.

I've been seeing lots of confusion about how the generally accepted accounting principles led Apple to charge for this, so I thought I'd give a few words on this matter. I'm not an accountant or a lawyer, but based my experience working for a software vendor, it's absolutely true.

Here's my layman's explanation.

Firstly, when a company sets accounting rules in place, it's mostly about setting up money buckets that are broken out for reporting to management and investors. Examples of buckets at Apple include: Macintosh, iPod, Peripherals, Software, etc. One has to be consistent in counting these sales, or else a company can slush money from one bucket to another if a product line isn't doing very well.

Secondly, because of the blurred lines between what is a software product and a service, and plenty of accounting shenanigans over the years blurring the two, there are very strict rules about when a public software company can "recognize" product revenue.. In the past, if a company that sold hardware, services, and software, was having a bad quarter, they'd sometimes sell a combination of services and software and be very liberal in its accounting (for example, discounting services to $0 and allocating the sale to license revenue). Or, alternatively, they'd discount software to $0 and accrue the balance to hardware sales.

Now, vendors are required to document "Vendor Specific Objective Evidence" (VSOE) for products that have multiple deliverables, which basically is a puffy term for "standardized prices". This way, if a software company like Microsoft, BEA, or Oracle were to also sell professional services, they must sell those services at or above the VSOE hourly rate (subject to variations).

Here's what may have happened: Mac OS X has many bundled features, and their accountants broke out the features by VSOE. And, it seems that device drivers have a deemed value of $1.99. Apple can't give it away the 802.11n enabler for free because they can't recognize the revenue on their hardware until all the pieces are delivered! They have to break out the 802.11n into a separate product that's not tied to the original product, and sell it at its VSOE-documented fair value to demonstrate this wasn't really just a hidden software discount intended to inflate hardware revenues.

The above may all be false, and again, I'm not an accountant, nor do I have inside Apple information. If you're interested, the standards are SAB 104 and SOP 97-2, which Apple claims it conforms to in its SEC filings.

Update 2/13/2007: A colleague at BEA, Tim Joransen, suggests that Apple likely picked $1.99 for just this case and it has nothing to do with VSOE, it's just a case of avoiding deferred revenue & a restatement.

"The equivalent for would be to try and recognize revenue for a product feature that isn't yet shipping. Say we are selling Product X. We are shipping 2.6, but the customer really wants a feature that we plan for 3.0. If we in any way promise the feature for 3.0 and tie it to the deal, then we cannot recognize the revenue until 3.0 ships.

If Apple had not monetized it some way, then someone may have made a case that the product wasn't done and the revenue should have been deferred...leading to a huge restatement."