Connect the Dots - Apple's use of deferred accounting for iPhone

How about that....it's Day 2 of the Obama administration and there is already change in my world!!  That's right, I'm actually going to write about accounting in a positive light. I'm not exactly sure why accounting frustrates me more than something like strategy, but I suspect that it's because accounting seems to flip-flop between defined rules and interpretive rules. Or maybe it's just because all the examples in the accounting books are about industries I don't know very well, hence I don't commit myself to it as much.

To my pleasant surprise this morning, I found this article on iPhone deferred accounting.  Being somewhat of an Apple fanboy, I started reading it with interest and all of a sudden I start seeing all these accounting terms from this semester and last semester.   And they made sense.  And I kept reading, and reading, and reading.

After finishing the article, a couple thoughts came to mind:

1. Some of the accounting concepts are starting to soak into my head.  I understood the viewpoint of the author, as well as actively thinking about the flipside from an investor vs. business manager vs. regulator perspective.  I know it seems small, but it was really a lightbulb moment for me.
2. I've been around Silicon Valley companies for 15yrs now, so I'm fully aware of the hype-machines that they can create.  But I also live in today's economic situation and understand the problems that occur when exuberance and excess are practiced above all else.  So I found myself taking the viewpoint that while Apple's decision could be short-changing stock investors in the short-term, it seems like a much more responsible long-term decision to represent the true value of the company.  It matches revenues from the phone sale (device) with revenues from the service it provides (monthly fee from AT&T). And in today's economic situation, that sort of responsibility seems like a breath of fresh air.

One of the things I'm learning from this MBA program is there are times when you need to disconnect yourself from the underlying business and simply focus on the numbers, because otherwise you allow subjectivity (or boredom, in my case) to creep into your analysis.  In this case, I got lucky that the subject and the concept held my interest.  But it also showed me that I need to keep paying attention in accounting...

 

1st Semester Summary - "The Numbers Classes"

"So sayeth the data" could easily be the mantra of any MBA program, and for good reason. While previous generations of business had their fair share of data to collect and numbers to crunch, today's world of data has exploded with the connectedness of networks, computerized analysis and a willingness of companies to share their data via APIs (Facebook, Twitter, Google, Yahoo, Amazon, etc.). But behind all of this data analysis are still the fundamentals of Financial Accounting, Quantitative Methods and Managerial Economics. These three courses make up what I called "The Numbers Classes" in the 1st semester. For most MBA students, these were either love or hate classes, depending on your predisposition to mathematics and problem solving. I tended to follow more on the love side of the spectrum, although I will deny all claims to "love" accounting...it's a black magic that still leaves me scratching my head.

Without going into great detail on these classes, several themes and lessons did emerge from the coursework:

1. There are lies, dam lies, statistics and then there is accounting. For anyone who believes that accounting is a cut & dry, boring, purely numbers crunching exercise is sorely mistaken. As we've learned over the past 10 years, accounting can make or break companies and economies if not understood and monitored properly. It is a science that is grounded in principles and rules, but the shades of grey between those two is enough to fill a 64 box of Crayolas. For managers at any level, it is critical to understand how your company manages their accounting, and how your work impacts the accounting and results of your business. It was incredible to watch all the subtle ways that Balance Sheets, Income Statements and Cash Flow Statements could be affected by decisions that could be viewed as proper or improper, depending on which shade of grey-colored classes you happened to be wearing that day.
2. Anyone can generate or collect data, but only those that can use it to communicate important concepts or make critical decisions will ever be paid to analysis that data. Standard Deviations, Normal Distributions, Probabilities, Pricing and Stocking via Critical Fractiles, Confidence Intervals, Variance, Regression Analysis - all of these quantitative methods can either make your head hurt, or make you appear to be a genius when trying to analysis the data related to your business. More than anything else, Dr. Boone's course provided an outstanding introduction into critical thinking.  Considering how complex and critical quantitative analysis has become in modern business, I actually wish this class had been slightly longer so we had time to cover some of the more complex topics in more depth, but for now I feel like I have enough of a foundation to apply to the rest of the courses in the program.
   
3. While every manager would probably prefer to take a long-term approach to their work, the reality is that much of our work is short-term and succeeds or fails based on our ability to live "on the margins".   Managerial Economics provides an alternative look at the data and accounting for business, by looking at what marginal value, cost or utility our next decision or action will create.  For some people it seemed like a way to manipulate decision making because it didn't always deal with real costs or revenues (just the next cost or revenue), for for others it provided a clearer picture of how to analyze the options between decisions.  The techniques learned in this course are definitely something that we'll build upon in later classes. 

No matter how much anyone wants to talk about vision, leadership or strategy, the fundamentals of any MBA program (or analysis) is the data.  It provides a foundation from which to look at both sides of a decision, as well as to create relative comparisons vs baselines, history and predictions.  

The 2nd Semester Approaches

I think I'm finally caught up with my summaries and impressions from the 1st semester, so it's now time to take a look at the upcoming (2nd) semester, which starts next weekend.  The course list looks like this:

Operations Management - Dr. Jack Meredith

Managerial Accounting - Dr. Bern Beatty

Strategic Marketing - Dr. James Narus

Financial Management - Dr. Sandra Dow

IT Management - Dr. Charles Iacovou

Commercializing Innovation - Dr. Tom Clarkson & Dr. Stan Mandel (Elective)

Based on some initial reading and syllabus review, both Strategic Marketing and Operations Management appear to be extremely interesting.  StratMktg includes an online simulation model, and OpsMgmt appears to be very much about active discussion and the case-study model.  As much as I like Dr. Beatty, I can't say that I'm really looking forward to another accounting course.  I know it's good for me, and so are certain vegetables, but that doesn't mean I have to like them.  Luckily I have a few teammates that seem to grasp it better than me, so I'll be leaning on them again this semester.  I'm interested to see what is covered in the ITMgmt course, since I've spent the past 15 years in the IT industry, although almost entirely on the side of the vendors selling products as opposed to the day-to-day management of those systems.  I'll be interested to see what ROI models and metrics are discussed...maybe it'll help me position and sell my vendor-side products better. The FinMgmt course doesn't have the syllabus released yet, but I suspect that will also be a favorite of mine, as I'm a closet finance junkie.  

I suspect this semester will be as challenging as any in the program, both in terms of the coursework (seems like quite a bit in several courses) and the navigation in the economy in early 2009.  I suspect that we'll all be learning alot from each other as we cope with additional layoffs, economic swings, a new government in place and the overall uncertainty in our connected world.  

The break for the past couple of weeks has been nice and much appreciated, but I'm looking forward to getting back in a routine next week.  I just need to keep reminding myself that 2009 is not 2008, and new thinking and optimism will rule the day.