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Summary:

When Apple says it sold 37.5 million iPhones and 19.5 million iPads this is often interpreted as Apple declaring that 37.5 million iPhones and 19.5 million iPads have been purchased by customers. That’s not quite the whole story.

Apple (AAPL)
photo: Getty Images / Daniel Barry

When can you count a smartphone as “sold” and when can you count it as “shipped”? For mobile industry reporters, this rather arcane argument never fails to come up each quarter when discussing the health of the players in the smartphone or tablet markets. And it always revolves around (who else?) Apple.

It’s almost gospel in the mobile tech media and among mobile enthusiasts that Apple reports the actual number of iPads, iPhones (and Macs and iPods) it sells directly to consumers during each quarter in its earnings reports. Those numbers are often used disparagingly against other mobile companies when third-party market research firms like IDC report shipment estimates. Still, it’s difficult to get a totally accurate picture of the market; we’ve struggled with it here along with everyone else.

The most common interpretation is that Apple is being open about its shipment totals while its competitors are too shy or scared to share their actual sales numbers. The latter is partly true: Samsung and Amazon, for example, two of the most prominent Android device vendors, famously refuse to share either shipment or sales totals in their quarterly results. There are no legal requirements that companies do so. But that secrecy can be used to imply that Samsung or Microsoft or ZTE or whomever are “channel stuffing,” which is retail lingo for shipping a bunch of products to a distributor even if a business can’t or won’t sell them, just to make it look like there’s demand for its product.

But in this case, it’s not quite that simple.

Apple’s “sold” numbers are really its shipment numbers, according to several prominent financial analysts who obsessively follow every word and number that emerges from Cupertino. Horace Dediu, who writes the Asymco blog, told me that “Apple’s reports show shipments not sales.” He added, “All vendors as far as I know report shipment data since that is what they can record.” He has written about the nuances of what being “sold” actually means as well.

When is a sale a sale?

An Apple store in China.

An Apple store in China.

An Apple spokesman pointed me to the company’s earnings statements. Here’s what it says about how it recognizes revenue from the sale of a product:

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped and title and risk of loss have been transferred. For most of the Company’s product sales, these criteria are met at the time the product is shipped. For online sales to individuals, for some sales to education customers in the U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company retains a portion of the risk of loss on these sales during transit.

Apple is certainly different from companies like Samsung: it has a pretty enviable outlet through which to hawk its own products. There are a little over 400 Apple Stores worldwide and they, along with Apple’s own website, do a lot of the heavy lifting when it comes to getting Apple products in the hands of customers. And products sold through Apple’s retail channels are indeed products sold directly to customers.

But Apple doesn’t only sell direct: it has retail partners too. We’re talking about big companies like Best Buy, Walmart, Target, to name just a few, and mobile carriers worldwide. Note that in Apple’s most recent earnings release, it reported $5.2 billion in net sales through its retail channel, but about $38 billion in net sales through all of its geographic regions, which represent the location of customers when they purchased products.

When Apple says it sold 37.5 million iPhones and 19.5 million iPads, as it did in its second fiscal quarter press release, this is often interpreted as Apple declaring that 37.5 million iPhones and 19.5 million iPads have been purchased and are currently in purses, pockets, backpacks and briefcases somewhere. But Apple, as several financial analysts pointed out, reports something called “channel inventory too,” which it announces during those same earnings calls.

“Their reported numbers are ‘sell in,'” Toni Sacconaghi, research analyst who follows Apple for Bernstein & Co., said. That number includes product sales to retail partners. “They typically state during their earnings call how much channel inventory changed in the quarter, allowing one to compute to sell out units for both iPhone and iPad.”

Verizon storeThe “channel” is its collection of retail partners, which have grown steadily over the years to include retail powerhouses like Walmart and Best Buy. Apple knows how many iPhones and iPads it sent to AT&T or to Best Buy — during the most recent earnings call, CFO Peter Oppenheimer noted the company had “11.6 million iPhones in channel inventory, a sequential increase of about 1 million iPhones” during the quarter. Apple also said it had about “four to six weeks of channel inventory.” That means it takes about four to six weeks for its inventory going to retailers to sell out.

Making it count

But Apple has already marked those 11.6 million iPhones as “sold,” since the company has transfered the product to its retail partners, in this case the “customer” as outlined in the revenue recognition criteria above. Therefore, to understand the bigger picture of how Apple is doing versus its competition, it’s best to count those 37.5 million iPhones as “shipped:” Apple doesn’t technically know if all 11.6 million iPhones sold to retail partners have actually been sold to end users, and for the purposes of recording a sale, it doesn’t care.

Obviously Apple doesn’t want iPhones or iPads piling up on store shelves, and there is certainly no reason to believe that is actually happening. It’s a good indication to Apple whether those products sold based on how often the retailer partner reorders products. So while demand for Apple products remains pretty high, automatically assuming that Apple sold all 37.5 million iPhones to actual people during that three-month period is wrong.

It seems like a small thing, but it is important to keep in mind when evaluating the mobile market, especially as it matures and multiple sales channels are employed. In order to present the clearest possible picture of how demand for Apple’s products stands in relation to its competitors, we will be referring to Apple’s announced numbers as “shipped” from now on.

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  1. So yet another analyst OUTSIDE of Apple decides (guesses?) what he or she thinks about the company and it makes headlines.
    Why?
    If someone inside of Apple had spoken that would be different.
    These are the same people who said Apple should sell lower cost iPhones.
    Then they run around yelling the sky is falling because profit margins are lower.
    DUH!

    1. “An Apple spokesman pointed me to the company’s earnings statements.” Is what Apple itself releases in its earnings statements not good enough for you?

  2. intherealworld Thursday, May 9, 2013

    America is not the world. Yes Apple dominated for years, but now its somebody else’s throne–DEAL WITH IT. No amount of analysis can disprove that. Are you even an analyst by profession?

  3. why did you not consider the elephant in the room the sarbanes-oxley laws which do not count a sale as complete until the contract is fulfilled to the customer companies like ATT pay royalties to apple out of the monthly subscription plans and apple can not legally count that money until the phone sales are complete at the close of the contract . this gives apple a 2 year lag in declaring a sale in the register. thanks for adding another layer of confusion to a touchy subject . why don’t you think about how a company giving a free phone with every purchase can make any money at all on the transaction. when your done pondering that go have a forkful of soup.

    1. Do you have any source for the claim about AT&T paying Apple royalties out of monthly subscription plans?

      “why don’t you think about how a company giving a free phone with every purchase can make any money at all on the transaction.”

      What are you talking about?

    2. Your comment is completely out of date. It used to be correct many years ago.

      For one thing, AT&T used to pay monthly royalties to Apple à la Blackberry only for the first iPhone. Starting in July 2008, Apple moved to the standard model of full cash (about 650$) upfront. The subsidy to make the phone “free”/$99/$199 with contract is out of AT&T’s pocket.

      As for the legal accounting requirement, Apple used to book those $650 as deferred revenue first and spread its recognition over 24 months after the purchase (around $81 per quarter). However, they stopped doing that in 2009 when the law changed. Today they defer only $15 or so per device to reflect later iOS upgrades. Most revenue is accounted in full immediately. Again, this is very old news. There’s a lot of info on this on Apple’s investor website.

  4. one more thing the 6 weeks that was not counted the previous quarter would be in the sales reported in the current quarter so the “lag ” would cancel itself out . you need to take some lessons on counting dynamic inventory go to the supermarket and count the cereal boxes and when your done double check yourself in case some one bought one and when your done check again.

    1. “one more thing the 6 weeks that was not counted the previous quarter ”

      What 6 week were not counted in the previous quarter?

      Do you tell others to take some lessons when it is totally clear that you don’t know nothing about what are you talking?

      1. the author states that 6 weeks of sales are not counted correctly because they are in the product stream or “channel” and are in transit or on the shelf .I quote

        “Peter Oppenheimer noted the company had “11.6 million iPhones in channel inventory, a sequential increase of about 1 million iPhones” during the quarter. Apple also said it had about “four to six weeks of channel inventory.” That means it takes about four to six weeks for its inventory going to retailers to sell out.

        But Apple has already marked those 11.6 million iPhones as “sold,””

        i maintain channel inventory is basically a constant that wherever it is in the quarter is counted on one end or the other and can not be considered a “short count” error

        1. You have to re read, he has not said that 6 weeks are not counted or are not counted correctly.

          I think the one that has to learn what sell in, sell out, channel inventory and shipped is not the author

        2. Channel inventory is not exactly a constant. It grows for new products and declines for old products. In Apple’s latest quarter it grew by 1 million. Sell-through to consumers was one million less than the widely reported number. There’s nothing wrong with that. In the quarter before the next iPhone arrives, channel inventory with probably decrease. Sell-through to consumers will be a few million higher than the official headline number everybody is going to report. Hope that will make you happy. By the way, Gartner tries to reflect that more than IDC in their respective smartphone stats.

  5. I have asked friends in market research firms as well as posted inquiries on quora and so far no one can tell me how most of the analysts come up with their shipment numbers (comscore uses a web survey). Since no manufacturer apart from Apple discloses shipment info my assumption is that the analysts call the main distributors for the country, then extrapolate based on proprietary methodology (aka wild assed guess). Maybe someone can enlighten me on how it’s done?

    1. Apparently there is some PR involved. Samsung can hand down selected unofficial numbers to their pet analysts without having to worry about the scrutiny an official statement would require.

      Comscore is measuring installed base by the way, not market share. I guess a survey is the best way to measure that.

  6. So if Apple’s product is merely “shipped” then we report the rest of the industry as zero? Let’s just go by the reliable numbers. Apple is kicking ass in profit and in actual customer usage as web use can be measured. Two objective measures, two ass kickings. All the other numbers we hear are projected fantasies.

    Where is all the Apple product that never sold sitting and gathering dust? Find THAT and you’ve proven your strong allegations.

    1. Nobody is alleging that Apple devices aren’t being sold. What’s been stated is that up until now, it’s always been assumed that Apple’s stated “sold” numbers were exactly that–phones that were sold to the end user. Meanwhile, with other companies, only “shipped” figures are announced, in that those numbers reflect what has been sold to carriers and retail stores. Apple’s own earning statements contradict this, in that at least a portion of the “sold” figures are in fact what has been sold to retailers and carriers and not to people like you and me.

      This makes total sense, since Apple can’t possibly know the instant each single phone is sold. So why are you so defensive?

    2. I think the point here is that Apple fans are sometimes trying to look for some weird moral high ground for their team by claiming other companies’ figures (if they release any) are somehow second-rate or faked. Now if they don’t release any, that’s something to be frowned upon. But if they do, don’t automatically assume it’s collecting dust on the store shelf just because it doesn’t have a Apple logo.

  7. Actually it’s very clear that the numbers reported are devices shipped and pretty much everybody is reporting that way.
    Inventory in the channel is normal and is just that but they report inventory every quarter so it’s easy to see if it goes to unusual levels and you are making way too much fuss about it.
    You talk about retail, yes Apple does have that and they report those numbers too .It’s some 12% of revenue with some quarterly variations so it’s not much of a factor.
    Apple doesn’t really do anything unusual here at all.

    1. I don’t know if she implied that they do something unusual. It’s quite the opposite. She points out that Apple is doing the usual thing. Those 12 % are only brick-and-mortar store sales. Apple doesn’t break out their online sales. Those could be another 5 or 10 %. Or 25 %, who knows? We do know that iPhones (which are half of Apple’s revenue) are mostly sold by the carriers, but for the other products there has to be a large part of online sales. Amazon, the most popular online retailer, doesn’t carry iPhones and iPads, by the way.

      1. A quick scan of Amazon shows multiple listings for iPads and iPhones with Prime shipping.

        Amazon is sometimes confusing, though, with their retail partnerships, which can show 3rd-party stores under the Amazon branding, so I don’t know if it’s actually Amazon that’s carrying them. But I would think Prime shipping would indicate that they are indeed for sale by Amazon.

    2. No one is saying anything is unusual here on Apple’s part. But I disagree that “it’s very clear that numbers reported are devices shipped.” If it were, this topic wouldn’t come up every quarter. See the comments sections of any of my previous posts — or those on other tech blogs — related to this topic for reference.

  8. Mike Palmer Thursday, May 9, 2013

    How dare you speak of apple like that…… Your gonna make all the isheep mad, never mind I see that they already are lol

    1. Dear Mike. my family is invested in this company because they actually do something. Shill reporting like this may cause actual harm to actual people I people if you will . demonizing us as I-sheep is I-stupid on your part. you may choose to invest in companies that sell your eyes and information in your “free” emails . i suggest you eschew all of apple’s ideas make a clean break and go tell all your friends about your decision on your clam shell flip phone.

      1. “you may choose to invest in companies that sell your eyes and information in your “free” emails .”

        Yes, because iAds are so much better.

  9. Considering most Apple products that ship don’t sit on shelves… its pretty much a wasted article. Seriously.

    1. They also do not have a history of channel stuffing like some other companies do.

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