Comment by rahimnathwani | Hacker News Reader

Comment by rahimnathwani | Hacker News Reader

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  If you think of it like a hick farmer would

OK, let's do that. But we need to use an example where there are two or more outputs under 'joint supply'. Otherwise it's not analogous to the situation with Apple's ecosystem.

Let's figure out the profit margin on wool from your sheep farm. Each month:

  - Your wool revenue is $1000
  - Your mutton revenue is $1000
  - Your total costs (feed, labor, etc.) are $1000

What's your profit margin on wool?

Most people will try to split the costs 50/50 since revenues are equal, making wool's margin (1000 - 500)/1000 = 50%.

But then ask them: What if wool prices double, so now:

  - Wool revenue is $2000
  - Mutton revenue is still $1000
  - Total costs still $1000

Should wool's costs still be $500? Or should they now be $667 since wool is 2/3 of revenue? The margin would be either:

  A) (2000 - 500)/2000 = 75%
  B) (2000 - 667)/2000 = 67%

Which is right? There's no correct answer, because any cost allocation between wool and mutton is arbitrary. We can calculate the total profit margin for the farm, but not for individual products.

I'm not an accountant, but my understanding is that accounting guiding principles say that the answer is B.

But that's only because the example is over-simplified, and assumes that the labor & feed benefit both wool & mutton equally.

They don't. For example, a lot of the labor cost will be in the shearing. That should be allocated completely to wool, right? Not so fast, if you don't shear your sheep your meat production will be affected so even farmers that raise sheep for mutton will still shear their sheep. So there is no correct answer in a real-world situation. rahimnathwani is correct.

A and B are both close enough to the truth to indicate a profit margin of around 70%. There is room to quibble over the last few percent, no room to deny a hefty profit margin, hence It won't matter if they get it a few percent too low since actual profits will be far up in the double digits region.

The two options I gave are illustrative, and do not cover the complete range of possible answers. So you can't assume the 'true' answer (if it exists) lies within that range.

I could reasonably argue that 100% of costs should be allocated to wool (after all, I'm a wool farmer, and mutton is just a byproduct!), or that 100% of costs should be allocated to mutton.

The options were illustrative but the numbers are plausible, it doesn't matter whether you use wool and mutton or bits and bytes as illustrations. That is what this is about, not the last few percent but the grand scale of the margin. That Apple takes to the IT-version of Hollywood Accounting [1] may be expected but does not need to be defended.

[1] https://en.wikipedia.org/wiki/Hollywood_accounting

In my original example, the profit on wool could be $0 (0% of revenue) or $1000 (100% of revenue), depending on how you allocate costs. So, if there's a true number, it's somewhere in the range 0% to 100%.

For the lone farmer who's just trying to make it through the season and can't afford an accountant, it may seem difficult to correctly account for costs, but if you're one of the richest large multi-national corporations in the world, you'd book the revenue according to GAAP and not try to guess at how to do it from first principles. In particular, you'd pick a method and stay with that until there's a reason to change. By "percentage of revenue contribution" is entirely valid, though there are other methods.

Since the question was written to pose by percentage of revenue contribution as wrong, by production units is another way you could do it. But importantly, as a public company, you pick a method and go with that so that the numbers can be compared from year to year, and quarter to quarter, and is more important than the absolute number, though that's still important.

Importantly, it's not this big crazy unknown question that's never been answered before in the history of the business of sheep. Or hardware and software sales. Apple, whos legal and accounting department used an aggressive tax minimization strategy similar to the Dutch Sandwich to book revenue in Europe until they got called out for it, isn't comprised of "hick farmers" who don't know what they're doing and can't figure out a method on how to book revenue. It's a ploy yet again to avoid paying taxes or developers and isn't some off-the-cuff answer.

Apple, as a public company, is required to break out material revenue, and thus the App store revenue is listed in their quarterly 10-K with the SEC. Cost of sales and operating expenses are also listed. Importantly though, the lawyers fighting Apple just need to establish that the percentage is quite high, even if a specific number came be agreed upon, and thus Apple is can sustainability pay out whatever they're being asked for.

Though, the SEC is a US institution and has limited reach outside of the US, and the linked case is coming from the UK, so I'm not sure if the existence of the 10-K comes into play.

We tend to breed specialised sheep for wool, and specialised sheep for meat. Same thing with different animals.

Besides, why the analogy? We’re talking app stores. It's not apparent why we need a joint supply analogy.

  It's not apparent why we need a joint supply analogy.

The ecosystem wouldn't work without the hardware, the SDKs and the app store. They are designed and maintained in tandem. They are in joint supply. Why does Apple create Xcode and the various SDKs? Is it to support hardware sales, or to support app store sales?

I had a big post written before I remembered wool and mutton come from the same animal. Good post!

Thanks for some level headed-ness. HN becomes quite Reddit-y anytime financial topics come around.

As someone who has some deep interests outside of tech, I’ll say that any time I see HN commentary stray into those interests the quality of people’s understanding takes a very sharp nosedive. The knowledgeable responses don’t get nearly the attention of the shallow and instinctive (but wrong) rebuttals.

I have to assume this pattern holds true for the areas I’m less knowledgeable in. It’s probably safe to assume that the further a topic strays from tech, the less faith you should put in the popular HN take.

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