In the tables above, the figures for product warranty claims are labeled "Service obligations honored." The figure for product warranty accruals is labeled "Costs accrued for new warranty contracts and changes in estimates for pre-existing warranties."

With product warranties, one adds new accruals to the balance at the beginning of the period, subtracts claims paid, and calculates an ending balance. When we calculate a claims rate or an accrual rate, these are the amounts used, along with the corresponding figure for product sales.

Extended warranties are a little different. When an extended warranty is first sold, accounting rules specify that the amount collected must be deferred. Then, over time, the company obliged to perform the repairs can recognize the revenue gradually over the life of the contract. Most companies choose to use the straight line method to recognize the revenue. So if it's a three-year contract, they recognize one-third of the revenue each year.

Extended Warranty Disclosures

With extended warranties, one must disclose the amount of deferred revenue, but not much else. As we saw in last week's newsletter, Apple chose to also reveal the amount of that liability which is current (to be recognized as revenue within a year) and non-current (to be recognized more than a year into the future).

Dell also includes figures for the current and non-current portions of both its product warranty and extended warranty liabilities. Dell, however, goes a step further and also reveals the amount of new extended warranty sales (labeled as "Revenue deferred for new extended warranties") as well as the amount of past-year sales revenue that has recently been recognized (labeled as "Revenue recognized").

What we don't get is a look at the amount of cost involved in the extended warranties, which would in turn say something about the profitability of these contracts. Product warranties are more or less run as a "break even" operation, where accruals are meant to finance claims with nothing left over. In contrast, extended warranties are supposed to make money in that there will be some money left over once all costs are paid.

In other words, the disclosures required for extended warranties are meager, compared to those required for product warranty. For extended warranties, Apple gives us figures for deferred revenue and we have to make guesses about how much of that is extended warranty. Dell gives us figures for extended warranty revenue, but not the cost of repairs.

Still, at least in this case, we know there's nothing else mixed in with the extended warranty revenue figure, because in its 2012 annual report, Dell identifies the deferred revenue as extended warranty premiums paid by customers:

"Deferred Services Revenue -- Deferred services revenue primarily represents amounts received in advance for extended warranty sales and services contracts. Revenue from the sale of extended warranties and services contracts is recognized over the term of the contract or when the service is completed, and the costs associated with these contracts are recognized as incurred. As of February 3, 2012, and January 28, 2011, the majority of deferred services revenue is related to extended warranties."

Extended Warranty Sales

Dell's product warranties and service contracts provide a wide array of coverages for different products in different locations.

For a $500 desktop sold in the U.S., one year of in-home service and 90 days of telephone support are included for free in the product warranty coverage. A service contract that extends the telephone support to one year is priced at $39. A service contract that extends both in-home service and telephone support for two years is priced at $89. A three-year service contract is $149.

A $1150 laptop sold in the U.S. comes standard with a one-year product warranty and one year of telephone support. A service contract that extends the coverage for both to three years is priced at $199 or $6.00 per month. Adding LoJack for Laptops (an anti-theft service) for those three years is an extra $20 or $1.00 more per month. A three-year service contract that also includes accidental damage protection and LoJack for Laptops is priced at $349 or $10.00 per month.

Dell Marketing L.P. is the administrator of most of the service contracts. It also self-insures in most areas and acts as the obligor (the company whose duty it is to repair or replace the product) for the product warranties and the basic service contracts.

However, for certain tasks or legal obligations, or for certain states or countries, it works with additional partners. For instance, in different U.S. states, the obligors for most of the in-home service contracts are affiliates of The Warranty Group, including National Product Care Co., Service Saver Inc., and the Texas National Product Care Company Inc. In Europe, accidental damage protection contracts are underwritten by London General Insurance Co. Ltd., the European underwriting company for The Warranty Group. Virginia Surety Co. Inc., another affiliate of The Warranty Group, handles accidental damage protection underwriting in Australia.

For the Optiplex, Precision and Dimension computer systems, across most of Europe, Dell sells service contracts that provide next business day on-site service. The list of these countries, which the company defines as its "Dell direct country" region, includes Austria, Belgium, the Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Norway, Poland, Portugal, South Africa, Spain, Sweden, Switzerland, and the UK.

In Canada, for the Dimension product line, Dell Canada Inc. contracts for on-site and next business day repairs with Getronics Canada Inc., a unit of the Aurelius Group. On-site and next business day repairs for most other products are administered by Dell itself.

Worldwide, Dell reported product warranty claims of $1.032 billion in the fiscal year ended February 3, 2012, down slightly from the $1.063 billion reported in the previous fiscal year. Based on nine-month figures, we expect the current fiscal year's claims total to come in a little above $1.1 billion.

Product Warranty Claims Paid

Figure 2 charts the amounts Dell provides each year for "Service obligations honored," otherwise known as warranty claims. As the data shows, Dell's annual product warranty claims payments peaked in the year ended February 2, 2007, at a level of $1.235 billion. The following fiscal year, claims costs fell to $1.17 billion, even though product revenue rose.

Also in its annual report for fiscal 2007, Dell restated some of its warranty expenses from fiscal 2006 and fiscal 2005, following an investigation by the U.S. Securities and Exchange Commission. The major change was to begin publishing completely separate tables for product warranty and extended warranty, a style which has been used ever since and which can be seen above in Table 1.

From fiscal 2003 to fiscal 2006, the two tables were jumbled together so that there was just a single amount listed in Dell's annual reports for product warranty accruals combined with extended warranty deferred revenue. Other manufacturers such as Cummins Inc. and Deere & Co. continue to use this combined format, even after the SEC went after Dell for its misuse.

Because of Dell's format change, in Figures 2 and 3 we have omitted the product warranty figures for fiscal 2003 and 2004, which were never restated. And we have made the comparisons in Figures 5 and 6 begin with the restated 2005 data as well. That way, we know we're comparing apples to apples, if you'll pardon the pun.

Product Warranty Accruals

In Figure 3, we're charting the amounts identified in the product warranty table as "Costs accrued for new warranty contracts and changes in estimates for pre-existing warranties," which we abbreviate as accruals made.

Accruals actually peaked a year before claims, in fiscal 2006. During that year, Dell set aside $1.391 billion in accruals, an amount that dropped to $1.242 billion in fiscal 2007.

The take-away from all of this is that Dell's product warranty claims and accruals peaked six or seven years ago, and have leveled-off since at around a billion dollars per year each.

Claims & Accrual Rates

Figure 4 takes each of these warranty metrics and calculates a rate based on product revenue. However, the calculations here are made quarterly, and the horizontal scale is made up of calendar years. And the suspect data from fiscal 2003 and 2004 is included.

The take-away here is that Dell's claims rate and accrual rate, except for that huge spike at the end of calendar 2005 (the third quarter of the fiscal year ended February 3, 2006, covering the months of August to October 2005), and except for some of that suspect data from 2003 and 2004, has remained largely within a range of 2.0% to 3.0%.

Therefore, in terms of product warranty, Dell has been more or less stable for the past six or seven years, based on the metrics of claims paid (Figure 2), accruals made (Figure 3) and its claims and accrual rates (Figure 4).

Now, let's look at the extended warranty measurements. As we intend to show, extended warranties have lately accounted for 5.0% to 7.0% of Dell's total revenue. In other words, it's not difficult to imagine that the profits from extended warranties are paying the costs of product warranties, and then some.

Extended Warranty Cash Flow

Figure 5 tracks Dell's warranty cash flow, counting the extended warranty revenue deferred and the product warranty accruals together on the same scale. In every one of the nine years shown (which includes our estimates for the final three months of fiscal 2013), extended warranty sales exceeds product warranty accruals by a wide margin.

The ratio was two-to-one in fiscal 2006. It has inched up ever since, passing three-to-one in fiscal 2008 and four-to-one in fiscal 2012. In other words, last year's $4.3 billion in extended warranty sales was more than four times as much as Dell's warranty accrual total.

In the fiscal year ending early next month, we expect accruals to inch up and extended warranty sales to inch down, along with the combined totals. That means fiscal 2012 will mark the peak for Dell's extended warranty sales, five years after its peak year for product warranty claims paid, and six years after its accruals peaked.

Extended Warranty vs. Total Revenue

There is, however, another way of looking at extended warranties that suggests perhaps the peak is still to come. In Figure 6, we're taking the amounts in Figure 5 for extended warranty revenue, and dividing them by Dell's total revenue. From this viewpoint, the percentage of Dell's total revenue that comes from extended warranty sales continues to climb.

Dell's total revenue in fiscal year 2012 was just over $62 billion. Total revenue in the fiscal year about to end is likely to be under $57 billion. Extended warranty sales last year were $4.3 billion. Extended warranty sales this year should come in at about $4.1 billion.

Therefore, the percentage of Dell's revenue arising from extended warranty sales is likely to surpass seven percent this year. It was actually as high as 7.8% of the total during the months of May, June and July 2012, but it was significantly lower in February-April and again in August-October. On balance, we expect the final figure for fiscal 2013 to come in around 7.2%.

Increasing Importance of Extended Warranties

That ratio first passed five percent in fiscal 2006. It first passed six percent in fiscal 2008. Last year, it was just over 6.9%. So it's quite accurate to say that extended warranty revenue is still increasing its importance to Dell, even though product revenue has peaked. And if Dell goes private in the near future, we won't know how much higher that percentage can go.

The danger comes, as Circuit City and a few others have found, when the hardware is being sold at a loss, in order to get an opportunity to sell a profitable extended warranty. Right now, Dell and Apple are cleverly positioning their extended warranties as elongations of their product warranties. Good becomes better, for an additional fee. But they would cross that line if they push too hard, and begin to act like insurance companies selling cars at a discount in order to put more drivers on the road, so they can sell more policies.

When we looked at Apple last week, we found that extended warranty sales were soaring. But so was annual revenue. Therefore, at Apple, we estimated that extended warranty was actually accounting for a declining percentage of total revenue. The rate was greatest in Apple's fiscal year 2007, when extended warranty revenue topped 5.4%. In the fiscal year ended September 29, 2012, we estimated it was slightly under 3.4%.

So there we have three headline trends: 1) Apple passed Dell last year to become the world's largest extended warranty administrator. Even so, 2) extended warranties continue to account for a larger share of Dell's total revenue than Apple's, and 3) that share is rising at Dell and falling at Apple.