Apple 2003 Annual Report Download - page 36

Although most components essential to the Company's business are generally available from multiple sources, certain key components
including microprocessors and ASICs are currently obtained by the Company from single or limited sources. Some key components (including
without limitation DRAM, TFT-LCD flat-
panel displays, and optical and magnetic disk drives), while currently available to the Company from
multiple sources, are at times subject to industry-wide availability and pricing pressures. In addition, new products introduced by the Company
often initially utilize custom components obtained from only one source until the Company has evaluated whether there is a need for, and
subsequently qualifies, additional suppliers. In situations where a component or product utilizes new technologies, initial capacity constraints
may exist until such time as the suppliers' yields have matured. The Company and other producers in the personal computer industry also
compete for various components with other industries that have experienced increased demand for their products. The Company uses some
components that are not common to the rest of the personal computer industry including certain microprocessors and ASICs. Continued
availability of these components may be affected if producers were to decide to concentrate on the production of components other than those
customized to meet the Company's requirements. If the supply of a key component were to be delayed or constrained on a new or existing
product, the Company's results of operations and financial condition could be adversely affected.
The Company's ability to produce and market competitive products is also dependent on the ability and desire of IBM and Motorola, the sole
suppliers of the PowerPC RISC-based microprocessor for the Company's Macintosh computers, to provide the Company with a sufficient
supply of microprocessors with price/performance features that compare favorably to those supplied to the Company's competitors by Intel
Corporation and other developers and producers of microprocessors used by personal computers using other operating systems. Further, despite
its efforts to educate the marketplace to the contrary, the Company believes that many of its current and potential customers believe that the
relatively slower MHz rating or clock speed of the microprocessors it utilizes in its Macintosh systems compares unfavorably to those utilized
by other operating systems and translates to slower overall system performance. There have been instances in recent years where the inability
of the Company's suppliers to provide advanced PowerPC G4 and G3 microprocessors with higher clock speeds in sufficient quantity has had
significant adverse effects on the Company's results of operations. In addition, currently IBM is the Company's sole supplier of the G5
processor used in current Power Macintosh products and Motorola is the sole supplier of the G4 processors. The inability in the future of the
Company to obtain microprocessors in sufficient quantities with competitive price/performance features could have an adverse impact on the
Company's results of operations and financial condition.
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The Company relies on third-party music content, which may not be available to the Company on commercially reasonable terms or at all.
The Company contracts with third parties to offer their music content to customers through the Company's iTunes Music Store. The Company
pays substantial fees to obtain the rights to offer to its customers this third-party music. Many of the Company's licensing arrangements with
these third-party content providers are short-term in nature and do not guarantee the future renewal of these arrangements at commercially
reasonable terms, if at all. Certain parties in the music industry have announced their intent to consolidate their music distribution operations,
which could limit the availability and increase the fees required to offer music content to customers through the iTunes Music Store. If the
Company is unable to continue to offer a wide variety of music content at reasonable prices with acceptable usage rules, or expand its
geographic reach outside the United States, then sales and gross margins of the Company's iTunes Music Store as well as related hardware and
peripherals, including iPods, may be adversely affected.
Third-party content providers and artists require that the Company provide certain digital rights management solutions and other security
mechanisms. If the requirements from content providers or artists change, then the Company may be required to further develop or license
technology to address such new rights and requirements. There is no assurance that the Company will be able to develop or license such
solutions at a reasonable cost and in a timely manner, if at all, which could have a materially adverse affect on the Company's operating results
and financial position.
The Company is dependent on manufacturing and logistics services provided by third parties, many of whom are located outside of the United
States.
Many of the Company's products are manufactured in whole or in part by third-party manufacturers. In addition, the Company has outsourced
much of its transportation and logistics management. While outsourcing arrangements may lower the fixed cost of operations, they also reduce
the Company's direct control over production and distribution. It is uncertain what effect such diminished control will have on the quality or
quantity of the products manufactured, or the flexibility of the Company to respond to changing market conditions. Moreover, although
arrangements with such manufacturers may contain provisions for warranty expense reimbursement, the Company may remain at least initially
responsible to the ultimate consumer for warranty service in the event of product defects. Any unanticipated product defect or warranty
liability, whether pursuant to arrangements with contract manufacturers or otherwise, could adversely affect the Company's future operating
results and financial condition.
Final assembly of products sold by the Company is conducted in the Company's manufacturing facilities in Sacramento, California, and Cork,
Ireland, and by external vendors in Fremont, California, Fullerton, California, Taiwan, Korea, the Netherlands, the People's Republic of China,
and the Czech Republic. Currently, manufacture of many of the components used in the Company's products and final assembly of
substantially all of the Company's portable products including PowerBooks, iBooks, and the iPod is performed by third-party vendors in Japan,
Taiwan and China. If for any reason manufacturing or logistics in any of these locations is disrupted by regional economic, business,
environmental, medical, political, or military conditions or events, the Company's results of operations and financial condition could be