Apple 2004 Annual Report Download - page 50

The Company is currently focused on market opportunities related to digital music distribution and related consumer electronic devices,
including iPods. The Company faces increasing competition from other companies promoting their own digital music products and distribution
services and free peer-to-peer music services. These competitors include both new entrants with novel market approaches, such as subscription
services models, and also larger companies that may have greater technical, marketing, distribution and other resources than those of the
Company, as well as established hardware, software and music content supplier relationships. Failure to effectively compete could negatively
affect the Company's operating results and financial position. There can be no assurance that the Company will be able to continue to provide
products and services that effectively compete in these markets or successfully distribute and sell digital music outside the U.S. The Company
may also have to respond to price competition by lowering prices and/or increasing features which could adversely affect the Company's music
product gross margins as well as overall Company gross margins.
The Company also faces increased competition in the U.S. education market. Sales in the U.S. to both elementary and secondary schools, as well
as for college and university customers, remain a core market for the Company. Uncertainty in this channel remains as several competitors of the
Company have either targeted or announced their intention to target the education market for personal computers, which could negatively affect
the Company's market share. In an effort to regain market share and remain competitive, the Company has been and will continue to pursue one-
to-one (1:1) learning solutions in education. The Company's 1:1 learning solutions are a complete solution consisting of an iBook portable
system for every student and teacher along with a wireless network connected to a central server. These 1:1
learning solutions and other strategic
sales are generally priced more aggressively and could result in significantly less profitability or even in financial losses, particularly for larger
deals. Although the Company believes it has taken certain steps to strengthen its position in the education market, there can be no assurance that
the Company will be able to increase or maintain its share of the education market or execute profitably on large strategic arrangements. Failure
to do so may have an adverse impact on the Company's operating results and financial condition.
The Company must successfully manage frequent product introductions and transitions in order to remain competitive and effectively stimulate
customer demand.
Due to the highly volatile and competitive nature of the personal computer and consumer electronics industries, which are characterized by
dynamic customer demand patterns and rapid technological advances, the Company must continually introduce new products and technologies,
enhance existing products in order to remain competitive, and effectively stimulate customer demand for new products and upgraded versions of
the Company's existing products. The success of new product introductions is dependent on a number of factors, including market acceptance;
the Company's ability to manage the risks associated with product transitions, including production ramp issues; the availability of application
software for new products; the effective management of inventory levels in line with anticipated product demand; the availability of products in
appropriate quantities to meet anticipated demand; and the risk that new products may have quality or other defects in the early stages of
introduction. Accordingly, the Company cannot determine in advance the ultimate effect that new products will have on its sales or results of
operations.
The Company's products, from time to time, experience quality problems that can result in decreased net sales and operating profits.
The Company sells highly complex hardware and software products that can contain defects in design and manufacture. Sophisticated operating
system software and applications, such as those sold by the Company, often contain "bugs" that can unexpectedly interfere with the operation of
the software. Defects may also occur in components and products the Company purchases from third-parties. There can be no assurance that the
Company will be able to detect and fix all defects in the hardware and software it sells.
47