Apple 2004 Annual Report Download - page 53

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reduce their ordering and marketing of the Company's products. The Company has invested and will continue to invest in various programs to
enhance reseller sales, including staffing selected resellers' stores with Company employees. These programs could require a substantial
investment from the Company, while providing no assurance of return or incremental revenue to offset this investment.
Over the past several years, an increasing proportion of the Company's net sales have been made by the Company directly to end-users through
its online stores around the world and through its retail stores in the U.S. and Japan. Some of the Company's resellers have perceived this
expansion of the Company's direct sales as conflicting with their own business and economic interests as distributors and resellers of the
Company's products. Perception of such a conflict could discourage the Company's resellers from investing additional resources in the
distribution and sale of the Company's products or lead them to limit or cease distribution of the Company's products. The Company's business
and financial results could be adversely affected if expansion of its direct sales to end-users causes some or all of its resellers to cease or limit
distribution of the Company's products.
Further information regarding risks associated with Marketing and Distribution may be found in Part I, Item 1 of this Form 10-K under the
heading "Markets and Distribution."
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. Further,
some third-party content providers currently, or may in the future, offer music products and services that compete with the Company's music
products and services, and could take action to make it more difficult or impossible for the Company to license their music content in the future.
If the Company is unable to continue to offer a wide variety of music content at reasonable prices with acceptable usage rules, or continue to
expand its geographic reach outside the U.S., 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 effect on the Company's operating results
and financial position.
The Company's future performance is dependent upon support from third-party software developers. If third-party software applications cease
to be developed or available for the Company's hardware products, then customers may choose not to buy the Company's products.
The Company believes that decisions by customers to purchase the Company's personal computers, as opposed to Windows-based systems, are
often based on the availability of third-party software for particular applications such as Microsoft Office. The Company also believes the
availability of third-party application software for the Company's hardware products depends in part on third-party developers' perception and
analysis of the relative benefits of developing, maintaining, and upgrading such software for the Company's products versus software for the
larger Windows market. This analysis is based on factors such as the perceived strength of the Company and its products, the anticipated
potential revenue that may be generated, continued acceptance by customers of Mac OS X, and the costs of developing such
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