Apple 2006 Annual Report Download - page 27

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Final assembly of products sold by the Company is currently performed in the Company’s manufacturing facility in Cork, Ireland, and by
external vendors in Fremont, California; Fullerton, California; Taiwan; the Republic of Korea; the People’s Republic of China; and the Czech
Republic. Currently, manufacturing of many of the components used in the Company’s products is performed by third-party vendors in
Taiwan, China, Japan, Korea, and Singapore. Final assembly of substantially all of the Company’
s portable products, including MacBook Pros,
MacBooks, and iPods, is performed by third-party vendors in China. If for any reason manufacturing or logistics in any of these locations is
disrupted by regional economic, business, labor, environmental, public health, or political issues, or due to information technology system
failures or military actions, the Company’s results of operations and financial condition could be adversely affected.
The Company’s future operating performance is dependent on the performance of distributors and other resellers of the Company’s products.
The Company distributes its products through wholesalers, resellers, national and regional retailers, and cataloguers, many of whom distribute
products from competing manufacturers. In addition, the Company sells many of its products and resells certain third-party products in most of
its major markets directly to end-users, certain education customers, and certain resellers through its online stores around the world and its
retail stores. Many of the Company’s resellers operate on narrow product margins and have been negatively impacted in the past by weak
economic conditions. Considerable trade receivables that are not covered by collateral or credit insurance are outstanding with the Company’s
distribution and retail channel partners. The Company’s business and financial results could be adversely affected if the financial condition of
these resellers weakens, if resellers within consumer channels were to cease distribution of the Company’s products, or if uncertainty regarding
demand for the Company’s products caused resellers to 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 and contractors. 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., Canada, Japan, and the U.K. Some of the Company’s resellers have
perceived this expansion of the Company’s direct sales as conflicting with their own businesses 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.
The Company relies on third-party digital 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 digital content to customers through the Company’s iTunes Store. The Company pays
substantial fees to obtain the rights to offer to its customers this third-party digital content. 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 consolidated and formed alliances, which could limit the availability and increase the
fees required to offer digital content to customers through the iTunes Store. 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 digital content in the future. Further, other distributors of third-party content or third-
party content owners may seek to limit
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