Apple 2006 Annual Report Download - page 28

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the Company’s access to or increase the total cost of such content. If the Company is unable to continue to offer a wide variety of digital
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 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 (“DRM”) 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. In addition, certain countries have passed legislation or may propose
legislation that would force the Company to license its DRM solutions so that content would be interoperable with competitor devices, which
could lessen the protection of content subjecting it to piracy and could affect arrangements with the Company’s content suppliers. There is no
assurance 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 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 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 or growing Linux market. This analysis may be 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
software products. To the extent the minority market share held by the Company in the personal computer market has caused software
developers to question the Company’s prospects in the personal computer market, developers could be less inclined to develop new application
software or upgrade existing software for the Company’s products and more inclined to devote their resources to developing and upgrading
software for the larger Windows market or growing Linux market. The Company’s recent announcement that it plans to add a feature to the
next version of Mac OS X that will enable Intel-based Macintosh systems to run Windows XP may deter developers from creating software
applications for Mac OS X if such applications are available for the Windows platform. Moreover, there can be no assurance software
developers will continue to develop software for Mac OS X on a timely basis or at all.
In June 2005, the Company announced its plan to begin using Intel microprocessors in its computers. During 2006, the Company introduced
new Intel-based models of the MacBook Pro, MacBook, Mac Pro, iMac, and Mac mini computers. The Company’s transition to Intel
microprocessors for Macintosh systems was completed in August 2006, and its transition for Xserve was completed in November 2006. The
Company depends on third-party software developers to timely develop current and future applications that run on Intel microprocessors.
Universal versions of Microsoft Office and Adobe’s Creative Suite applications are not currently available. The lack of applications that run on
Intel-based Macintosh systems, including Microsoft Office and Adobe Creative Suite, could have a materially adverse effect on the Company’
s
operating results and financial position.
In addition, past and future development by the Company of its own software applications and solutions may negatively impact the decision of
software developers, such as Microsoft and Adobe, to develop, maintain, and upgrade similar or competitive software for the Company’s
products. The Company currently markets and sells a variety of software applications for use by professionals, consumers, and education
customers that could influence the decisions of third-party software developers to develop or
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