15 Things Apple Says Could Kill Its Business

SJ risks

Apple is in strong financial shape, reporting its best quarter ever leading into the busy holiday shopping season, and having more than $50 billion in cash in the bank.

But even Apple has to worry — about competitors running off with its markets, suppliers screwing it with bad terms, and executives fleeing.

Apple expresses some of its biggest worries every three months in its quarterly report to the SEC, in a section called “Risk Factors.”

It doesn’t get very specific — no mention of Google or Android by name, for example — and very few of the risks could actually cripple the company. But it’s still interesting to look at.

The economy

Apple warns: 'Economic conditions could materially adversely affect the Company.'

A global economic meltdown could, yes, threaten Apple's business. (And everyone's.)

The good news for the company is that the last time the economy melted down -- just a couple of years ago -- Apple fared much, much better than the overall technology industry.

The tech industry changes fast, and Apple may not be able to keep up

Apple warns: 'Global markets for the Company's products and services are highly competitive and subject to rapid technological change. If the Company is unable to compete effectively in these markets, its financial condition and operating results could be materially adversely affected.'

Prices and margins fall, products need to be introduced regularly and have short life cycles, industry standards change, competitors could move faster, and consumers may become more price-sensitive.

These realities of the tech industry have mostly hurt Apple's competitors this decade, as Apple has been driving a lot of the innovation and pricing in personal electronics. But it's entirely possible that Apple will slip, the way Sony did in music, Microsoft and Palm did in mobile, MySpace did in social, etc.

Bootleg copies of Mac OS running on cheap PCs

Apple warns: 'In the market for personal computers and peripherals, the Company faces a significant number of competitors, many of which have broader product lines, lower priced products, and larger installed customer bases.' But, 'The Company is currently the only authorised maker of hardware using the Mac OS.'

So, 'Use of unauthorised copies of the Mac OS on other companies' hardware products may result in decreased demand for the Company's hardware products, and could materially adversely affect the Company's financial condition and operating results.'

This is why Apple fights Mac 'hackintosh' bootlegs so strongly, such as Psystar.

Steve Jobs (and other Apple people)

Apple warns: 'Much of the Company's future success depends on the continued availability and service of key personnel, including its CEO, its executive team and highly skilled employees in technical, marketing and staff positions.'

It's true, especially of Apple CEO Steve Jobs, who is Apple. Apple could probably continue to thrive without Jobs for a while, but it would be very hard to replace him, and ultimately, the company would probably decline.

Plus, as Apple notes, Silicon Valley is a competitive place. It's kind of amazing how few key execs Apple has lost over the years.

Apple doesn't have as much experience in the mobile industry as its competitors

Apple warns: 'The Company has only recently entered the mobile communications and media device markets, and many of its competitors in these markets have significantly greater experience, product breadth and distribution channels than the Company. Because some current and potential competitors have substantial resources and/or experience and a lower cost structure, they may be able to provide such products and services at little or no profit or even at a loss.'

It's cute of Apple to warn about this, but even with its lack of experience, Apple has gobbled up the lion's share of the mobile industry's profits, despite having a relatively small market share.

Relying too much on AT&T

Apple warns: 'In the U.S. the Company has contracted with a single carrier to provide cellular network services for iPhone on an exclusive basis. If this exclusive carrier cannot successfully compete with other carriers in the U.S. market on any basis, including but not limited to the quality and coverage of wireless voice and data services, performance and timely build-out of advanced wireless networks, and pricing and other terms or conditions of customer contracts, or if this exclusive carrier fails to promote iPhone aggressively or favour other handsets in their promotion and sales activities or service plans, sales may be materially adversely affected.'

This is actually a real problem for Apple. Yes, the iPhone has been a runaway success for both Apple and AT&T, but AT&T's network quality has given Verizon and Google's rival Android platform a serious boost. The iPhone is still wildly popular and profitable, but it would arguably be more popular if Apple were to have sold the iPhone at Verizon, too.

Anyway, this might not be a problem for much longer, as Apple is reportedly going to start offering a Verizon iPhone early next year.


Apple warns: 'Many of the Company's products are designed to include third-party intellectual property, and in the future the Company may need to seek or renew licenses relating to various aspects of its products and business methods. Although the Company believes that, based on past experience and industry practice, such licenses generally could be obtained on reasonable terms, there is no assurance that the necessary licenses would be available on acceptable terms or at all.'

Right now, Apple is in the middle of a bunch of patent wars, including battles with HTC, Motorola, and Nokia. Patent suits don't generally drive big companies into hardship, and Apple has a LOT of cash. But they can be a distraction.

Apple relies on subsidies from wireless carriers, which could shrink or go away

Apple warns: 'The Company currently receives subsidies from its exclusive and non-exclusive carriers providing cellular network service for iPhone. There is no assurance that such subsidies will be continued at all or in the same amounts upon renewal of the Company's agreements with these carriers or in agreements the Company enters into with new carriers.'

It's true: While consumers only spend $200 or so for an iPhone, carriers pay Apple more than $600, on average, for those phones. Those wholesale prices could go down, potentially pinching Apple's margins, especially as carriers start to see Android as a strong alternative to the iPhone.

Apple has to keep getting components at good prices

Apple warns: 'Because the Company currently obtains certain key components including but not limited to microprocessors, enclosures, certain LCDs, certain optical drives, and ASICs, from single or limited sources, the Company is subject to significant supply and pricing risks.'

Apple COO Tim Cook seems to have the company's suppliers in check, but it's always possible a market will get out of whack, or pricing could shift out of Apple's favour. This could create shortages, affect margins, or worse.

Apple relies on overseas companies to manufacture its products

Apple warns: 'Substantially all of the Company's components and products are manufactured in whole or in part by a few third-party manufacturers. Many of these manufacturers are located outside of the U.S., and are concentrated in several general locations. The Company has also outsourced much of its transportation and logistics management.'

This is cheaper, but gives Apple less control over its products. This could lead to all sorts of problems, such as the recent, embarrassing delays for the white iPhone 4. Plus, it connects Apple to these companies, which can be a headache -- such as when Apple got some flack over partner Foxconn's suicide problems earlier this year.

Apple's iTunes content could go away, at least on reasonable teams

Apple warns: 'The Company's licensing arrangements with these third parties are short-term and do not guarantee the continuation or renewal of these arrangements on reasonable terms, if at all.'

Apple's iTunes business won't make or break the company, but it's a central part of the iStory. iTunes probably will never just collapse, but if multiple big partners ever pulled out, Apple could have egg on its face. (Remember when NBC left iTunes for a while?)

Distributors, carriers, and other resellers

Apple warns: 'Many resellers operate on narrow operating margins and have been negatively affected in the past by weak economic conditions. Some resellers have perceived the expansion of the Company's direct sales as conflicting with their business interests as distributors and resellers of the Company's products. Such a perception could discourage resellers from investing resources in the distribution and sale of the Company's products or lead them to limit or cease distribution of those products.'

As Apple's resellers go, Apple could go. Apple has insulated itself against this problem by expanding its own retail empire. But that may threaten those resellers.

Developers, developers, developers

Apple warns: 'The Company's future performance depends on support from third-party software developers. If third-party software applications and services cease to be developed and maintained for the Company's products, customers may choose not to buy the Company's products.'

In general, Apple's developer status has never been better: Thousands of developers are building hundreds of thousands of apps for Apple's portable gadgets. And based on the success of the App Store, Apple is now bringing it to the Mac. But Apple had lost some goodwill in the developer community over the last couple of years, due to inconsistent app rules, before straightening things out this year.

Apple even lists the App Store itself as a risk

Apple warns: 'Unlike third-party software applications for Mac products, the software applications for the iPhone, iPad and iPod touch platforms are distributed through a single distribution channel, the App Store. The absence of multiple distribution channels, which are available for competing platforms, may limit the availability and acceptance of third-party applications by the Company's customers, thereby causing developers to curtail significantly, or stop, development for the Company's platforms.'

Apple obviously knows the App Store has been a huge success. But it knows that having all the control could also blow up.

Quality problems

Apple warns: 'There can be no assurance the Company will be able to detect and fix all defects in the hardware, software and services it sells. Failure to do so could result in lost revenue, harm to reputation, and significant warranty and other expenses, and could have a material adverse impact on the Company's financial condition and operating results.'

Most recent examples: The iPhone 4 'Antennagate' issue, which forced the company to offer free 'bumper' cases, which was costly. And the white iPhone 4, which is still missing in action. And in the past, Apple has had to recall products or issue credits.

BONUS: Political events, war, terrorism, and other circumstances

Apple warns: 'War, terrorism, geopolitical uncertainties, public health issues, and other business interruptions have caused and could cause damage or disruption to international commerce and the global economy, and thus could have a strong negative effect on the Company, its suppliers, logistics providers, manufacturing vendors and customers, including channel partners.'

Apple also warns about a bunch of other potential problems, such as IT system failures, its volatile stock price, the risks of international operations, fluctuations in its investment portfolio, its past stock options practices, legal proceedings, etc.

Of course, these aren't the REAL things Apple is worried about

Bigger worries include: Google, Facebook, Google, Google, Microsoft, and Google.

But Apple has to say something to the SEC.

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