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Apple's 10K outlines risks from economy, third party developers

Apple's latest submissions to the Securities and Exchange Commission report some new, relatively unfamiliar dangers related to the weak world economy and third party development that could potentially hurt its business.

Like all US companies, Apple is compelled to report to the SEC in detail about a variety of risks the company conceivably faces, in order to give investors a clear picture of the threats to its bottom line. Apple's risk statement in its 10K form typically covers the gamut from general competition in global markets to the special challenges of staying on top of a rapidly changing tech industry. It also notes everything from changes in regulations and tax law to fluctuating component prices to threats from terrorism.

The economy

This year, the company outlines a series of new risks facing the company related to current economic conditions. These included postponed spending by consumers and businesses in response to "tighter credit, negative financial news and/or declines in income or asset values, which could have a material negative effect on the demand for the Company’s products and services."

The report also singles out the "very pronounced" strengthening of the dollar, "since the Company generally raises prices on goods and services sold outside the U.S. to offset the effect." That will result in higher prices in overseas markets. The weak dollar has, until now, been giving Apple a big boost in foreign markets.

Apple also outlined "continuing increases in fuel and other energy costs, conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence, and other macroeconomic factors affecting consumer spending behavior." If enough customers are either plagued by too many costs or simply too jittery to spend the money they have, this could reduce demand for Apple's products and its finances as a result, the company elaborates.

Apple's 10K also presents the possibility of a domino effect where financial institutions' own troubles could spread and make it difficult for customers to pay or even for resellers to stock items.

"The current financial turmoil affecting the banking system and financial markets and the possibility that financial institutions may consolidate or go out of business," the filing reads. This has "resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit, currency and equity markets.

"There could be a number of follow-on effects from the credit crisis on the Company’s business, including insolvency of key suppliers resulting in product delays; inability of customers, including channel partners, to obtain credit to finance purchases of the Company’s products and/or customer, including channel partner, insolvencies; and failure of derivative counterparties and other financial institutions negatively impacting the Company’s treasury operations... Uncertainty about current global economic conditions could also continue to increase the volatility of the Company’s stock price."

Third party development

Apple further notes possible new pitfalls in its dealings with third party developers, warning that the advent of the App Store has expanded the appeal (and turn-offs) of its handhelds as well as Macs. "The Company believes decisions by customers to purchase its hardware products, including its Macs, iPods and iPhones, are often based to a certain extent on the availability of third-party software applications and services," it says.

Among the factors related to ensuring third-party development continues is "the perceived strength of the Company and its products, the anticipated revenue that may be generated, continued acceptance by customers of Mac OS X, and the costs of developing such applications and services." Apple also lists its "minority share of the global personal computer" as a plausible reason for "developers to question the Company’s prospects," resulting in the potential for lost development.

And as many are aware, the company explains that its occasional tendency to develop software that treads on others' products may well damage its relationship with companies that produce important apps. "The Company’s development of its own software applications and services may also negatively affect the decisions of third-party developers, such as Microsoft, Adobe, and Google, to develop, maintain, and upgrade similar or competitive software and services for the Company’s products," the company points out.

The Cupertino, Calif.-based firm all the same recognizes that supporting third party development is critical for its new mobile platform: it needs developers to produce "compelling and innovative" apps for the iPhone and iPod touch and needs to persuade creators as much as it does end users. "The availability and development of these applications also depend on developers’ perceptions and analysis of the relative benefits of developing software for the Company’s products rather than its competitors’," it says, alluding to smartphone operating systems like Google's Android, RIM's BlackBerry OS, or Symbian. "If developers focus their efforts on these competing platforms, the availability and quality of applications for the Company’s devices may suffer."