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Apple Carefully Explains Exactly How It Could Be Destroyed

tim cook, apple, iphone 5, ios6With a market capitalization of $559 billion, Apple is the most valuable company in the entire world.

But that doesn't mean it can't be destroyed.

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In fact – per SEC regulations – Apple itself has put together a list of "risk factors" that, in careful detail, explain just how Apple could come apart.

Just like you could with any public company, you can find this list in Apple annual report, called a "10-K."

The language Apple uses in its 10-K is a bit obtuse – it's very lawyer-ly – so we'll translate it for you into English here.

So, here are few scenarios Apple worries could materially damage its entire business:

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The wildly unstable global economy could get worse. Thanks to "the continuing sovereign debt crisis," "financial market volatility," spiking fuel costs, healthcare costs, and unemployment, consumer spending could tank and bring Apple down with it. Or, credit markets could freeze up and wipe out Apple's supply chain. Volatility could also wipe out Apple's huge wholly-owned hedge fund.

Consumers could buy cheap, copycat gadgets from Apple competitors. Apple says spends a lot of money designing and developing "nearly the entire solution for its products, including the hardware, operating system, numerous software applications, and related services." Apple says its competitors skip those costs and compete by "emulating the Company’s products and infringing its intellectual property" and then charging a much lower price for copycat products.  If too much of that is allowed it could undercut Apple's business and sink the whole ship.

Apple's designers could start to suck at their jobs. Apple says it that in mobile in particular, it faces deep-pocketed and entrenched rivals. It's only advantage, it believes, is that iOS and iOS products like the iPhone and iPad are superior products in their design. So if Apple's designers start to suck, well then so will Apple. "The Company’s financial condition and operating results depend substantially on the Company’s ability to continually improve iOS and iOS devices in order to maintain their functional and design advantages." 

Apple could lose its grasp on what consumers want, and how much they want it.  To keep winning, Apple has to be constantly releasing new and improved products. Ever since Steve Jobs returned, it's done an incredibly good job figuring out what consumers what kind of gadgets they'll want and how many of them they will buy. There's a lot of risk in building millions of gadgets and assuming people will want to buy them. So far it's paid off for Apple. It's not a given that this will continue, and Apple knows it.

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Component suppliers don't have much competition for Apple's business, and they could start overcharging. Apple "currently obtains components from single or limited sources." So, if these suppliers suddenly decide they want to charge Apple a lot more for those components, Apple doesn't have a lot of options.

Political unrest in Asia could disrupt product manufacture. Apple has third parties build its products in Asia. That's far away from the market place leaves Apple vulnerable to disruptions it can't control, including "natural and man-made disasters, information technology system failures, military actions or economic, business, labor, environmental, public health, or political issues."

Hollywood and record labels could stop licensing content to iTunes. Without movies, TV shows, or books, Apple's iTunes store would be empty and iPods, iPads, and iPhones would be much less fun. All that content isn't free for Apple. Hollywood, publishing companies, and record labels have to agree to sell it through iTunes. That could end if those content owners found a more profitable way of distributing it. The current deals don't last forever.

Apple might get busted for copying someone else's technology. Apple get sued over patent infringement all the time. It's expensive to fight court cases. Even if it's not in the wrong, Apple may have to reach some settlements and agree to licensing payments. "Although management considers the likelihood of such an outcome to be remote," Apple may some day have to pay a huge amount that could effect its earnings.

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Developers could stop making apps. Apple updates its operating systems frequently. "If third-party developers are unable to or choose not to keep up with this pace of change, third-party applications might not successfully operate and may result in dissatisfied customers."

Apple's retail partners could go out of business, or chuck Apple's products out the window. Apple sells a lot of phones and other gadgets at stores operated by cellphone service providers. Because they have pretty lousy margins, Apple worries those companies could go out of business, and make it much harder for Apple to move product. Or, those businesses might decide they are tired of competing with Apple Stores and stop selling Apple products.

Apple's massive expansion into physical retail stores could become unwieldy.  Apple Stores depend on reasonable real estate prices, careful inventory management, and helpful foreign partners. There's a lot of uncertainty in those variables.

A particularly "buggy" Apple gadget could ruin everything. "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, significant warranty and other expenses, and harm to the Company’s reputation."

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Government regulations could force Apple to end lucrative business practices. For example, Apple worries that the government could force it to sell iPhones that work on more than one carrier.

Google or Amazon could start poaching key executives. "Much of the Company’s future success depends on the continued availability and service of key personnel. Experienced personnel in the technology industry are in high demand and competition for their talents is intense, especially in the Silicon Valley, where most of the Company’s key personnel are located."

Terrorists could attack.

Nuclear power plants could blow up.

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War could start.

Fire could wipe out offices, factories, or infrastructure.

Labor disputes could bring business to a halt.

Public health disasters could happen.

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Apple could be hacked and its users privacy could be exposed, ruining the company's reputation.  "If a computer security breach affects the Company’s systems or results in the unauthorized release of personally identifiable information, the Company’s reputation and brand could be materially damaged and use of the Company’s products and services could decrease."

Apple's stock price could simply decline too much, for whatever reason. That would "have a material adverse impact on investor confidence and employee retention."

Foreign currencies could tank, making the US dollar too strong. "Weakening of foreign currencies relative to the U.S. dollar adversely affects the U.S. dollar value of the Company’s foreign currency-denominated sales and earnings, and generally leads the Company to raise international pricing, potentially reducing demand for the Company’s products." Apple is particularly worried about Europe.

Apple's foreign partners could prove unreliable. Apple makes significant pre-payments to foreign suppliers. Who's to say how trustworthy those partners really are? "While the Company has procedures to monitor and limit exposure to credit risk on its trade and vendor non-trade receivables as well as long-term prepayments, there can be no assurance such procedures will effectively limit its credit risk and avoid losses."

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Taxes could go too high in the US or abroad. "Current economic and political conditions make tax rates in any jurisdiction, including the U.S., subject to significant change."

Want to see for yourself? Go here and scroll to page 9 >>

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