Adobe 2003 Annual Report Download - page 43

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We distribute our application products primarily through distributors, resellers, retailers and increasingly
systems integrators, ISVs and VARs (collectively referred to as “distributors”). A significant amount of our revenue
for application products is from two distributors. In addition, our channel program now focuses our efforts on larger
distributors, which has resulted in our dependence on a relatively small number of distributors licensing a large
amount of our products. Our distributors sell our competitors’ products; if our distributors favor our competitors’
products for any reason, they may fail to market our products as effectively or to devote resources necessary to
provide effective sales, which would cause our results to suffer. In addition, the financial health of these distributors
and our continuing relationships with them are becoming more important to our success. Some of these distributors
may be unable to withstand changes in business conditions. Our business could be seriously harmed if the financial
condition of some of these distributors substantially weakens.
In connection with the enforcement of our own intellectual property rights or in connection with disputes
relating to the validity or alleged infringement of third-party rights, we have been, are currently and may in the
future be subject to claims, negotiations or complex, protracted litigation as part of our policy to vigorously defend
our intellectual property rights, including rights derived from third-party licensors. Intellectual property disputes and
litigation are typically very costly and can be disruptive to our business operations by diverting the attention and
energies of management and key technical personnel. Although we have successfully defended or resolved past
litigation and disputes, we may not prevail in any ongoing or future litigation and disputes. Adverse decisions in
such litigation or disputes could have negative results, including subjecting us to significant liabilities, requiring us
to seek licenses from others, preventing us from manufacturing or licensing certain of our products, or causing
severe disruptions to our operations or the markets in which we compete, any one of which could seriously harm our
business. Additionally, although we actively pursue software pirates as part of our enforcement of our intellectual
property rights, we do lose revenue due to illegal use of our software. If piracy activities increase, it may further
harm our business.
Our computer network and applications could be adversely impacted by malicious code such as worms and
viruses, which are released into the public Internet using recently discovered vulnerabilities in popular software
programs. The documents created by our applications, even those with security features, are also vulnerable to
malicious acts such as hacking. Although we have a response team that is notified of high-risk malicious events
from multiple sources and we take certain preventative measures, these procedures may not be sufficient to avoid
harm to our business.
We currently rely on six turnkey assemblers of our products, with at least two turnkeys located in each major
region we serve. If any significant turnkey assembler terminates its relationship with us, or if our supply from any
significant turnkey assembler is interrupted or terminated for any other reason, we may not have enough time or be
able to replace the supply of products manufactured by that turnkey assembler to avoid serious harm to our business.
Although revenue from our OEM PostScript and Other segment remained relatively stable during fiscal 2003 as
compared to fiscal 2002, we expect revenue from this segment to decline in the future. Our overall business may be
harmed if the magnitude of the decline significantly exceeds our expectations. The continuing weakness in the
economy and aggressive competition among printer manufacturers is contributing to pressure on the average selling
price of printers, which may result in the reduction of our royalty arrangements or the adoption by an OEM of
alternative technology.
The Internet market is rapidly evolving and is characterized by an increasing number of market entrants that
have introduced or developed products addressing authoring and communications over the Internet. As is typical in
the case of a new and evolving industry, demand and market acceptance for recently introduced products and
services are subject to a high level of uncertainty. The industry for software that addresses authoring and
communications over the Internet is still developing. Standards defining Web graphics have not yet been fully
adopted. In addition, new models for licensing software may be needed to accommodate new information delivery
practices. The new models may be less lucrative for us than our existing business models. Moreover, critical issues
concerning the commercial use of the Internet (including security, reliability, ease of use and access, cost and quality
of service) remain unresolved and may affect the growth of Internet use, together with the software standards and
electronic media employed in such markets.