This section contains an overview of the principal business-related and other risks facing the KDDI Group that could have a material bearing on the decisions of investors. The section also discloses information on a number of other subjects that, while not explicitly considered business risks at present, could be materially relevant to investment decisions.
KDDI discloses information on possible risks in the interest of greater transparency, and assesses the likelihood of issues arising in connection with the various risk factors. Based on these assessments, it strives to take all appropriate measures to avoid risk wherever possible and to develop appropriate and timely countermeasures for situations as they arise.
This section contains various forward-looking statements that represent the best judgments of the KDDI Group as of March 31, 2016.
Investors should note that future developments are also subject to unknown risks and uncertainties that by their nature cannot be covered by the following discussion.
As the Japanese telecommunications market shifts from traditional mobile devices to smartphones, tablets and other "smart devices", the homogenization of services provided by mobile phone operators and the penetration of low-cost SIM and other services from each of the MVNO companies continues to advance. Telecommunications carriers are expanding their business areas into non-telecommunications services to secure new forms of revenue, and the business strategy of each firm has reached a significant turning point. In addition, the Ministry of Internal Affairs and Communications has issued new requirements and guidelines based on the "Policy Initiative Regarding the Reduction of the Smartphone Rate Burden and Adjustment of Device Sales" (applicable starting from April 1 of this year), which is leading to a new phase in the business environment for the entire telecommunications sector.
Responding rapidly to the changes in this business condition and solidifying competitiveness further, the Company promote "3M Strategy" (multi-network, multi-device, multi-use) while pursuing our "Global Strategy" for business growth in medium and long-term perspective.
On the domestic front, the Company is honing its "au style" in all aspects including the network, devices, services, support, and rates based on the "3M strategy", further improving the customer base, smartphone penetration, and promoting multi-device and multi-use scenarios. The promotion of multi-device, tablet use is regarded as a new driving force for growth. On the multi-use side, the Company entered the electric power retail business from April 2016 as a part of expansion of the "au Economic Zone" in addition to consolidating its successes in product goods sales, finance, and payment settlement services. Furthermore, with the promotion of the multi-device and multi-use scenarios, the "au ARPA (Average Revenue Per Account)", which reflects the multi-device revenue per person, and the "value-added ARPA" per customer have been designated as important KPIs for the current period, and the Company is working to maximize both ARPA figures.
- Market demand trends out of line with KDDI Group expectations
- Subscription growth trends out of line with KDDI Group expectations
- Unclearness of entry of new businesses to yield the expected revenue
- Fall in communications revenues due to tariff discounts sparked by fierce price competition, or higher sales commission and retention costs
- Decline in communications revenues due to drop in service usage frequency by subscribers
- Drop in customer satisfaction with the quality of the network or content due to unforeseen developments
- Decrease in attractiveness of products and services such as handsets and supplied content in comparison with offerings of rival carriers
- Support for product defects as a result of expanding the product goods business
- Increase in handset procurement costs associated with adoption of more advanced functions, or higher sales commissions
- Drop in customer satisfaction caused by spam and threats stemming primarily from the security issues with smartphones, plus increases in costs to address these issues
- Increase in network costs associated with the construction of base stations to accommodate new frequencies or the sharp rise in data traffic
- Inability to acquire bandwidths in accordance with the Company's needs
- Increase in competition due to new high-speed wireless data technology
- Effects associated with dependence on specific communications protocols, handset technologies, network technologies, or software
- Reduced revenue from voice call fees due to the expansion of apps with free calling features
- Possibility of increase in connection fees with other telecommunications carriers
- Intensification of competition due to changes in business conditions resulting from partnering with different industries, bundled sales of telecommunications with electric power and other products, the entry of new MVNO operators, and the expansion of business areas by other carriers.
KDDI is legally obliged as a licensed Japanese telecommunications carrier to safeguard the security of communications over its network. The Company is also actively engaged in protecting the confidentiality of customer and other personal information. KDDI has established the Information Security Committee to formulate and implement measures across the entire KDDI Group to prevent internal privacy breaches and other information leaks, as well as unauthorized access from external networks.
We are strengthening our safety management measures in terms of technology, organization, and personnel. For example, we are limiting the use of information systems that manage personal and customer information, reinforcing supervision over use, saving access logs, and forbidding employees from taking internal data out of the office or from copying data from work PCs to external memory devices.As part of its activities to maintain awareness of these policies, KDDI conducts ongoing training on the privacy of communications and the protection of personal and customer information. At the same time, KDDI stringently manages subcontractors with regard to information security. In particular, we are implementing a comprehensive program of initiatives targeting au shops, one of our sales venues. This program includes improvement and monitoring measures for shop operation as well as thorough educational activities.
Despite all these measures and safeguards, however, KDDI cannot guarantee that breaches of privacy or leakage of confidential customer information will never occur. Any such incident could seriously damage the brand image of the KDDI Group. In addition to a possible loss of customer trust, the Company could also be forced to pay substantial compensation, which could have a negative impact on the financial position and/or earnings performance of the KDDI Group. Going forward, the Company may also face higher costs to develop or upgrade communications security and privacy protection systems.
The KDDI Group depends on communications network systems and equipment in and out of Japan to provide voice and data communication services. The KDDI Group, to minimize as much as possible the risk of service outages or interruptions as a result of natural disasters or accidents, takes steps to improve the reliability of its network and to prevent service outages.
However, should there be a service outage as a result of failures in network systems or communications equipment, or substantial billing errors, the discredit to the Group's brand image, reliability, and lower customer satisfaction caused by opportunity loss in provision of products and services due to agent closures and distribution suspension could have a negative impact on the Group's financial position and/or earnings performance.
The following incidents could cause a service outage
- Natural disasters, such as earthquakes, tsunamis, typhoons, or floods, as well as secondary damages from the spread of toxic substances caused by natural disasters
- Spread of infectious disease
- War, terrorism, accidents or other unforeseen events
- Power brownouts or blackouts
- Computer viruses or other forms of cyber-attack, hacking
- Operation system hardware or software failures
- Flaws in communications equipment and services
The revision or repeal of laws and ordinances governing telecommunications, electric and finance business, together with related government policies, has the potential to exert a negative impact on the financial position and/or earnings performance of the KDDI Group. The Group believes it is taking all appropriate measures to respond to such laws, ordinances, and government policies, including those related to social issues with potentially injurious implications for its brand image and customer trust. However, if such measures were to prove ineffective in the future, it could negatively affect the financial position and/or earnings performance of the KDDI Group.
Regarding the policies for competition in the new era, the KDDI Group advocates measures for fair competition with other telecommunications companies through various deliberative council, study groups with the Ministry of Internal Affairs and Communication and by offering opinions through a public comments system. However, if KDDI's market competency is lost despite the above efforts, it could have a negative impact on the financial position and/or earnings performance of the KDDI Group.
The Company's business operations are subject to the following elements of uncertainty in regard to the revision or abolishment of telecommunications laws and regulations, to government policies, and to factors affecting the competency of the KDDI Group.
- Revisions to inter-operator access charge calculation formulae and accounting methods
- Revisions to the specified telecommunications equipment system and the regulations on prohibited activities
- Revisions to systems governing universal service
- New carriers entering the mobile communication market as Mobile Virtual Network Operators (MVNOs)
- Revisions to radio wave usage rules
- Rules regarding the migration of NTT East and West's fixed telephone networks to IP networks
- Regulations regarding the operations of NTT East, NTT West, and the NTT Group as a whole
- Revision of rules on consumer protection
- Regulations of the mobile Internet due to an increase in harmful websites
- Regulations of mobile phone usage
- Rules regarding mobile phone rates and other service terms
- Rules regarding the measurement of Internet service quality and advertisement display
- Rules regarding the liberalization of the retail sale of electricity
- Regulations regarding the effect of radio waves on health
In each of the countries in which it operates, the KDDI Group takes steps to secure the appropriate business and investment permits and licenses, to establish procedures in conformity with national safety and security laws, and to apply various other government regulations. The Group also seeks to comply fully with commercial, anti-trust, patent, consumer, tax, currency exchange, environmental, labor, and financial laws. Were these laws and regulations enhanced, or should the Group and/or business contractors fail to comply with legislation, it could result in limitations being placed on the future business activities of the KDDI Group and increases in costs.
Litigation stemming from alleged infringement of intellectual property and other rights associated with KDDI Group products, services, and technologies could potentially have a negative impact on the financial position and/or earnings performance of the KDDI Group.
The KDDI Group invests in company-wide personnel training to ensure that it can respond rapidly to technological developments, although the training process takes time for the desired effects to manifest. Going forward, KDDI faces the risk of a substantial increase in personnel development costs.
The KDDI Group provides a defined-benefit pension plan (fund type) and a retirement allowance plan (internal reserve). Some consolidated subsidiaries have defined-contribution pension plans. KDDI regularly reviews its asset management policies and agencies in accordance with future predictions of retirement payment liabilities. However, going forward the KDDI Group could incur extraordinary losses if a fall in yields on managed pension assets leads to a drop in the market value of the pension funds, or in the event of significant revisions to the actuarial assumptions (such as the discount rate, composition of personnel, or expected rate of salary increases) on which planned retirement benefit levels are based.
For the fiscal year ended March 31, 2016, the KDDI Group posted impairment loss on assets and others including certain communication facilities that have seen reduced utilization rates and non-operational equipment that was not converted due to the shift from the 2GHz band to the LTE broadband. Going forward, the KDDI Group may post other impairment losses against property, plant and equipment, depending on the level of its utilization.
Consolidation within the telecommunications industry in Japan and abroad could exert a negative impact on the financial position and/or earnings performance of the KDDI Group. Going forward, the KDDI Group may undertake further business restructuring measures at some later date. The Group cannot guarantee that such action would necessarily have a positive impact on its business performance.