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, 2013.
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.
Looking at the KDDI Group's operating environment, in the mobile communications market, competition for customers is intensifying through means such as providing a diverse range of devices including smartphones and tablet-type terminals; expanding a complete lineup of downloadable content such as music, videos, and ebooks; and various campaigns on pricing measures.
Furthermore, the competitive environment is changing in response to growing mobile data traffic, in line with the increasing use of smartphones, and the allocation of new frequencies. Also, full-fledged competition has commenced in relation to the next-generation LTE (Long Term Evolution) standard for high-speed communication.
In the fixed-line communications market, in addition to the development of services that combine mobile and fixed-line aspects, market is moving toward a new stage of competition characterized by the fusion of telecommunications and broadcasting.
Under these conditions, the Group is working avidly to enhance its lineup of services for individuals and corporate customers. In the Personal Services segment, to augment services in line with the 3M Strategy, we are working to increase the number of providers offering "au Smart Value" services, sell distinctive devices, provide extensive services, become involved in video services, and expand the service area, including through "au Wi-Fi SPOTs." Through these efforts, we aim to enable customers to use services that are increasingly convenient, safe and secure. In the Value Services segment, the number of subscribers to "au Smart Pass" is on the rise. In the Business Services segment, we are enhancing solutions for corporate customers, and making particularly aggressive inroads into improving services for small and medium-sized corporate customers. In the Global Services segment, we are proactively expanding our number of locations for the Company's global data center "TELEHOUSE."
However, these services are subject to various uncertainties arising from competition with rival carriers, competing technologies, and rapid shifts in market conditions.
As a result, the following factors could have a negative impact on the Group's financial position and/or earnings performance.
- Market demand trends out of line with KDDI Group expectations
- Subscription growth trends out of line with KDDI Group expectations
- Fall in ARPU (Average Revenue per Unit) due to tariff discounts sparked by fierce price competition, or higher sales commission and retention costs
- Decline in ARPU 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 handsets or supplied content in comparison with offerings of rival carriers
- 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
- Contraction of the fixed-line telephony market due to spread of IP telephony
- Possible increase in NTT access charges
- Intensifying competition resulting from convergence of fixed-line, mobile, and broadcasting, and other changes in the operating environment
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 Corporate Risk Management Division and a committee for privacy and security issues 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.
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 training and educational activities. Through these efforts, we are working to guarantee the privacy of communications and protect customer and other personal information. 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, 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 of fiber optic and IP services, the KDDI Group advocates measures for fair competition with other telecommunications companies through various 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.
- Rules concerning the mobile business model
- Revisions to inter-operator access charge calculation formulae and accounting methods
- Revisions to the specified telecommunications equipment system
- Revisions to systems governing universal service
- New carriers entering the mobile communication market as Mobile Virtual Network Operators (MVNOs)
- Regulations of the mobile Internet due to an increase in harmful websites
- Regulations of mobile phone usage
- Regulations regarding the effect of radio waves on health
- Revisions to radio wave usage rules
- Rules regarding access to the next-generation networks of NTT East and NTT West
- Regulations regarding the operations of NTT East, NTT West, and the NTT Group as a whole
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), a retirement allowance plan (internal reserve), and a retirement benefit trust. Some consolidated subsidiaries have defined-contribution pension plans or association- establishment-type employees' pension funds. 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.
In the year ended March 31, 2013, the KDDI Group posted impairment loss on certain assets that have seen reduced utilization rates. These facilities include shared-use facilities related to the old 800MHz bandwidth (which ceased operation following the bandwidth reorganization conducted in July 2012) that will not be put to other uses (idle assets with no plan for future use) as well as domestic transmission lines. 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.
- "Smart Value" is a registered trademark of EMC Co., Ltd.
- "Wi-Fi" is a registered trademark of the Wi-Fi Alliance(R).