With a diverse range of businesses the SOFTBANK Group faces a variety of risks in its operations. The major risks envisioned by the Group as of the release of this annual report that could affect investors' investment decisions are outlined below.
The Group is working to reduce these risks and minimize their effects, but cannot necessarily guarantee that all risks can be completely avoided. This summary may not necessarily include all risks that could arise with regard to the Group's operations in the future. The items listed below contain forward-looking statements deemed appropriate as of the release of this annual report.
The Group operates in a wide range of markets including mobile communications, with a focus on Internet-related operations. Demand for these businesses' products and services is dependent on economic conditions and market trends, which therefore could have an impact on the Group's performance.
The Group's market competitiveness could also be weakened when competitors are deemed to have stronger capital strength, services, price competitiveness, customer bases, sales structures, and brand or name recognition. As a result, products and services may not prove to be as successful as anticipated, and customer acquisition and retention may fall short of targets, thereby impacting the Group's results.
The value of listed (investment) securities held by the Group depends on economic conditions and trends in stock and foreign exchange markets in Japan and overseas, and import of telecommunications equipment is influenced by the trend in the foreign exchange market.
The Group has a substantial amount of interest-bearing debt and holds large amounts of assets and liabilities denominated in foreign currencies. The Group considers interest rate and foreign exchange rate risks to be significant risks. The Group strives to minimize the risks it faces, utilizing long-term fixed rates and other means to minimize interest rate risks and currency hedges on major assets and liabilities denominated in foreign currencies. However, depending on market trends, it may not be possible to completely avoid these risks.
Shares of Internet-related companies in Japan, the U.S., China and other countries constitute the majority of the Group's investments, and these activities are one of the core sources of cash flows for the Group. Share prices for Internet-related investments are subject to drastic fluctuations, and the Group's fundraising capacity could be severely impacted by a significant drop in these values.
The fields of the Internet and telecommunications experience a rapid pace of technological innovation, in the industries overall as well as in the area of telecommunications systems technology, and the Group needs to respond flexibly to the developments that result. If for whatever reason, however, the Group is unable to appropriately respond to these technological advances, it runs the risk of losing competitiveness because of outdated services or technology. Even when the Group is able to respond to these advances, there is a possibility of unexpected cost increases for new equipment introduction or the updating of existing equipment, and this could affect the Group's performance.
The Group's telecommunications business is regulated by a number of laws and regulations, including the Telecommunications Business Law and the Radio Law. Revisions to these laws and regulations, or the enactment of new laws and regulations, could therefore prevent the Group from developing businesses as expected. Relating to the mobile communications business, changes at the Ministry of Internal Affairs and Communications (MIC) covering items like bandwidth allocation and the review of the NTT Group's management structure could also have a major impact on the Group's operations.
The Group strives to ensure that the video content handled in the Group's video distribution operations, including Yahoo! Streaming, and BBTV, does not infringe on any rights or interests, including those of the holders of various intellectual property rights. It is possible, however, that the Group's actions will somehow infringe on intellectual property rights held by third parties, and that the Group will be subject to demands that it stop using video content or that it pay compensatory damages.
Because of the large number of companies aggressively developing Internet technologies and business models including broadband, the possibility exists that the Group could be sued by a third party for compensatory damages for patent infringement and that, in the future, the Group's business activities may be restricted with regard to providing content and/or the use of technologies.
Furthermore, the revision of other laws and regulations related to intellectual property rights could have a significant impact on the Group's business activities in the future.
The Group pays careful attention to the protection of personal information through measures including the strengthening of the Group's customer information management system and by restricting access to personal information obtained and maintained by the Group. In particular, SOFTBANK MOBILE Corp. and the Group's other telecommunications businesses appropriately manage personal information in compliance with the Act on the Protection of Personal Information and the MIC's Guidelines on the Protection of Personal Data in Telecommunications Business. Nevertheless, the possibility exists that personal information could be either intentionally, or accidentally leaked externally by a Group affiliate, business partner or subcontractor and misused. If such a situation were to occur, the Group's credibility could suffer serious damage and operations could be significantly impacted.
With its wide variety of operations such as the mobile communications business and other Internet-related businesses, the Group faces the possibility of lawsuits by third parties claiming compensatory damages for the infringement of rights or benefits, regardless of whether or not the Group is responsible. Furthermore, while the Group currently maintains amicable labor-management relations, future developments could change this relationship and there is a possibility of lawsuits emerging as a result. Lawsuits could therefore impact the Group's performance in ways including financial liability and a weakening of the brand image.
The Group constructs and maintains telecommunications networks and information systems required by the mobile telecommunications and other businesses to provide telecommunications services. There is a danger that natural disasters including earthquakes, typhoons or tsunami, fires, power outages or shortages, terrorist attacks, computer viruses or other external attacks could damage the Group's telecommunications systems and disrupt its ability to provide telecommunications services.
If these disruptions were to become widespread and/or significant time were required to restore services, not only could the Group's earnings be affected, but there is also a possibility that customer trust and satisfaction, and the brand image, could be adversely impacted, making it difficult to acquire and retain customers.
The head offices and business offices of SOFTBANK and the Group companies are concentrated in the greater Tokyo metropolitan area. The possibility therefore exists that a major earthquake, or other force majeure in Tokyo could paralyze the Head Office's functionality and impede the continuity of the Group's operations.
The Group makes use of certain telecommunication lines and facilities owned by other telecom operators when constructing and maintaining the telecommunications networks required for providing telecommunications services. The Group's performance could therefore be impacted if for some reason it became difficult to continue to use those facilities, or if utilization or connection rates for those facilities were to be increased.
The Group also relies on other companies to provide mobile phone handsets and other types of telecommunications equipment required for providing telecommunications services. If for some reason in the future changes were to arise in the relationship between the Group and these suppliers, or at suppliers themselves, and these suppliers were to cease to supply, or inspect and service, the telecommunications equipment, or if a major defect in the telecommunications equipment were to be discovered, the Group could become unable to continue providing services and the brand image could suffer. The Group uses subcontractors to sell mobile handsets and other products and services, to acquire and retain customers, and to carry out certain other related operations. The Group's performance and market share could therefore be affected by changes in subcontractor relationships or by the public image and credibility of those subcontractors.
In addition, several of the Group's services including Yahoo! JAPAN, Yahoo! BB and Yahoo! Keitai make use of the Yahoo! brand of Yahoo! Inc. The Group currently has an amicable relationship with Yahoo! Inc., but a significant change in this relationship in the future could prevent the Group from developing its business as planned.
The Group must continuously invest in facilities and equipment in order to provide attractive services and maintain service quality. At the mobile communications businesses in particular if, due to customer growth and diversification of content services, the expansion in communication volume (traffic) were to exceed projections the capital expenditure required to increase the capacity of our telecommunications network could lead to a temporary deterioration in cash flow and profitability.
Furthermore, the Group strives to maintain its telecommunications network and information systems in order to provide stable telecommunications services, but there is a possibility that human error or the emergence of unforeseen problems could disrupt the Group's ability to provide telecommunications services. If these disruptions were to become widespread and/or significant time were required to restore services, not only could the Group's earnings be affected, but there is also a possibility that customer trust and satisfaction, and the brand image, could be adversely impacted, making it difficult to acquire and retain customers.
The Group introduced installment sales for mobile phone handsets in September 2006, and the number of installment sales contracts exceeded 15 million in February 2009. Installment sales have a lowering impact on the churn rates but on the other hand contribute to the increase of account receivables for a large amount of individual customers. There is a possibility that the increased risk of bad debt and higher collection costs will impact the Group's earnings results. Although installment sales have contributed to a decline in churn rates, this has also led to an increase in accounts receivable from a large number of individual customers. The resulting increased risk of credit defaults and increased collection costs could therefore impact the Group's performance.
Were the Group to become unable to recover investments in its fixed assets because of a decline in asset profitability, an impairment loss as stipulated in the Accounting Standards for Impairment of Fixed Assets may need to be recognized, and this could have an impact on the Group's results or financial position.
Because of its wide range of businesses, the Group must comply with a variety of laws including the Telecommunications Business Law, the Radio Law and the Law on the Prevention of Unauthorized Use of Cellular Phones at the telecommunications businesses, as well as the Act on the Protection of Personal Information, the Financial Instruments and Exchange Law, the Act on the Prohibition of Private Monopolization and Maintenance of Fair Trade, and the Act Against Unjustifiable Premiums and Misleading Representation.
The Group is continuously working to strengthen its compliance structure, and has established the SOFTBANK Group Officer and Employee Code of Conduct, a code of conduct related to compliance that is to be followed by all directors and employees, and holds training programs at various levels to ensure that this code is thoroughly understood throughout the Group. Nevertheless, there is a possibility that compliance risks cannot be completely avoided, and the Group's results could be affected if laws or other regulations were to be violated.
Furthermore, in the event an illegal act were to occur at a SoftBank shop or sales agent handling the Group's products and services, the Group could receive a warning or administrative guidance from the regulatory authorities, or be investigated for non-fulfillment of its supervisory responsibility, and there is a possibility that the Group's credibility or brand image could suffer as a result.
The cost of procuring funds required for the development of the Group's businesses is affected by interest rates and ratings received by rating agencies. The Group's profitability could therefore deteriorate if those costs were to increase because of an increase in interest rates or a decline in the Group's creditworthiness.
The Group's interest-bearing debt includes financial covenants that the Group must comply with in its operations. The details of the financial covenants are as discussed in the Notes to Consolidated Financial Statements 6. Short-term Borrowings, Long-term Debt and Lease Obligations (8) Financial covenants. In the event, however, that these covenants were to be breached and requests were to be made for the immediate repayment of the affected interest-bearing debt, the Group's financing could be adversely impacted.
Certain financial and operating performance standards have been established for the 1,366.0 billion yen raised through SOFTBANK MOBILE Corp.'s whole business securitization. In the event SOFTBANK MOBILE Corp.'s performance were to fall short of these standards, outlays for capital expenditure would be restricted and the development of new services would require the prior approval of the lenders, and this could impact SOFTBANK MOBILE Corp.'s business development. Furthermore, in the event SOFTBANK MOBILE Corp. were not able to meet these standards on a cumulative basis, the lenders could appoint a majority of the board of directors and might exercise their collateral rights for assets provided as collateral, including shares of SOFTBANK MOBILE Corp.
The Group has expanded its fields of business through acquisitions and business alliances. When entering into acquisitions or business alliances, the Group works to understand risks by conducting due diligence regarding the financial position and business operations of the counterparty company. There is a risk, however, that unanticipated obligations will arise after an acquisition. Furthermore, changes in the business environment or competitive conditions could also prevent the implementation of initial operating plans. Moreover, there is also a risk that the Group will not be able to realize initially anticipated synergies for reasons including a loss of customers or human resources, and therefore will not adequately recover investments that have already been made. As a result, the Group may not be able to develop its operations as planned.
In addition, SOFTBANK and the Group companies establish joint ventures and enter into business alliances with a variety of business partners. There is therefore a possibility that the Group will not be able to develop its businesses as planned if it becomes unable to effectively control the acquired company or to effect important decisions.
The planning and administration of the Group's businesses are carried out by the Group's officers and employees. Unforeseen situations concerning senior management — especially President and Chief Executive Officer Masayoshi Son— could create an obstacle to smooth operational progress and impact the Group's operations.
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