A. Risks related to business activities
1. Higher game development costsAdvances in performance and functionality are enabling more diverse and sophisticated content experiences on the consumer game consoles, PCs, smartphones, and other platforms for which we provide games. This trend gains momentum with each passing year, and since we need to provide content that keeps pace, our game development costs are on the rise. With next-generation consumer game consoles slated for release in the latter half of 2020, our game development costs are likely to remain high going forward. By engaging in more stringent management of our development efforts and earnings at the level of individual titles and by undertaking aggressive marketing and promotional initiatives, we are endeavoring to keep our development costs at an appropriate level while also expanding sales. However, our earnings could be impacted if we were to sell fewer units than initially anticipated and were therefore unable to sufficiently recoup our development costs.
We enrich our game portfolio and hedge our risk by creating the optimum mix of AAA and smaller titles. In addition, we are striving to improve the profitability of our HD games by expanding post-launch sales (especially via digital downloads), seizing the additional earnings opportunities presented by the GaaS (Games as a Service) model, and otherwise creating a diverse base of recurring income. Moreover, we are working to stabilize earnings across our businesses by creating a diverse monetization base of recurring income from our massively multiplayer online (MMO) games, our smart device and PC browser games, as well as our Amusement and Publication segments.
2. Our ability to respond to changing customer tastes, increasingly diverse business modelsMajor structural changes are underway in the digital entertainment industry as high-speed telecommunications infrastructure becomes more advanced and widely available and streaming and other cloud-based content delivery methods result in more diverse means and business models by which to provide content. Our earnings could be impacted if we were to be unable to respond to such changes in an appropriate and timely manner.
In order to respond to the diverse needs of our customers, we not only offer our existing intellectual property (IP) via all our business segments (i.e., Digital Entertainment, Amusement, Publication, and Merchandising), but also leverage it in new business domains such as live entertainment and e-commerce. By doing so, we expand our customer base and enhance customer engagement, thereby maximizing earnings.
3. Securing human resources to execute our growth strategy focused on creating new content and services, expanding overseasOur business environment is undergoing major changes. In order to respond to such environmental changes in an appropriate and timely manner, securing talented human resources is crucial. Our earnings could be impacted if our efforts at securing the necessary human resources were unable to keep pace.
In our view, recruiting talented human resources and enabling each of them to display their utmost abilities in the optimal way fuels sustained growth. For this reason, we are striving to create an attractive corporate culture, maintain competitive compensation, and run an employee evaluation system that is fair and equitable.
4. International business operationsWe operate our businesses internationally. As such, our earnings could be impacted by market trends, political and economic developments, legal and regulatory developments, social conditions, and other factors at play in the countries in which we operate our overseas businesses.
B. Risks related to the economic environment
1. Changes in the economic environmentOur earnings could be impacted by markedly sluggish economic conditions that diminish consumer demand given the potential for them to reduce consumption of the products and services we offer in the field of entertainment.
2. Foreign exchange riskWe have consolidated overseas subsidiaries in North America, Europe, and Asia. We reduce our foreign exchange risk by using local currency obtained by such subsidiaries primarily to cover payments in the relevant geography or to fund investments there.
However, because we convert the sales, costs, asset values, and other foreign currency-denominated amounts associated with consolidated overseas subsidiaries into Japanese yen when producing our consolidated financial statements, our earnings could be impacted if foreign exchange rates at the time of conversion were to deviate significantly from our expectations.
C. Risks related to laws & regulations, litigation
1. Information and network systemsWe appropriately develop, operate, and manage the information and network systems required to execute our businesses and operations. However, system failures, operational errors, and other problems could disrupt the execution of our operations, resulting in opportunity losses and the incurrence of additional costs.
In addition, we develop, operate, and manage robust preventative and defensive measures against security incidents such as cyberattacks, unauthorized access, and computer virus infections affecting our information and network systems. However, in the unlikely event a security incident arising that was unpreventable even through the employment of such measures, the execution of our businesses or operations could be disrupted, resulting in opportunity losses and the incurrence of additional costs. There is also potential for the personal data of our customers and employees to leak externally, thus resulting in the incurrence of additional costs and damage to our social credibility.
2. Management of personal informationIn response to the enactment of Japan's Act on the Protection of Personal Information and the EU's General Data Protection Regulation, we are developing strict internal controls on personal information and providing training regarding personal information protection to our officers and employees on an ongoing basis. However, as noted in "1.
Information and network systems" above, our earnings could be impacted if a security incident were to result in the external leakage of personal information.
3. Japan's Act on Control and Improvement of Amusement BusinessesBusinesses operating game facilities are regulated under Japan's Act on Control and Improvement of Amusement Businesses. The law covers the granting of permits for the establishment and operation of such facilities, limits on their operating hours, age limits for entrants, restrictions on facility locations, and regulations regarding such facilities' structures, interiors, lighting, and noise emissions. We operate our facilities legitimately and appropriately in compliance with the aforementioned law, but our earnings could be impacted if stronger regulations were to be enacted under the law.
4. Litigation, etc.We have established a code of conduct of which our officers and employees are made thoroughly aware that includes legal and regulatory compliance as well as respect for the rights of third parties. However, given our business operations in Japan and abroad, we are inevitably exposed to risk of becoming party to disputes. Should litigation or other legal procedures be brought against the Group, our earnings could be impacted despite our efforts to resolve any such matter quickly with terms that are advantageous to us.
D. Risks related to disasters, etc.
1. Accidents and disastersIn order to minimize the impact of earthquakes and other major natural disasters, fires, power outages, system or network failures, terrorism, outbreaks of infectious diseases, and other accidents and disasters, we take countermeasures including performing regular disaster-readiness and facility inspections, developing our evacuation guidance capabilities, and performing appropriate regular disaster-readiness and evacuation drills.
However, our earnings could be impacted if major accidents or disasters were to occur.
2. Impact from the outbreak of the novel coronavirusIn responding to the global spread of the novel coronavirus (COVID-19), we have made the safety of our customers, business partners, and employees our top priority, electing to cancel or postpone the events we host and to enable work from home in an effort to prevent the spread of the virus. Moreover, in order to maintain business continuity, we are also revisiting our operational processes and enhancing our information systems in an ongoing effort to create a business operation system built around the work-from-home concept.
However, there are concerns over the potential COVID-19 has to slow the global economy by diminishing production, distribution, and consumption. Risks we face in our Group's business domains include weaker demand for content, impact to the manufacturing and distribution processes for packaged products, and lower sales at amusement facilities. Our earnings could be impacted as a result.