Capcom Co.,Ltd. (hereinafter "Capcom", which includes its subsidiaries) is exposed to risks which may affect its operating results, financial status, stock price and operational environments, including but not limited to those stated in writing below, which are based on information that is available as of March 31, 2017 and certain assumptions by Capcom that serves as the basis of rational judgments.
1. Risks Relating to Digital Contents
(1) Increase in Development Costs
Development costs have been rising steeply in recent years. This is driven by greater sophistication and diversity in home video games, due to integrating functions such as internet features, virtual reality (VR) and computer graphics technologies. As such, there is a risk that we will be unable to recoup the development costs for some titles, such as for those that do not reach their target unit sales.
(2) Obsolescence of Game Software
Demographically, our end-users are primarily young people and children. Long product life is not guaranteed, and further, we face intense competition from smart phones, the Internet and other industries whose consumer segments overlap with our own. Given this, product obsolescence can occur quickly, and we might face the risk of increased inventories and irrecoverable development costs.
(3) Dependency on Popular Series
Capcom has released many games, and a portion of these have tended to be more popular than others. Sales for our established franchises show limited volatility and help stabilize our business performance; however, if the market environment changes or if there are any defects or issues with these games, we face the risk of losing users, which could have an adverse effect on our future business strategies, performance and financial condition.
(4) Violent Scenes and Depictions
Some of our popular games contain scenes of violence, grotesque imagery, or other provocative depictions. When violent crimes or crimes involving juveniles occur, certain members of the media often claim that games have an effect on or relationship to these incidents. Because of this, we may be subject to defamation in public or possible regulatory action by governing bodies, which may have an adverse effect on our business performance or financial condition.
(5) Seasonal Fluctuations
Trends in the demand for games fluctuate substantially throughout the year. As the market experiences peak demand from the Christmas season until New Year's Day, the first quarter of the year tends to be relatively quiet. Accordingly, there is a risk that business performance may substantially fluctuate from quarter to quarter.
(6) Trends in Home Video Game Console Adoption
We provide video game titles primarily for home video game consoles made by Sony Interactive Entertainment Inc., Nintendo Co., Ltd. and the Microsoft Corporation. Therefore, depending upon home console adoption trends or the existence of defects or other issues in game consoles, there is a risk that our business strategies, performance and financial condition may be adversely affected.
(7) License Agreements with Console Manufacturers
We take a multi-platform approach, which involves providing home video game software titles on major current-generation game platforms.
Accordingly, we have licenses for manufacturing and distributing game software from Sony Interactive Entertainment Inc., Nintendo Co., Ltd. and the Microsoft Corporation, who are also our competitors. However, there is a risk that amendments to the licensing agreements and new terms and conditions of the agreements may have an adverse effect on our future development strategies, business performance and financial condition.
(8) The Home Video Game Platform Cycle
In the past, new home video game platforms have been released every three to seven years. Consumers tend to be reluctant to purchase new software during transitions between hardware generations. Therefore, there is a risk that our business performance and financial condition may be adversely affected by sluggish sales during these transitional stages.
(9) The Used Software Market
Used software accounts for approximately one quarter of the current domestic software market. Further, the flood of pirated games in the Asian market is becoming an increasingly serious issue. As a result, it is gradually becoming more difficult to recover development costs, and depending on trends in this market, there is a risk that our business results and financial condition may be adversely affected.
(10) Mobile Market
Smartphones and other mobile devices have been widely adopted within the market; recently however, failing to adapt to new technology quickly enough has been known to disrupt IP holders' ability to provide content. Additionally, if the number of users were to decline due to more diverse entertainment options or consumer needs, there is a risk that our performance and financial situation could be adversely affected. Further, there is the risk that monetization systems could be scrutinized as a social issue, inviting stronger regulations from governing bodies.
2. Risks Relating to Other Businesses
(1) Arcade Operations
There is a risk that our business results and financial condition may be adversely affected by the popularity of machines, the diversification of entertainment options, the falling birth rate, intensified competition, changes in the market environment and other such factors.
(2) Amusement Equipments
In addition to only selling Pachislo machines to a small number of business partners, the performance of the Amusement Equipments business often depends heavily on these machines because in recent years they have gone from accounting for the mere majority of sales to the overwhelming majority. Also, under the provision of The Entertainment and Amusement Trades Rationalizing Act, we are allowed to sell only those machines that meet Security Electronics and Communications Technology Association requirements. Performance in this business segment may be significantly affected by the aforementioned systemic industry factors.
At the same time, there is a risk that revenue may fluctuate significantly by the narrowed gap between arcade games and home video games, a decline in facility operators' purchasing power, changes in the business environment and uncertainties regarding growth.
As a result, there is a risk that our performance and financial condition may be adversely affected.
3. Risks Relating to Overseas Operations
- There is a risk that our business strategies, performance and financial condition may be adversely affected by market trends and the existence of competitors, as well as other various country risks including political, economic, legislative, cultural, religious, customary and foreign currency risks in overseas markets.
- As the volume of overseas transaction expands, it is possible that losses or expense burdens will increase depending on regulations or the interpretation of the accounting laws by the customs or taxation authorities. The operating results and financial position of Capcom may be affected negatively by these conditions.
- There is a risk that our business performance may be adversely affected by the increase in expenses and the failure to recover overseas investment in the event of unforeseeable circumstances which cannot be predicted by feasibility studies.
4. Risks Relating to Financial Status and Operating Results
- Our principle business of home video games is exposed to the risk of short product life, which hastens obsolescence and drives increased inventories. There is a risk that our business results and financial condition may be adversely affected by this.
- Our business performance may substantially fluctuate from quarter to quarter, as the market environment may change throughout the year in our industry. Also, we may not be able to generate cash flows as originally planned due to declines in sales, changes in management strategies and other factors, which may have an adverse effect on our business results and financial condition in the years following.
5. Risks Relating to Development Technologies
Products relating to game machines, including home video games, are subject to rapid technological progress. Therefore, there is a risk that sales opportunities may be lost due to any delays with technological progress, which may have an adverse effect on our business results and financial condition.
6. Legislative Risks
Our Arcade Operations business is subject to the Entertainment Establishments Control Law and its related regulations and ordinances. In the event of any amendments or the establishment of laws and ordinances in the future, the scope of our business activities may be subject to change, or the preliminary examinations, inspections and other procedures carried out by regulatory agencies may become stricter. There is a risk that this may result in impeding our business plans, and adversely affecting our business results and financial condition.
7. Risks Relating to Intellectual Property Rights
The development and distribution of game software involves intellectual property rights such as patent rights, trademark rights, utility model rights, design rights, copyrights, etc. Because of this, it is probable that the development and distribution of game software will become difficult if we cannot acquire intellectual property rights. Also, we cannot rule out the risk of a third party's intellectual property rights being violated by us. These factors pose a risk that may adversely affect our business results and financial condition.
8. Risks Relating to Lawsuits
In the past, Capcom has both sued and been sued over copyright infringement. In addition, as the company expands its business domain, it is possible Capcom may be taken to court in the future over product liability, labor or intellectual property rights related issues. As a result, depending on the type of lawsuit and the amount claimed in the lawsuit, there is a risk of this adversely affecting our business results and financial position.
9. Risks Relating to Information Leaks
It is possible for our hardware, software and databases to be compromised through unauthorized access via computer viruses, technology exceeding our assumptions or other unforeseeable events. Accordingly, in the event that confidential information related to individual persons or game development was leaked, damages may have to be paid, our image may be tarnished and development may be brought to a halt. Therefore, these incidents may negatively affect the operating results and financial position of Capcom.
10. Development and Retention of Human Resources
The expression "a business is only as good as its people" means that the future success and growth of any corporation depends upon competent employees.
As such, Capcom is actively engaged in recruiting, educating and retaining excellent human resources. However, the mobility of personnel is relatively high in the game industry, and it is possible that our business activities will be disturbed if any of our talented employees decide to resign or move to our competitors. As such, these factors may negatively affect the business results and financial condition of Capcom.