Ubisoft 2016 Annual Report Download - page 42

Governance, risks, riskmanagement andinternalcontrol
3Report of the Chairman of the Board of Directors on corporate governance, internal control andriskmanagement
This chapter presents the material risks identifi ed by the Audit
Committee, to which Ubisoft may be exposed. These are broken
down into three main categories: risks linked to the Group’s business,
legal risks and market risks. Other risks and uncertainties, not yet
identifi ed or considered immaterial as at the date of this Registration
Document, could also become signifi cant risk factors and have an
adverse effect on the Group’s business, its fi nancial position or its
earnings.
Ubisoft has introduced a risk management policy as well as an
internal control system to pre-empt, identify and address the main
risks that could have a negative impact on the Group’s business and
performance. However, these measures cannot provide an absolute
guarantee that objectives will be met and that the following risks
will be controlled.
3.1.2.1 Group’s business risks
RISKS ASSOCIATED WITH MARKET CHANGES
Ubisoft operates on a market that is becoming increasingly
competitive and selective and is subject to concentration and
economic fl uctuations, marked by rapid technological changes
requiring signifi cant R&D investment.
The Group endeavors to anticipate new challenges such as the
dematerialization of physical media, the second-hand market, piracy,
online and mobile games and the emergence of new competitors in
Asia. Digital distribution in particular could have a long-term impact
on the average price of games, considering that a fall in prices would
probably be accompanied by an increase in sales.
In a sector of constant technological innovation, Ubisoft must
continually adapt by developing new products and by investing in
new video game platforms long before their success has been proven.
Signifi cant levels of revenue are required in order to absorb the
substantial cost of these investments. Should sales not reach expected
levels, the Group’s earnings could be negatively affected. Similarly, in
order to remain competitive, it is essential for a publisher to choose
the development format for a game wisely as an inappropriate choice
could have an adverse impact on the expected sales and profi tability.
The increasing presence of Free-to-Play (FTP), in the mobile segment
in particular, means the Group is exposed to the risks of these new
models, including the risk of dependency where a small number of
consumers represent a large portion of the revenue of these games.
In the development of these new business models, Ubisoft becomes
exposed to new risks, becomes increasingly dependent on its
ability to develop and make money from its FTP games, and faces
heightened competition.
Size of the video games market(1) 2015 (in € billions)
Sales of physical games 9.9
Digital sales 18.6
(1) Data relating to the EMEA region and North America– Sources: NPD, GFK, AppAnnie, PricewaterhouseCoopers and internal projections
Market share in terms of physical sales (GFK, NPD)
2015 2014
Independent
publisher Market share Independent publisher Market share
US 5th 6.6% 3rd 10.1%
EMEA 3rd 9.0% 3rd 14.3%
Main competitors:
Physical games Online games
Electronic Arts Electronic Arts
Activision Activision
Take-Two Tencent
Nintendo Supercell
During 2015, Ubisoft’s market share declined due to the launch of
“fl agship” games Tom Clancy’s The Division and Far Cry Primal
in the 3 fi rst months of 2016.
- Registration Document 2016
40