Ubisoft 2016 Annual Report Download - page 43

Governance, risks, riskmanagement andinternalcontrol
3
Report of the Chairman of the Board of Directors on corporate governance, internal control andriskmanagement
RISKS ASSOCIATED WITH PRODUCT STRATEGY,
POSITIONING AND BRAND MANAGEMENT
Ubisoft, like all publishers, is dependent on the success of its product
catalogue and the suitability of its offering with regard to consumer
demand. In this context, launching new brands offers less visibility
than that of established franchises. The success of Ubisoft games
may also be impacted by the performance of the competition’s
titles, since its customers only have a certain amount of time and
purchasing power.
In order to meet market demand, Ubisoft takes particular care in
building its product catalogue by concentrating on:
♦
reinforcing its existing franchises on a regular basis and launching
new brands with strong potential for consoles and PC;
♦ developing its digital business.
In order to diversify and enrich its brand portfolio and thus ensure
steady income in the long term, Ubisoft favors a strategy of creating
its own brands and producing internally, underpinned by a targeted
acquisition strategy.
The Company also allocates the necessary marketing and sales
resources to showcase its products via a worldwide distribution
network. Its position among the top fi ve independent publishers
provides the Group with a high-performance distribution platform
for its products.
Finally, the Company has embarked on a market expansion strategy,
promoting its brands in other segments of the entertainment market,
especially cinema. As part of its strategy to develop its brands beyond
video games, the Company may decide, on a case-by-case basis,
to invest in fi lms derived from its franchises. Contractually, this
investment cannot exceed 25% of the overall production budget
of the fi lm. The Company’s ability to recoup its investment will
partly depend on the fi lm’s success and profi tability, as well as the
ability of the production company to keep to the original budget.
To maximize the chances of success and limit the risks of a budget
overrun, Ubisoft works with major fi lm studios.
Nevertheless, the success of these strategies cannot be guaranteed
and the poor positioning of a product could also have a material
effect on the Group’s performance and earnings.
RISKS OF A DELAY OR POOR START TO
THERELEASE OF A FLAGSHIP GAME
Ubisoft may have to delay the launch of a video game for any of
the following reasons:
♦ diffi culty in accurately estimating the time required to develop
or test it;
♦ requirements imposed by the creative process;
♦
challenges in the coordination of large development teams, often
based in different countries;
♦
the increasing technological complexity of video game products
and platforms;
♦ the desire to continue to improve the quality of the game prior
to launch. The marketing of a game that lacks the level of quality
required to realize its potential could have a negative impact on
the Group’s brand and its earnings.
Similarly, if a competitor brings out a game with signifi cant
technological or artistic innovations, the Group might also have to
postpone the release dates of some of its games to boost their chances
of commercial success in a competitive environment where players
are very sensitive to the quality and content of games.
However, in a very competitive and seasonal market, the
announcement of a delay in the release of a highly anticipated game
could have a negative impact on the Group’s income and future
earnings, and could lead to a drop in its share price. Failure to meet
production and product release schedules could lead to increased
development and marketing expenses which could in turn result
in an operating profi t signifi cantly lower than expectations. To
mitigate these risks, the Group continually strives to improve its
development processes, both in the organization of its teams and
through leveraging synergies and/or cultivating its in-house expertise.
SEASONAL TRENDS IN THE VIDEO GAME BUSINESS
Sales/quarter (in €millions) 2015/2016 Breakdown 2014/2015 Breakdown 2013/2014 Breakdown
1stquarter 96 7% 360 25% 76 8%
2ndquarter 111 8% 124 8% 217 21%
3rdquarter 562 40% 810 55% 520 52%
4thquarter 625 45% 170 12% 194 19%
CONSOLIDATED ANNUALSALES 1,394 100% 1,464 100% 1,007 100%
RISK OF DEPENDENCY ON THE SUCCESS OF BIG HITS
The majority of Ubisoft revenue has historically been based on a
limited number of fl agship games, the success of which has helped
ensure the Group’s performance and the achievement of its goals.
Should the expected performance not be achieved for any one of
these games, the Group’s net fi nancial income could be signifi cantly
affected.
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