Legal risks
Vivendi has performed a review of risk factors that may have a negative impact on its businesses or results. It has not identified any material risks other than those set out below.
The Risks Committee regularly assesses the potential risks that may have an impact on the businesses carried out by the Vivendi Group and the adequacy of procedures to protect against such risks. It informs the Supervisory Board’s Audit Committee of its main conclusions and decisions.
A summary of the work performed by the Risks Committee is included in Chapter 3, Section Risks Committee of this document.
Risks associated with regulations applicable to the Group’s operations
In the ordinary course of business, Vivendi is obliged to comply with complex, restrictive and evolving laws and regulations, particularly those that govern the telecommunications and broadcasting sectors.
Substantial changes in the nature, interpretation or application of these laws and regulations by governmental, administrative, judicial or other authorities, particularly with respect to competition and tax law, may result in Vivendi incurring additional costs or altering the products and services offered by the company, which may materially impact its business, financial position, results and development prospects.
In addition, certain operations of the Group are dependent upon obtaining or renewing licenses issued by regulatory authorities (both in France and abroad, and specifically: in France: the ARCEP – the French Telecommunications and Posts Regulator Authority, and the CSA – the Superior Audiovisual Council; in Morocco: the ANRT – the National Telecommunications Regulatory Agency, and in Brazil: the ANATEL – the National Telecommunications Agency). The process of obtaining or renewing such licenses can be long, complex and costly. If Vivendi were unable to obtain or retain the licenses required to conduct, continue or expand its operations in a timely manner, its ability to achieve its strategic objectives may be impaired.
A detailed description of the regulatory environment applicable to each of the Group’s operations is included in section Description of the Group’s Businesses of this chapter.
Risks associated with litigation
The Group is, or is likely to become, involved in a number of contentious proceedings or investigations, filed by subscribers, consumer associations, competitors, shareholders or regulatory and tax authorities. When the Group fails to negotiate an amicable settlement, damages and interest may be claimed or penalties imposed.
The main legal proceedings or investigations in which the Group is involved are described in Note 27 of the Notes to the Consolidated Financial Statements for the year ended December 31, 2010 and in the “Litigation” section of this chapter.
Vivendi recognizes a provision for expenses that may result from a proceeding whenever a risk becomes likely to materialize and when it is possible to estimate the potential cost associated with such risk. With the exception of the main legal proceedings and investigations described in this section and in Note 27 of the Notes to the Consolidated Financial Statements for the year ended December 31, 2010 (Chapter 4), Vivendi considers it unlikely that current proceedings will have a significant negative impact on the Group’s financial position.
Risks associated with commitments given by Vivendi
Vivendi and its subsidiaries have entered into a number of conditional commitments, the most significant of which are described in Note 26 of the Notes to the Consolidated Financial Statements for the year ended December 31, 2010. Certain of these commitments are unlimited in their duration or amount. If Vivendi were obliged to make a payment in respect of one or more of these contingent liabilities, such an obligation may have a negative impact on its financial results and financial position.
Risks Associated with the Group’s Operations
Risks associated with piracy and counterfeiting
Over the past few years, the reduction in the cost of computer and electronic equipment and associated technologies has facilitated the unauthorized reproduction of music and audiovisual works and games. At the same time, increased access to high-speed Internet connections has enabled, and continues to enable, computer users to share such works more easily (and in greater number), without the copyright holder’s authorization and without paying royalties.
Vivendi is dependent on the decisions of public or administrative authorities and their determination to find effective means to fight piracy. Persistent difficulties in passing and applying suitable legislation or in enforcing court rulings, particularly in certain regions of the world where piracy is endemic, constitute a threat to Vivendi’s businesses, which depend heavily on the intellectual property rights owned by or licensed to the Group.
The decline in the market for recorded music may therefore continue in the next few years and could continue to affect UMG’s results if Vivendi does not succeed in finding ways to protect its businesses against piracy and counterfeiting. For the same reasons, in the absence of adequate means to prevent piracy and counterfeiting, Vivendi’s operations related to the production and distribution of audiovisual content and video games publishing may suffer a significant decline in revenues.
Section 2 of this chapter contains a detailed analysis of piracy issues and measures taken by each of the Group’s business units to fight it.
Risks associated with intensified commercial and technical competition
Vivendi’s businesses face strong competition, which may intensify in the near future due to the trend towards industry concentration among existing companies or the entry of new competitors in the relevant markets. Growing competition exerts considerable pressure on Vivendi, which may lead to a loss in market share if Vivendi is no longer able to supply products and services that are sufficiently competitive in terms of price and quality.
In particular, Vivendi’s development depends on its ability to adapt the products and services it offers to the requirements of increasingly demanding customers, in industries distinguished by rapid technological developments. The need for Vivendi to respond to such requirements and advances, or even in some cases to anticipate them, may lead to the Group making substantial investment without any assurance that the new products and services developed and offered will not become obsolete within a short period of time.
Risks associated with the lack of commercial success of recorded music, films and video games produced, published or distributed by the Group
The production and distribution of musical and audiovisual content and video games publishing represent a substantial proportion of Vivendi’s revenues. The commercial success of these works is dependent upon the public’s response, which may not always be predicted, the existence and success of competing entertainment offers, and general economic circumstances.
Finally, when these operations are based on content provided by third parties, no assurance can be given that such third parties will always agree to transfer their rights on financial and commercial terms acceptable to Vivendi.
Conducting operations in various countries is subject to additional risks
Vivendi conducts its business in various markets throughout the world. The main risks associated with business being conducted on an international scale are as follows:
- the local economic and political situation;
- exchange rate fluctuations;
- restrictions on capital repatriation;
- unexpected changes in the regulatory environment;
- the various tax systems that may have an adverse effect on Vivendi’s operating results or cash flow, and in particular regulations relating to transfer costs and the withholding tax on the repatriation of funds; and
- tariff barriers, customs duties, export controls and other trade barriers.
Vivendi may not be able to protect itself against such risks without incurring additional costs.
Potential health risks posed by networks, mobile phones or Wi-Fi terminals
Over the past few years, concerns have been expressed on an international level as to the potential risks posed to human health by electromagnetic radiation from mobile phones and mobile transmission sites. Vivendi is not currently aware of any tangible evidence that demonstrates the existence of risks to human health associated with the use of mobile phones, the emission of radio waves or electromagnetic fields.
Nevertheless, the perception of such risks by the public may have a material negative impact on Vivendi’s results or financial position, particularly if, as a consequence, the number of Vivendi customers decreased significantly, the consumption of its products and services fell, or legal claims were brought against the company. Furthermore, Vivendi may not be certain that in the future, medical or scientific research will not produce evidence of a link between the emission of radio waves and risks to health, which may have a negative impact on Vivendi’s operations and its financial position.
The “Regulatory Environment” section of this chapter contains a detailed description of these risks and of actions being taken by each of the Group’s businesses to address them.
Industrial Risks or Risks Associated with the Environment
The Group’s operations do not pose any major industrial or environmental risks. In fact, the Group’s operations are by their very nature largely non-manufacturing and a large proportion of the Group’s assets are intangible. However, the Group remains alert to any environmental damage that may arise or be discovered in the future, and has set up programs intended to ensure the application of regulations relating to this area (see the Raw Materials section of this chapter).
Risks Associated with the Current Economic and Financial Situation
The ongoing economic crisis has resulted in a severe contraction of credit markets, a high level of volatility in stock markets and a reduction in growth forecasts. The unfavorable circumstances of the economic recession, in particular the reduction in consumers’ purchasing power and level of confidence, could lead to customers postponing or reducing their expenditure on the products and services offered by the Group or affect their ability to pay for them, which in turn may have a negative impact on Vivendi’s revenues and results.
Each year, Vivendi undertakes impairment tests on goodwill and assets with definite or indefinite lives, in order to assess whether their book value exceeds their recoverable value. Current economic circumstances may cause Vivendi to recognize impairment losses for such assets.
To date, the Vivendi Group’s resistance to the economic and financial crisis has confirmed the relevance and soundness of its economic model, which is based on subscriptions, and the strategy implemented over the last few years in order to strengthen and develop its core businesses in France and worldwide, particularly those in emerging countries.
Market risks
Note 24 of the Notes to the Consolidated Financial Statements for the year ended December 31, 2010 contains a detailed analysis of market risks (e.g., interest and exchange rates, liquidity and shares).
