Further development of the operations of Polsat Cyfrowy Group on the mature mobile telephony and pay TV markets will depend mostly on the ability to effectively encourage the existing customers to use a wider range of the offered services, win customers from competitive operators, as well as the ability to reduce churn
The Group cannot give any assurance that the measures it is undertaking will encourage its existing customers to use a wider range of services or attract customers from competitive pay TV or telecommunication operators, or that the measures we are undertaking to increase customer loyalty will reduce the rate of churn or allow the Group to maintain the current churn rate.
The Group’s performance depends on the customers' satisfaction, the acceptance of the programming content by viewers, as well as our ability to generate profit from our own productions or from acquired broadcasting rights.
Cyfrowy Polsat Group operates on markets where a commercial success primarily depends on customer satisfaction and acceptance of programming content, and viewers' reactions are often difficult to predict. While striving to acquire and retain pay TV customers, Cyfrowy Polsat provides them with access to a broad range of channels. Whereas, the Group’s ability to generate advertising revenue in the TV production and broadcasting segment depends almost entirely on viewers' demand for our programmes.
To some extent, the profitability of the Group’s operations depends on its ability to produce or obtain broadcasting rights to the most attractive programmes in a cost-effective manner. While costs of in-house productions of television content are usually higher than costs of purchasing third-party programmes, a larger number of Polish programmes broadcast on our channels will increase viewers' demand and consequently increase the demand from advertisers. However, there can be no assurance that financial outlays the Group has made or will make in the future on Polish programming production will be fully recovered or that we will be able to generate revenue high enough to offset those costs. Consequently, if customers do not accept the programming offer or the Group is unable to produce programmes or acquire broadcasting rights in a profitable manner, it may have a material adverse effect on the Group’s financial condition, results of operations or prospects
Attracting and retainings customers and advertisers also depends on the Group’s ability to conclude or extend the license agreements under which we distribute key programs
There can be no assurance that the licence agreements concluded by the Group will be extended on equally favorable terms or that they will be extended at all, nor can we exclude the possibility that a licensor will terminate the licence agreement before its agreed expiry date. Lack of ability to obtain, maintain, or extend important programme licences may make it difficult to provide and offer new attractive channels and programmes, which may result in losing the ability to acquire and retain customers and advertisers. This in turn may have a material adverse effect on our performance, financial condition and growth prospects.
An ability to increase sales of the Group’s services depends on the effectiveness of the sales network.
Because of, for instance, growing competition with other pay TV providers and telecommunications services providers, we might have to raise fees paid to our distributors, which would result in higher operating costs and probably lead to lower profit from operating activities.
The Group’s business depends on third-party providers for certain services, infrastructure or equipment. If these are delivered late or if they are not delivered at all our services may be delayed or even suspended.
Such a risk exists, although the Group relies on proven and reliable providers. However, we have little to no influence over how and when these third-party providers perform their obligations. For instance, we lease transponders from Eutelsat S.A. to deliver digital signal via satellite to our customers in Poland. Our customers' antennas are usually adapted to receiving signals delivered through transponders leased from Eutelsat S.A. In order to switch the satellite operator in the event of our failure to extend a contract, or in the event of contract termination by Eutelsat S.A., or for other reasons, we would be forced to find an alternative provider of satellite transmission capacities and potentially reposition our customers' satellite antennas, which would be a cost- and time-consuming process considering the size of our customer base.
If any of our major providers is unable to, or refuses to, perform their contracted services or provide access to equipment, on which timely and economically rational delivery of specific services or products to customers depends, we may not be able to offer to customers such services or products, of their quality may deteriorate, which may have a material adverse effect on the Company’s reputation and affect the customers’ trust and lead to the decrease of revenues from the sale of goods and services, thus having a material adverse effect on the Group’s business, financial condition, results of operations or prospects.
The Group may be unable to keep pace with new technologies used on the markets on which it operates.
Despite the observation of changes taking place on the market, the Group may be unable to adjust itself to the ever changing technologies. We cannot currently predict, with absolute certainty, how emerging and future technological changes will affect the Group’s operations, nor can it predict that new technologies required to support its planned services will be available when expected, if at all. Failure on our part to adapt our products and services to the changing lifestyles and preferences of our customers, or to make sufficient use of new technologies in our activities, may have a material adverse effect on the Group’s business, financial condition, results of operations or prospects.
Alleged health risks of wireless communications devices could lead to decreased wireless communications usage or increased difficulty in obtaining sites for base stations.
Alleged health risks of wireless communications devices could lead to decreased wireless communications usage or increased difficulty in obtaining sites for base stations. In addition, these health concerns may cause authorities to impose stricter regulations on the construction of the components mobile telecommunications networks, which may lead to an increase in our operating costs in the segment of services to individual and business customers, and may hinder the completion of network deployment and the commercial availability of new services, or may increase costs of such development.
There is a risk of fraudulent activities by some of our customers.
Some of our customers use telecommunications services in a way that differs from the standard method of their use by the end user, e.g. by terminating mass traffic in the network of another operator while bypassing wholesale interconnect settlements There can be no assurance that we will be sufficiently effective in preventing this type of fraud, which may expose the Group to additional costs or loss of some revenue.
The Group might be unable to maintain good name of the Cyfrowy Polsat, Plus, Telewizja Polsat, IPLA, TV4 and TV6 brands.
The good name of the “Cyfrowy Polsat,” “Plus,” “Telewizja Polsat,” “IPLA,” “TV4” and “TV6” brands is a significant component of Group's goodwill. Maintaining their good name is fundamental for acquiring new and retaining existing customers and advertisers. Our reputation may suffer if due to technical faults or other circumstances there are difficulties with the delivery products and services.
Goodwill and brand values may be impaired.
Following the acquisitions made in the past, in particular of Telewizja Polsat, Metelem, indirectly holding Polkomtel, and Litenite, holding Aero2 (the legal successor of Midas), we have carried considerable amounts of goodwill and intangible assets, representing brand value, on our balance sheet. We test the goodwill and brand value allocated to our business segments for impairment on an annual basis, by measuring the recoverable amounts of cash-generating units, based on value in use. Any adverse changes to the key assumptions we apply in impairment testing may have a material adverse effect on our business, financial condition, results of operations.
There is a risk of loosing our management staff and key employees.
Whether the Group is successful in the future will depend partly on the Group’s ability to retain the Management Board members who have made considerable contributions to the development of our company, as well as to acquire and retain qualified employees. No assurance can be given that on a competivie labour market we will be able to acquire or retain the best staff, which may affect our business, financial condition or prospects.
Disruptions to set-top box production may adversely affect our reputation and increase customer churn.
The Group is currently producing most of the set-top boxes offered to customers at the Group’s manufacturing plant in Mielec. In 2016 set-top boxes manufactured by our plant accounted for more than 91% of all the set-top boxes sold or leased by us. Possible disruptions in the production or acquisition of a bigger volume of set-top boxes from external sources may have a negative effect on the Company’s reputation and lead to erosion of our brand value, which could have a material adverse effect on our business, financial condition, results of operations or prospects.
Network infrastructure, including information and telecommunications technology systems, may be vulnerable to circumstances beyond the Group control that may disrupt service provision.
Network infrastructure, including information and telecommunications technology systems, may be vulnerable to circumstances beyond the Group control that may disrupt service provision. Such disruptions may include power outages, acts of terrorism and vandalism and human error, as well as fire, flood, or other natural disasters. Base stations, a particularly important element of the Group’s network infrastructure, are exposed to most of these risks. Disruptions in service proviso may also result from software errors, virus attacks or through unauthorized access. Any such interruptions could seriously harm our reputation and reduce customer confidence. A satellite center (satellite transponders) is also exposed to a risk of failure, and in the television production and broadcasting segment – IT systems used for managing advertising schedule and program broadcasting.
The Group may lose spectrum reservations it uses for LTE network roll-out.
Group companies currently hold frequency allocations in the 800 MHz, 900 MHz, 1800 MHz, 2100 MHz and 2600 MHz bandwidths. These allocations are fundamental for the roll-out of the Group’s mobile telecommunications network. Our competitors have taken a number of steps, some of which may lead to retraction of the decisions regarding frequency allocations granted to companies belonging to Aero2 Group, including the 800 MHz and 1800 MHz band frequency allocations, which are currently integral to the offering of LTE services.
No assurance can be given that as a result of the pending proceedings or proceedings the instigation of which cannot be excluded, as events lying outside the control of beneficiaries of 1800 MHz spectrum reservation decisions, our reservation decsion could be revoked, which could have a material effect on our ability to provide LTE services. Proceedings to invalidate the 1800 MHz frequency allocation tender have been instigated by T-Mobile and Orange. Supreme Administrative Court (NSA), in its ruling dated May 8, 2014, sustained the decision of the Court of First Instance and repealed the decision issued by the President of the Office of Electronic Communications (UKE) on September 23, 2011 which partially invalidated the above mentioned tender. Following the decision of the Supreme Administrative Court, UKE informed that “the decisions regarding re-running the tender will be taken by the Office upon careful analysis of the written justification of NSA’s rulings and the Court’s guidelines regarding further procedure as well as upon analysis of the legal situation.” UKE also stated that the “reservation decisions issued by UKE President remained valid while the operators could continue providing their services while using these frequencies.” In correspondence dated December 23, 2016, the President of UKE informed the parties involved that proceedings to invalidate the tender for the 1800 MHz frequency band have been opened. The instigation of the abovementioned proceedings by UKE remains without effect on the final and legally binding character of the reservation decision, which constitutes the basis for Polkomtel to use capacity in the 1800 MHz spectrum.
T-Mobile Polska, Orange Polska and P4, as well as the French Chamber of Commerce and Industry have undertaken a series of legal actions aimed at blocking the possibility of using frequencies from the 800 MHz spectrum by our subsidiary, Sferia. As at the date of preparation of this Report legal proceedings are in progress before the Regional Court in Warsaw, the Administrative Court in Warsaw and the Supreme Administrative Court in Warsaw. So far all the decisions of the courts have been favorable for Sferia. Nonetheless, until the legally binding termination of proceedings, it is not possible to exclude the possibility of an unfavorable, from the point of view of Sferia, modification of rulings in the currently ongoing proceedings, which may result in an unfavorable change of the reservation decision regarding the 800 MHz spectrum, or its withdrawal.
No assurance can be given that if we lost certain frequency allocations on the basis of which we provide services in LTE and LTE-Advanced/ technologies, we would be able to gain access to sufficient alternative frequency band resources on satisfactory terms or at all, and failure to obtain access to such resources could have a negative impact on the implementation of business strategies and consequently a material adverse effect on our financial condition, results of operations and prospects.
The necessity to obtain building permits may delay or prevent roll-out of the telecommunication networks.
The roll-out of Polkomtel’s network infrastructure, including in particular the construction and installation of base transceiver stations, might require obtaining building permits. No assurance can be given that all the necessary building permits will be obtained or that they will be obtained when originally anticipated, which would pose the risk that work on development of the network infrastructure may have to be discontinued, or may be considerably delayed.
The Group could become a party to labor disputes or experience growth of employment costs.
In spite of correct relations with our employees, we may not rule out the risk of occurrence work disruptions, disputes with employees, strikes or significant growth of labor costs in one or many of the Group’s companies. Two trade unions are active at Polkomtel: Niezależny Samorządny Związek Zawodowy Solidarność (the Solidarity Independent Self-Governing Trade Union) and Ogólnopolskie Porozumienie Związków Zawodowych (All-Poland Alliance of Trade Unions). At December 31, 2016, 138 employees (expressed as full-time equivalents), or 3.7% of the total workforce of Polkomtel Group were trade union members. At the date of preparation of the Annual Report of the Capital Group of Cyfrowy Polsat for the financial year ended December 31, 2016 (published on March 16, 2017), we had no knowledge of any disputes with trade unions or any other collective disputes at Polkomtel. However, involvement in lengthy negotiations with the trade unions or in collective disputes cannot be ruled out; strikes, work interruptions or other industrial action (triggered, for example, by an attempt to optimise the employment level or labour costs or the need to restructure the workforce), as well as employees' pay rise demands may also be experienced.
The administrative and court proceedings in which the Group is involved may result in unfavorable rulings.
We were, and currently are, party to a number of past or pending administrative and court proceedings in connection with our business. Therefore, there is a risk of new proceedings being instituted against us in the future, outcomes of which may prove unfavorable (including those instituted in connection with claims made by organisations for collective administration of copyrights). Under Polish copyright law, we are required to pay fees for collective administration of copyrights to organisations that collect royalties on behalf of authors of copyright-protected works we broadcast or distribute as part of our operations. Such fees are charged in accordance with licence agreements signed with these organisations. Although relevant agreements are in place with several organisations for collective administration of copyrights, there is a risk that claims will be brought against us by other such entities. Polkomtel is in turn a party to administrative and court proceedings, including the ones which have been initiated by regulators, competition and consumer protection office as well as tax authorities. Polkomtel is also a party to disputes and court proceedings involving third party entities
Should any claims related to the infringement of third-party intellectual property rights be brought against us, we may be forced to incur substantial expenses to defend against those claims, to acquire a licence for a third-party technology, or to redefine our business methods to eliminate the infringement.
Our business success depends largely on third-party intellectual property rights, particularly rights in advanced technologies, software, and programming content. No assurance can be given that we have not, or that we will not in the future, infringe any third-party intellectual property rights. Any such infringement may result in claims for damages being brought against us by third parties. We may also be placed under an obligation to obtain a licence or acquire new products which would enable us to conduct our business in a non-infringing way, or we may have to expend time, human and financial resources to defend against claims of infringement
Our own intellectual property rights and other means of protection may not adequately protect our business, and insufficient protection of our programming content, proprietary technologies and know-how may cause profit erosion and customer churn.
A large proportion of the products of Cyfrowy Polsat Group make use of proprietary or licensed content, delivered through our broadcast channels, interactive TV services, and pay TV. We establish and protect our property rights on distributed content relying on trademarks, copyrights, and other intellectual property rights, but no assurance can be given that these rights will not be challenged, revoked or disregarded.
Even if our intellectual property rights remain in full effect, no assurance can be given that our protection and anti-piracy measures will successfully prevent unauthorised access to our services and theft of our programming content. Furthermore, our proprietary content and the content we use under licences may be accessed, copied or otherwise used by unauthorised persons. The risk of piracy is particularly harmful to our segments of TV production and broadcasting and the distribution of paid content. Media piracy is a problem well known in many geographies, including Poland. Technological advancements and digital conversion of multimedia content are powerful incentives for pirating, as they enable the production and distribution of high-quality unauthorised copies, recorded on various carriers, of pay-per-view programmes delivered via set-top boxes, licence-free or free-to-air transmissions on television or the Internet. This is further exacerbated by the difficult enforcement of the laws governing copyright and trade-mark infringements on the Internet, which compromises the protection of our intellectual property rights in that medium. Unauthorised use of our intellectual property may adversely affect our operations, harming our reputation and undermining our trading partners' confidence in our ability to properly protect our proprietary and licensed content, which in turn may have a material adverse effect on our business, financial condition, results of operations or prospects.
Our broadcasting licences may be revoked or may not be renewed.
As at December 31, 2016, we held 7 terrestrial broadcasting licences and 26 satellite broadcasting licences. All TV broadcasting licences issued by KRRiT are issued for specified period. Our terrestrial TV broadcasting licences and satellite broadcasting licences will expire at various times between 2023 and 2030.
Our mobile pay TV services use the 470–790 MHz band, which has been allocated to us for a specified period. There can be no assurance that this allocation will be extended prior to its expiry. In particular, pursuant to the Telecommunications Law, our frequency allocation may not be extended or may be revoked by the President of UKE, especially if the extension of the allocation would lead to excessive frequency concentration within the Group. Given that the regulations and laws governing the Polish telecommunications industry are very complex and often change, there can be no assurance that the Group will not breach any laws or regulations related to frequency allocation or any terms of such allocation
If any of our broadcasting licences or the Group's frequency allocation are not extended, are revoked or extended on unfavorable conditions, the Group may be forced to suspend the provision of some services temporarily or permanently, may be unable to offer services based on a particular technology or may have to incur substantial expenditure, all of which may have a material adverse effect on our business, financial condition, results of operations or prospects.
Group's current frequency allocations may be revoked or may not be renewed on acceptable terms or at all.
All frequency allocations have been issued to companies belonging to the Group for a definite term. Group's frequency allocations may not be extended or may be revoked by the President of UKE in case of a substantial breach of the terms of its use, or if revocation of the frequency allocations follows from the necessity to ensure equal and effective competition or substantially better use of frequencies, especially if the extension of the allocation would lead to excessive frequency concentration by Cyfrowy Polsat Group.
The spectrum of radio frequencies available to the mobile phone industry is limited and therefore we may not be able to obtain new frequency allocations.
In May 2016 the European Union Council adopted a general approach regarding the draft decision on the development of broadband services in the European Union. In accordance with the proposal, access to the 700 MHz band (the so-called second digital dividend, i.e. the spectrum from 694-790 MHz frequency range) is to be provided to telecommunication operators for the purpose of wireless communications by 30 June 2020 at the latest. In justified cases it will be possible to postpone this deadline by two years. At the same time, TV broadcasters who will be forced to release the 694-790 MHz band as a result of the decision, and to use the 470-694 MHz band only, have been given the guarantee of maintaining the latter frequency band, i.e. 470-694 MHz, at least till the year 2030.
The Group’s inability, or limited ability, to obtain access to frequency bands important for further development of our telecommunication operations (on favorable terms or at all), including maintaining the existing or implementing new or improved mobile technologies, or obtaining such access by competitors can have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.