Risk factors

Telecommunications market

Changes within the telecoms market, structural adjustments and competition from service providers who do not maintain their own telecoms infrastructure are exerting pressure on transformation. It remains to be seen which technologies and services will emerge the winners. Current trends are increasingly necessitating the integration of a growing number of technologies and devices in order to win new customers and deliver multimedia services. The integration and operation of new infrastructures entails significant risks in terms of interfaces to existing infrastructure. The occurrence of such risks could delay implementation of the strategy or have a detrimental effect on customer satisfaction. Swisscom has initiated measures in various areas to address this transformation process.

Politics and regulation

For Swisscom, telecommunications and antitrust legislation entail risks which could have a sustained impact on the company’s future financial position and results of operations and hence negatively impact Swisscom’s products and services as well as its investment activities. The main risks concern the possibility of stricter price regulations (for leased lines, for example), which would further restrict Swisscom’s room for manoeuvre; or sanctions by the Competition Commission, which would reduce Swisscom’s operating results and damage the company’s good reputation.

New initiatives to revise the Telecommunications Act (TCA) and the related ordinance (OTS) further increase the regulatory risk. These include a possible regulation of roaming charges, mobile telephony and fibre-optic technology, or establishment of the principle of network neutrality. A change in the method used to calculate costs relating to regulated access services could have also negative implications for Swisscom.

Increased demands on the part of the regulator with regard to basic service provision (for example, universal entitlement to faster Internet access) or cooperation in the fight against crime (for example, entitlement to real-time monitoring of mobile phones) would push up expenditure considerably and have an adverse impact on Swisscom’s results.

Access network expansion

Customer demand for broadband access is growing rapidly, as is the popularity of mobile devices and IP-based services (smartphones, IP TV, OTTs, etc.). Swisscom faces tough competition from cable companies and other network operators as it strives to meet current and future customer needs and defend its own market shares. The necessary network expansion calls for major investments which need to be amortised over several decades. To mitigate financial risks and ensure optimum network coverage, expansion is determined by population density and customer demand. The risks would be substantial if Swisscom were forced to spend more on network expansion than planned, or if projected long-term earnings were to fall. Risks will be minimised by adapting expansion of the access network to changing framework conditions.

Human capital

Constant changes in framework conditions and markets necessitate a change in corporate culture. The key challenges in this context lie in maintaining employee motivation and high staff loyalty despite cost pressure, while managing growth and efficiency, increasing employees’ ability to adapt their skills and ensuring Swisscom remains an attractive employer.

Economic climate, market consolidation in Italy, regulation and recoverability of Fastweb’s assets

A potential consolidation of the Italian market could have significant ramifications for Swisscom’s subsidiary Fastweb. In addition, Italy’s economic development and competitive dynamics carry risks which could have a detrimental impact on Fastweb’s strategy and jeopardise projected revenue growth. The impairment test performed in 2013 confirmed the recoverable value of Fastweb’s assets. The recoverability of Fastweb’s net assets recognised in the consolidated financial statements is contingent above all on achieving the financial targets set out in the business plan (revenue growth, improvement in EBITDA margin and reduction in capital expenditure ratio). If future growth is lower than projected, there is a risk that this will result in a further impairment loss. Major uncertainty also surrounds the future interest rate trend and the country risk premium. An increase in interest rates or the country risk premium could lead to an impairment loss. Fastweb’s business operations are also influenced by European and Italian telecommunications legislation. Regulatory risks can jeopardise the achievement of targets and reduce the enterprise value.

Business interruption

Usage of Swisscom’s services is heavily dependent on technical infrastructure such as communications networks and IT platforms. Any major disruption to business operations poses a high financial risk as well as a substantial reputation risk. Force majeure, human error, hardware or software failure, criminal acts by third parties (for example, computer viruses or hacking) or the ever-growing complexity and interdependence of modern technologies can cause damage or interruption to operations. Built-in redundancy, contingency plans, deputising arrangements, alternative locations, careful selection of suppliers and other measures are designed to ensure Swisscom can deliver the level of services that customers expect at all times.

Information technologies

Swisscom is in the midst of a transformation from line-switched TDM technology to IP technology. This transformation should enable Swisscom to develop and roll out new products and services more flexibly, efficiently and cost-effectively than before. Initial results are positive, but Swisscom is entering new territory and therefore taking on higher risks. Swisscom’s highly complex IT architecture entails high risks during both the implementation and operating phases. These risks have the potential, among other things, to delay the rollout of new services, increase costs and impact competitiveness. The transformation is being monitored by the Swisscom Switzerland Management Board.

Environment and health

Electromagnetic radiation (for example from mobile antennas or mobile handsets) has repeatedly been claimed to be potentially harmful to the environment and to health. Under the terms of the Ordinance on Non-Ionising Radiation (ONIR), Switzerland has adopted a so-called precautionary principle and introduced limits for base stations that are ten times higher than the EU’s limits. The public’s wary attitude to mobile antenna sites in particular is impeding Swisscom’s network expansion. There is a future risk that regulations governing electromagnetic emissions and legal requirements for the construction of mobile base stations may be further tightened. This would result in additional costs for network expansion and operation. Even without stricter legislation, public concerns about the effects of electromagnetic radiation on the environment and health could further hamper the construction of wireless networks in the future and drive up costs. Such concerns could also reduce intensity of mobile phone usage.

Climate change poses risks for Swisscom in the form of increased levels of precipitation as well as higher average or extreme temperatures. These trends could impact the operability of Swisscom’s telecoms infrastructure, particularly in view of the potential risk to base stations and local exchanges. The analysis of risks and opportunities posed by climate change is based on the official reports of the Federal Office for the Environment (FOEN) on climate change, published in October 2007 and October 2011.