2K Sports 2008 Annual Report Download - page 14

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focused on family and casual games. We also offer our titles on the popular hardware platforms to take
advantage of their increasing installed base, including the PS3, Xbox 360, Wii, PSP and DS.
Leverage Emerging Technologies. The technological advances in our industry are leading to new revenue
streams which we are seeking to capitalize on. We see opportunities in a variety of areas, including
downloadable content, in-game advertising, micro-transactions and massively multiplayer online gaming
(‘‘MMOG’’). We released downloadable content for BioShock↦ on the PlayStation↦Network, and plan to
release downloadable content for Grand Theft Auto IV on Xbox Live↦, Microsoft’s online entertainment
and gaming network, in fiscal 2009. We currently include advertising in many of our sports titles. We also
plan to pursue opportunities that exist for networked gameplay, particularly for our wholly-owned
franchises, as well as micro-transactions, where gamers can pay to download additional content to enhance
their game playing experience.
Expand International Business. The global market for interactive entertainment continues to grow, and we
seek to increase our presence internationally, particularly in Asia, Eastern Europe and Latin America. In
2008, we purchased 2K Czech, formerly known as Illusion Softworks, a Czech Republic developer of the
Mafia video game franchise. We also have expansion initiatives in the rapidly growing Asia Pacific markets,
where our strategy is to broaden the distribution of our existing products, develop a presence in Japan, and
establish an online gaming presence, especially in China and Korea. Historically, we typically distributed
our products in Asia through license and royalty agreements with local publishers. While we retain title to
all intellectual property, local publishers are responsible for localization of software content, distribution
and marketing of the products in their respective local markets. We intend to build upon these
relationships and also establish new relationships to expand our international business.
Our Publishing and Software Development Businesses
Revenue in our publishing segment is primarily derived from the sale of internally developed software
titles and software titles developed on our behalf by third parties. Operating margins in our publishing
business are dependent in part upon our ability to continually release new, commercially successful
products and to manage software product development costs. We have internal development studios
located in the United States, Canada, the United Kingdom, Czech Republic, Australia and China. As of
October 31, 2008, we had a research and development staff of approximately 1,500 employees with the
technical capabilities to develop software titles for all major current and prior generation consoles,
handheld hardware platforms and PCs in multiple languages and territories.
Operating margins associated with our externally developed titles, or titles for which we do not own the
intellectual property, are generally lower because they require us to acquire licenses, provide minimum
development guarantees, and pay third party royalties. Agreements with third party developers generally
give us exclusive publishing and marketing rights and require us to make advance royalty payments, pay
royalties based on product sales and satisfy other conditions. Royalty advances for software titles are
typically recoupable against royalties otherwise due to developers based on software sales. Our agreements
with third party developers generally provide us with the right to monitor development efforts and to cease
making advance payments if specified development milestones are not satisfied. We also regularly monitor
the level of advances in light of expected sales for the related titles.
The development cycle for our titles generally ranges from 12 to more than 24 months. Although we often
simultaneously develop our software for multiple platforms, in certain cases it can take 9 to 12 months to
adapt a product for additional hardware platforms after initial development for one platform is completed.
The cost to develop a frontline software product generally ranges from $10 million to $30 million. We
expect that development costs and time will continue to increase for current generation platforms.
We continue to explore new revenue streams as they evolve, including higher margin sources such as
downloadable content and in-game advertising. In the third quarter of 2008, we announced plans to
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