2K Sports 2009 Annual Report Download - page 11

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At the same time, 2K Sports also announced a partnership with Tencent Holdings Limited, one of China’s
leading online game operators, to co-develop and distribute NBA 2K Online in China.
2K Play. 2K Play focuses on developing and publishing titles for the growing market of casual and family-
friendly games. 2K Play titles are developed by both internal development studios and third party
developers. Internally developed titles include Carnival Games and Birthday Party Bash. This year, 2K Play
announced a new licensed casual and family-friendly, internally developed game, Ringling Bros. and
Barnum & Bailey Circus, which was released in November 2009. 2K Play also has a partnership with
Nickelodeon to publish video games based on its top rated Nick Jr. titles such as Dora the Explorer; Go,
Diego, Go!; Ni Hao, Kai-lan and The Backyardigans. In 2009, 2K Play began to work with several small
independent developers to publish casual gaming titles exclusively for XBLA, including Axel & Pixel and
The Misadventures of P.B. Winterbottom. We expect family-oriented gaming to continue to be a component
of our industry in the future.
Our Distribution Business
Our distribution business, which consists of our Jack of All Games subsidiary, distributes our products as
well as software, hardware, and accessories produced by others to retail outlets in North America. Revenue
in our distribution business is derived from the sale of third party software titles, accessories and hardware
in North America. Operating margins in our distribution business depend in large part on the mix of
software and hardware sales, with software sales generally yielding higher margins than hardware.
In September 2008, we agreed to outsource the pick, pack, ship and warehousing functions for our
publishing and distribution businesses to a third party logistics management solutions provider.
Additionally, we adopted a plan to reduce the number of units held in inventory in order to focus on higher
margin titles and improve the operating efficiency of the business. We also sold certain assets of our U.S.
based distribution business to the third party logistics management solutions provider.
During our annual goodwill impairment test we determined that goodwill attributed to our distribution
reporting unit was impaired due to a decline in the retail environment in 2009 and its impact on our
outlook for our distribution reporting unit. For the fiscal year ended October 31, 2009, we recorded a
goodwill and intangible impairment charge of $14.8 million related to our distribution segment.
Intellectual Property
Our business is highly dependent on the creation, acquisition, licensing and protection of intellectual
property. Some of the intellectual property rights we have created or acquired for our internally-owned
portfolio of brands are: Agent, BioShock, Bully, Carnival Games, Darkness, Grand Theft Auto, Mafia,
Manhunt, Max Payne, Midnight Club, Railroad Tycoon, Red Dead, Rockstar Games Presents Table Tennis, Sid
Meier’s Civilization, Sid Meier’s Pirates!, Sid Meier’s Railroads!, Smuggler’s Run, Spec Ops, and Top Spin. We
believe that content ownership facilitates our internal product development efforts and maximizes profit
potential. We attempt to protect our software and production techniques under copyright, trademark and
trade secret laws as well as through contractual restrictions on disclosure, copying and distribution.
Although we generally do not hold any patents, we obtain trademark and copyright registrations for many
of our products.
We also enter into content license agreements, such as those with sports leagues and players associations,
movie studios and performing talent, music labels and musicians. These licenses are typically limited to use
of the licensed rights in products for specific time periods. In addition, we license and include console
manufacturer technology in our products on a non-exclusive basis, which allows our games to be played on
their respective hardware systems.
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