2K Sports 2009 Annual Report Download - page 55

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the release of Dora the Explorer and Go, Diego, Go! titles based on top rated Nickelodeon television shows
which contributed $17.3 million in net revenue in 2008. Furthermore, net revenue generated from our
sports business increased by $9.2 million due to our release of Top Spin 3 in 2008, partially offset by a
decrease in revenue due to the performance of our Major League Baseball franchise. These increases were
partially offset by lower revenue earned from our titles The Darkness, The Elder Scrolls IV, Fantastic Four:
Rise of the Silver Surfer and Ghost Rider and which were $112.0 million higher in the prior period,
reflecting sales generated in connection with their release in the third quarter of 2007. Also, BioShock,
which was released on the PS3 in the fourth quarter of 2008 and on the Xbox 360 and PC in the fourth
quarter of 2007, had lower net revenue of $54.7 million in 2008 compared to 2007.
Consumer demand for the PS3, Xbox 360 and Wii systems increased in 2008, helping to boost our sales on
current generation platforms. Sales on current generation platforms accounted for approximately 82.3% of
our total net publishing revenue in the 2008 period. PS3 and Xbox 360 software sales for 2008 increased
from 2007 by $347.0 million and $281.5 million, respectively, primarily due to the success of Grand Theft
Auto IV. Wii software sales accounted for $112.0 million of our net publishing revenue in 2008, reflecting
higher sales of Carnival Games and an increase in the number of titles we released on the Wii such as
Major League Baseball 2K8 and Top Spin 3. Sales on the prior generation platforms decreased by
$96.3 million, mainly reflecting decreased sales of Fantastic Four: Rise of the Silver Surfer and Grand Theft
Auto: Vice City Stories in 2008. We expect sales on the prior generation platforms to continue to decline as
a result of the hardware transition and have therefore reduced the number of titles in development for
these platforms. We have reduced pricing on several of our software titles for the prior generation
platforms as the current generation hardware installed base grows. Handheld sales increased by
$13.3 million, primarily due to the release of Midnight Club: LA Remix on the PSP and sales of our
Nickelodeon titles Dora the Explorer and Go, Diego, Go! and Carnival Games that released on the DS. PC
sales decreased by $52.5 million, primarily due to decreased sales of BioShock and The Elder Scrolls IV: The
Shivering Isles, which were released in 2007.
Gross profit as a percentage of net revenue increased significantly due to the release of Grand Theft Auto
IV in 2008, as this title was internally developed and the intellectual property is wholly-owned. Product
costs decreased as a percentage of net revenue, primarily due to the volume based manufacturing
discounts we received related to the release of Grand Theft Auto IV. Internal royalties increased as a
percentage of net revenue, again reflecting increased sales of our Grand Theft Auto titles.
Excluding the impact of Grand Theft Auto IV, product costs as a percentage of net revenue decreased
slightly, mainly due to the 2007 period which included a $5.2 million impairment charge related to
intellectual property. Software development costs and royalties decreased in 2008 as a percentage of net
revenue, mainly due to a larger share of revenues generated from internally developed titles. Internal
royalty costs as percentage of net revenues remained relatively consistent with the prior year. License costs
increased slightly as a percentage of net revenue due to both higher royalty expense and lower revenue
generated from our Major League Baseball license, partially offset by lower licensing rates in connection
with other 2008 titles, including Don King Presents: Prizefighter and Top Spin 3. Gross profit as a percentage
of net revenue, excluding the impact of Grand Theft Auto IV, increased by 2.3% in the 2008 period, mainly
due to a higher proportion of internally developed titles including Bully: Scholarship Edition, Midnight
Club: Los Angeles, Sid Meier’s Civilization Revolution, and Top Spin 3 and the continued success of
Carnival Games. In addition, in 2008 our NBA 2K9 title had higher gross margins than its predecessor
game due to higher revenues on a comparable amount of software development costs.
Revenue earned from licensing our intellectual property to third parties increased to $33.2 million in 2008
from $30.8 million in 2007, primarily due to our October 2008 release of Grand Theft Auto IV for the PS3
and Xbox 360 in Japan, which was partially offset by the July 2007 release of Grand Theft Auto: Liberty City
Stories for the PS2 and PSP in Japan. We recognize higher gross profit margins on revenue earned in
connection with licensing our products.
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