2K Sports 2009 Annual Report Download - page 9

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Leverage Emerging Technologies. We continually seek to capitalize on the technological advances in our
industry that are leading to new revenue streams. We see opportunities in a variety of areas, including
downloadable content, in-game advertising, micro-transactions, and social games. In fiscal 2009, we
released downloadable content for Grand Theft Auto IV on Xbox LIVE, and downloadable content for
Midnight Club: Los Angeles South—Central on Xbox LIVE and PSN. We also released NBA 2K10: Draft
Combine, a download-only experience on XBLA and PSN, and in fiscal 2008, we released downloadable
content for BioShock on PSN. We have also begun to develop and publish titles for the iPhone and
iPod touch, including Sid Meier’s Civilization Revolution which was released this year, and casual
gaming titles exclusively for XBLA, including the launch of Axel & Pixel this fall, and The Misadventures of
P.B. Winterbottom, planned for release in 2010. We are beginning to develop gaming experiences that
capitalize on the increasing consumer adoption of social networks, and announced the planned release of
CivilizationNetworkfor Facebook in calendar 2010. We currently include in-game advertising in many
of our sports titles. We also continue 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. We
have expansion initiatives in the Asian markets, where our strategy is to broaden the distribution of our
existing products, expand our business in Japan, and establish an online gaming presence, especially in
China and Korea. Historically, we typically distributed our products in Asia through license agreements
with local publishers in Japan and Korea, and distribution agreements with local distributors of finished
goods elsewhere in Asia. While we retain title to all intellectual property, under license agreements local
publishers are responsible for localization of software content, distribution and marketing of the products
in their respective local markets. We intend to continue to build upon these licensing relationships and also
expand finished goods distribution strategies to grow our international business. In 2009, 2K Sports
secured a multi-year license from the NBA to develop an online version of an NBA simulation game in
China, Taiwan, South Korea and Southeast Asia. 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 publish NBA 2K Online in China.
Our Publishing and Software Development Businesses
Revenue in our publishing business primarily is derived from the sale of internally developed software
titles and software titles developed by third parties for our benefit. 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 Australia, Canada, China, Czech Republic, the United Kingdom, and the United States. As of
October 31, 2009, we had a research and development staff of 1,633 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 development payments, pay
royalties based on product sales and satisfy other conditions. Development payments 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 development payments if specified development milestones are not satisfied. We also regularly
monitor the level of development payments in light of expected sales for the related titles.
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