Activision 2012 Annual Report Download - page 61

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43
We recognize revenues from World of Warcraft boxed product, expansion packs and value-added services, in each case with the
related subscription service revenue, ratably over the estimated service period beginning upon activation of the software and delivery of the
related services. Revenues attributed to the sale of World of Warcraft boxed software and related expansion packs are classified as “Product
sales,” whereas revenues attributable to subscriptions and other value-added services are classified as “Subscription, licensing, and other
revenues.”
Revenues for software products with more-than-inconsequential separate service deliverables and World of Warcraft products are
recognized over the estimated service periods, which range from a minimum of five months to a maximum of less than a year.
For our software products with features we consider to be incidental to the overall product offering and an inconsequential deliverable,
such as products which provide limited online features at no additional cost to the consumer, we recognize the related revenue from them upon
the transfer of title and risk of loss of the product to our customer.
With respect to online transactions, such as online downloads of titles or product add-ons that do not include a more-than-
inconsequential separate service deliverable, revenue is recognized when the fee is paid by the online customer to purchase online content and the
product is available for download or is activated for gameplay. In addition, persuasive evidence of an arrangement must exist and collection of
the related receivable must be probable.
Sales incentives and other consideration given by us to our customers, such as rebates and product replacement fees, are considered
adjustments of the selling price of our products and are reflected as reductions to revenue. Sales incentives and other consideration that represent
costs incurred by us for assets or services received, such as the appearance of our products in a customer’s national circular ad, are reflected as
sales and marketing expenses when the benefit from the sales incentive is separable from sales to the same customer and we can reasonably
estimate the fair value of the benefit.
Subscription Revenues
Subscription revenues are mostly derived from World of Warcraft. World of Warcraft is a game that is playable through Blizzard’s
servers and is generally sold through a subscription-only basis.
For World of Warcraft, after the first month of free usage that is included with the World of Warcraft boxed software, the World of
Warcraft end user may enter into a subscription agreement for additional future access. Revenues associated with the sale of subscriptions via
boxed software and prepaid subscription cards, as well as prepaid subscriptions sales, are deferred until the subscription service is activated by
the consumer and are then recognized ratably over the subscription period. Value-added service revenues associated with subscriptions are
recognized ratably over the estimated service periods.
Licensing Revenues
Third-party licensees in Russia, China and Taiwan distribute and host Blizzard’s World of Warcraft game in their respective countries
under license agreements, for which they pay the Company a royalty. We recognize these royalties as revenues based on the end users’ activation
of the underlying prepaid time, if all other performance obligations have been completed, or based on usage by the end user, when we have
continuing service obligations. We recognize any upfront licensing fee received over the term of the contracts.
With respect to license agreements that provide customers the right to make multiple copies in exchange for guaranteed amounts,
revenue is generally recognized upon delivery of a master copy. Per copy royalties on sales that exceed the guarantee are recognized as earned. In
addition, persuasive evidence of an arrangement must exist and collection of the related receivable must be probable.
Breakage Revenues
World of Warcraft boxed product sales and subscription revenues are recognized upon activation of the game. We analyze historical
activation patterns over time to determine when the likelihood of activation ever occurring becomes remote. We recognize revenues from
subscriptions that have not yet been activated, prepaid subscription cards, as well as prepaid subscription sales, when the likelihood of future
activation occurring is remote (defined as “breakage revenues”). We did not record any breakage revenues for the years ended December 31,
2012 and 2011. For the year ended December 31, 2010, we recorded $14 million in breakage revenues from the sale of packaged software in
“Product sales,” and $6 million from prepaid and subscription breakage revenues in “Subscription, licensing, and other revenues” in the
consolidated statements of operations.