Blizzard 2008 Annual Report Download - page 20

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our revenue recognition policy. This evaluation is performed for each software product together
with any online transactions, such as electronic downloads of titles with product add-ons when it
is released.
In instances where the online service is considered more than an inconsequential separate
deliverable in addition to the software product, we account for the sale as a “bundled” sale, or
multiple element arrangement, in which we sell both the software product and the online service
for one combined price. Vendor specific objective evidence for the fair value of the online service
does not exist as we do not separately offer or charge for the online service. Therefore, when the
online service is determined to be more than an inconsequential deliverable, we recognize the
revenue from sales of such software products ratably over the estimated online service period,
beginning the month after shipment of the software product. Costs of sales (excluding intangible
asset amortization classified as costs of sales) related to such products are also deferred and
recognized with the related revenues, including manufacturing costs, software royalties and
amortization and intellectual property licenses.
We consider the World of Warcraft boxed product including expansion packs and other
ancillary revenues as a single deliverable with the total arrangement consideration combined and
recognized ratably as revenue over the estimated product life beginning upon activation of the
software and delivery of the services. Revenues attributed to the sale of World of Warcraft boxed
software and related expansion packs are classified as product sales and revenues attributable to
subscription and other ancillary services are classified as subscription, licensing and other
revenues.
Determining whether the online service for a particular game constitutes more than an
inconsequential deliverable is subjective and requires management’s judgment. Determining the
estimated service period over which to recognize the related revenue and costs of sales is also
subjective and involves management’s judgment.
Allowances for Returns, Price Protection, Doubtful Accounts, and Inventory
Obsolescence. We may permit product returns from, or grant price protection to, our customers
under certain conditions. In general, price protection refers to the circumstances when we elect to
decrease the wholesale price of a product by a certain amount and, when granted and applicable,
allows customers a credit against amounts owed by such customers to us with respect to open
and/or future invoices. The conditions our customers must meet to be granted the right to return
products or price protection include, among other things, compliance with applicable trading and
payment terms, and consistent return of inventory and delivery of sell-through reports to us. We
may also consider other factors, including the facilitation of slow-moving inventory and other
market factors. Management must make estimates of potential future product returns and price
protection related to current period product revenue. We estimate the amount of future returns and
price protection for current period product revenue utilizing historical experience and information
regarding inventory levels and the demand and acceptance of our products by the end consumer.
The following factors are used to estimate the amount of future returns and price protection for a
particular title: historical performance of titles in similar genres; historical performance of the
hardware platform; historical performance of the franchise; console hardware life cycle; sales
force and retail customer feedback; industry pricing; weeks of on-hand retail channel inventory;
absolute quantity of on-hand retail channel inventory; our warehouse on-hand inventory levels; the
title’s recent sell-through history (if available); marketing trade programs; and competing titles.
The relative importance of these factors varies among titles depending upon, among other items,