Blizzard 2010 Annual Report Download - page 53

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41
When we determine that a software title contains online functionality that constitutes a more-than-inconsequential
separate service deliverable in addition to the product, principally because of its importance to gameplay, we consider that
our performance obligations for this title extend beyond the sale of the game. Vendor-specific objective evidence (“VSOE”)
of fair value does not exist for the online functionality, as we do not separately charge for this component of the title. As a
result, we recognize all of the software-related revenue from the sale of the title ratably over the estimated service period,
which is estimated to begin the month after either the sale date or the street date of the title, whichever is later. In addition, we
initially defer the costs of sales for the title (excluding intangible asset amortization), and recognize the costs of sales as the
related revenues are recognized. Cost of sales includes manufacturing costs, software royalties and amortization, and
intellectual property licenses.
We recognize World of Warcraft boxed product, expansion packs and other value-added service revenues each with
the related subscription service revenue ratably over the estimated service periods 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 value-added services are classified as
subscription, licensing and other revenues.
Revenue 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, the product is available for download and 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 are considered adjustments of the selling price
of our products, such as rebates and product placement fees, 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 derived from World of Warcraft, a game that is playable through Blizzard’s servers on a
subscription-only basis. 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 packaged software and prepaid subscription cards, as well as prepaid subscriptions sales, are
deferred until the subscription service is activated by the consumer and recognized ratably over the subscription period.
Revenue from internet gaming rooms in Asia is recognized upon usage of the time packages sold. 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 with Blizzard. We receive royalties from the licensees as a result. 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.