THQ 2010 Annual Report Download - page 22

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competitors’ products, leaving less space to sell our products. Since the life cycle of a game is short, strong
sales of our competitors’ games could negatively impact the sales of our games.
Failure to appropriately adapt to rapid technological changes or emerging distribution channels
may negatively impact our market share and our operating results.
Rapid technology changes in our industry require us to anticipate, sometimes years in advance, which
technologies we must implement and take advantage of in order to make our products and services
competitive. Currently, our industry is experiencing an increasing shift to online content and digital
downloads. We believe that much of the growth in the industry will come via online markets or digital
distribution such as massively multi-player games (both subscription and free-to-play), casual
micro-transaction based games, paid downloadable content and digital downloads of games. Accordingly, we
plan to continue integrating a digital strategy into all of our key franchises. However, if we fail to anticipate
and adapt to these and other technological changes, our market share and our operating results may suffer.
Our future success in providing online games, wireless games and other content will depend upon our ability
to adapt to rapidly-changing technologies, develop applications to accommodate evolving industry
standards, and improve the performance and reliability of our applications.
Our platform licensors control the fee struc tures for online distribution of our games on their
plat forms .
Certain platform licensors have retained the right to change the fee structures for online distribution of both
paid content and free content (including patches and corrections) on their platforms. Each licensor’s ability to
set royalty rates makes it difficult for us to forecast our costs. Increased costs could negatively impact our
operating margins. We may be unable to distribute our content in a cost-effective or profitable manner
through this distribution channel, which could adversely impact our results of operations.
Development of software by platform manufacturers may lead to reduced sales of our product s.
The platform manufacturers, Microsoft, Nintendo and Sony, each develop software for their own hardware
platforms. As a result of their commanding positions in the industry, the platform manufacturers may have
better bargaining positions with respect to retail pricing, shelf space and retailer accommodations than do
any of their licensees, including us. Additionally, the platform manufacturers can bundle their software with
their hardware, creating less demand for individual sales of our products. In the twelve month period ended
March 31, 2010, Nintendo’s market share across North America and top European territories was nearly 49%
on its Wii platform and more than 37% on its DS platforms. Continued or increased dominance of software
sales by the platform manufacturers may lead to reduced sales of our products and thus lower net sales.
Increased development of sof tware and online games by in tellec tual propert y owners may lead to
reduced net sales.
As discussed above, a significant portion of our net sales are due to sales of games based upon licensed
properties. In recent years, some of our key licensors, including Disney and Viacom (Nickelodeon), have
increased their development of video games, which could lead to such licensors not renewing our licenses to
publish games based upon their properties that we currently publish, or not granting future licenses to us to
develop games based on their other properties. For example, in fiscal 2009, Disney decided to internally
develop video games based upon its upcoming movie Toy Story 3 rather than granting the license to
develop and publish the game to an external publisher such as us. This may impact our net sales in fiscal
2011, as we are not releasing a new Disney•Pixar title this year. If intellectual property owners continue
expanding internal efforts to develop video games based upon properties that they own rather than
renewing our licenses or granting us additional licenses, our net sales could be significantly impacted.
Competition for licenses may negatively impact our profitabilit y.
Some of our competitors have greater name recognition among consumers and licensors of properties, a
broader product line, or greater financial, marketing and other resources than we do. Accordingly, these
competitors may be able to market their products more effectively or make larger offers or guarantees in
connection with the acquisition of licensed properties. As competition for popular properties increases, our
cost of acquiring licenses for such properties may increase, which could result in reduced margins and thus
negatively impact our profitability.
Competition with emerging forms of home-based entertainment may reduce sales of our products.
We also compete with other forms of entertainment and leisure activities. For example, we believe the overall
growth in the use of the Internet and online services, including social networking, by consumers may pose a