Activision 2009 Annual Report Download - page 17

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5
Management’s Overview of Business Trends
Online Content and Digital Downloads
We provide our products through both the retail channel and through digital online delivery methods. Many of our
video games that are available through retailers as packaged software products such as DVDs are also available by direct
digital download through the Internet (both from websites that we own and from others owned by third parties). We also
offer downloadable content and add-ons to our products (e.g., new multi-player map packs and additional songs). Digital
online-delivered content is generally offered to consumers for a one-time fee. Our subscription based services are digitally
delivered and hosted by Blizzard Entertainment’s proprietary online gaming service, Battle.net. Digital revenues have
become an increasingly important part of our business and we continue to focus on and grow them. For 2010 compared to
2009, our sales through digital channels grew year-over-year.
Current Generation of Game Consoles
The current generation of game consoles began with Microsoft’s launch of the Xbox 360 in 2005, and continued in
2006 when Sony and Nintendo launched the PS3 and the Wii, respectively. We have seen a significant decline in PS2
revenues during 2010 and 2009 as compared to 2008, suggesting that this prior- generation platform is very close to being
completely replaced by the current generation of consoles. Overall console sales remained strong in 2010, with an installed
base of hardware in the U.S. and Europe of 267 million units as of December 31, 2010, representing an increase of 23% in
units year-over-year, according to The NPD Group, with respect to the U.S., and Charttrack and Gfk, with respect to Europe.
The installed base of PS3 and Xbox 360 hardware units increased 35% year-over-year, while the installed base of Wii
hardware units increased only 24% year-over-year. We will continue to monitor game console sales to manage our product
delivery on each platform in a manner we believe to be most effective.
Concentration of Top Titles
The concentration of retail revenues among key core titles has continued as a trend in the overall interactive
software industry. According to The NPD Group, the top 10 titles accounted for 23% of the sales in the U.S. video game
industry in 2010, as compared to 21% in 2009. Similarly, a significant portion of our revenues has historically been derived
from video games based on a few popular franchises and these video games are responsible for a disproportionately high
percentage of our profits. For example, our two key franchises of Call of Duty and World of Warcraft, accounted for over
62% of our net revenues, and a significantly higher percentage of our operating income, in 2010. We expect that a limited
number of popular franchises will continue to produce a disproportionately high percentage of our revenues and profits.
Seasonality
The interactive entertainment industry is highly seasonal. We have historically experienced our highest sales volume
in the year-end holiday buying season, which occurs in the fourth quarter, and our lowest sales volume in the second quarter
of our calendar year. We defer the recognition of a significant amount of net revenue related to our software titles containing
online functionality that constitutes a more-than-inconsequential separate service deliverable over an extended period of time
(i.e., typically six months to less than a year). As a result, the quarter in which we generate the highest sales volume may be
different than the quarter in which we recognize the highest amount of net revenue. Our results can also vary based on a
number of factors, including title release dates, consumer demand for our products, market conditions and shipment
schedules.
Focused Product Offering and Restructuring Plan
Driven by a desire to improve operating margin by focusing Activision’s resources on titles it believes have the best
potential for success and the anticipation of a continuing weak environment for casual and music-based games, we will be
implementing a restructuring plan involving a focus on the development and publication of a reduced slate of titles on a
going-forward basis. Specifically, we will be disbanding our Guitar Hero business unit and discontinuing the development of
all music-based games, including the Guitar Hero title we had previously planned for 2011. In addition, we decided to
discontinue development on True Crime: Hong Kong due to the concentration of competitive titles in that genre. The
restructuring plan will also involve a re-alignment of our cost structure to correspond to our more focused product slate and a
related reduction in studio headcount and corporate overhead. The reduction will result in the separation of approximately
500 employees.