Activision 2010 Annual Report Download - page 54

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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”). In
2008, we recognized breakage revenues for the first time since the initial launch of World of Warcraft. For the years ended
December 31, 2010, 2009, and 2008, we recorded $14 million, $5 million, and $6 million, respectively of breakage revenues
from the sale of packaged software in product sales, and $6 million, $8 million, and $16 million, respectively of prepaid and
subscription breakage revenues in subscription, licensing and other revenues in the consolidated statements of operations.
Other Revenues
Other revenues primarily include licensing activity of intellectual property other than software to third-parties.
Revenue is recorded upon receipt of licensee statements, or upon the receipt of cash, provided the license period has begun.
Allowances for Returns, Price Protection, Doubtful Accounts, and Inventory Obsolescence
We closely monitor and analyze the historical performance of our various titles, the performance of products
released by other publishers, market conditions, and the anticipated timing of other releases to assess future demand of
current and upcoming titles. Initial volumes shipped upon title launch and subsequent reorders are evaluated with the goal of
ensuring that quantities are sufficient to meet the demand from the retail markets, but at the same time are controlled to
prevent excess inventory in the channel. We benchmark units to be shipped to our customers using historical and industry
data.
We may permit product returns from, or grant price protection to, our customers under certain conditions. In general,
price protection refers to the circumstances in which 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
performance of competing titles. The relative importance of these factors varies among titles depending upon, among other
items, genre, platform, seasonality, and sales strategy. Significant management judgments and estimates must be made and
used in connection with establishing the allowance for returns and price protection in any accounting period. Based upon
historical experience, we believe that our estimates are reasonable. However, actual returns and price protection could vary
materially from our allowance estimates due to a number of reasons including, among others, a lack of consumer acceptance
of a title, the release in the same period of a similarly themed title by a competitor, or technological obsolescence due to the
emergence of new hardware platforms. Material differences may result in the amount and timing of our revenue for any
period if factors or market conditions change or if management makes different judgments or utilizes different estimates in
determining the allowances for returns and price protection. For example, a 1% change in our December 31, 2010 allowance
for sales returns, price protection and other allowances would impact net revenues by approximately $4 million.
Similarly, management must make estimates as to the collectability of our accounts receivable. In estimating the
allowance for doubtful accounts, we analyze the age of current outstanding account balances, historical bad debts, customer
concentrations, customer creditworthiness, current economic trends, and changes in our customers’ payment terms and their
economic condition, as well as whether we can obtain sufficient credit insurance. Any significant changes in any of these
criteria would affect management’s estimates in establishing our allowance for doubtful accounts.
We regularly review inventory quantities on-hand and in the retail channel. We write down inventory based on
excess or obsolete inventories determined primarily by future anticipated demand for our products. Inventory write-downs
are measured as the difference between the cost of the inventory and net realizable value, based upon assumptions about
future demand, which are inherently difficult to assess and dependent on market conditions. At the point of a loss recognition,