Activision 2011 Annual Report Download - page 57

Subscription Revenues
Subscription revenues are derived from World of Warcraft and from our Call of Duty Elite membership. World of
Warcraft is a game that is playable through Blizzard’s servers and is generally sold through a subscription-only basis, whereas
Call of Duty Elite provides an enhanced multiplayer gameplay experience through subscription-based services, such as monthly
downloadable content and year round competitions.
For World of Warcraft, 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 boxed software and prepaid subscription cards, as well as prepaid subscriptions sales, are deferred
until the subscription service is activated by the consumer and are then recognized ratably over the subscription period.
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, for which they pay the Company a royalty. 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.
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”). For the years
ended December 31, 2011, 2010, and 2009, we recorded $0 million, $14 million, and $5 million, respectively of breakage
revenues from the sale of packaged software in product sales, and $0 million, $6 million, and $8 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, on a short or longer term basis, the wholesale price of
a product by a certain amount and, when granted and applicable, allow 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 sales reporting to us. We may also consider other factors, including the facilitation
of slow-moving inventory and other market factors.
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