Activision 2012 Annual Report Download - page 22

4
Management’s Overview of Business Trends
Online Content and Digital Downloads
We provide our products through both retail channels and digital online delivery methods. Many of our video games that are available
through retailers as physical “boxed” software products, such as DVDs, are also available by direct digital download over the Internet (both from
websites that we own and from others owned by third parties). In addition, we offer players downloadable content as add-ons to our products
(e.g., new multi-player content packs), generally for a one-time fee. We also offer subscription- based services for World of Warcraft, which are
digitally delivered and hosted by Blizzard’s proprietary online-game related service, Battle.net. In 2011, Activision launched Call of Duty Elite, a
digital service that provides both free and paid subscription-based content and features for Call of Duty: Modern Warfare 3. In conjunction with
the release of Call of Duty: Black Ops II, all of the Call of Duty Elite service features for that game were made available for free. This free service
does not include downloadable map packs, which are sold separately, either a la carte as individual map packs or as part of a discounted season
pass bundle. Existing Call of Duty Elite premium members will continue to enjoy the Call of Duty Elite premium membership features for Call of
Duty: Modern Warfare 3 through the end of their subscription period. Digital revenues remain an important part of our business, and we continue
to focus on and develop products that can be delivered via digital online channels. The amount of our digital revenues in any period may fluctuate
depending, in part, on the timing and nature of our specific product releases.
We currently define digital online channel-related sales as revenues from subscriptions and memberships, licensing royalties,
value-added services, downloadable content, and digitally distributed products. This definition may differ from that used by our competitors or
other companies.
For the year ended December 31, 2012, our sales through the digital online channels decreased by approximately $100 million, as
compared to 2011, and our net revenues from digital online channels represented 32% of our total consolidated net revenues in 2012 as compared
to 34% in 2011. These decreases were mainly attributable to the deferral of revenues due to the timing of the releases of Diablo III and World of
Warcraft: Mists of Pandaria. On a non-GAAP basis, our sales through the digital online channels increased by $40 million, as compared to 2011,
and our net revenues from digital online channels represented 32% of our total consolidated net revenues in 2012 as compared to 35% in 2011.
This increase in sales from the digital online channels was primarily due to the releases of Diablo III and World of Warcraft: Mists of Pandaria.
Please refer to the reconciliation between GAAP and non-GAAP financial measures later in this document for further discussions of
retail and digital online channels.
Current Generation of Game Consoles
The current generation of game consoles began with Microsoft’s launch of the Xbox 360 in November 2005, and continued in 2006
when Sony and Nintendo launched the PS3 and the Wii, respectively. The installed base of current generation hardware (i.e. Xbox 360, PS3 and
Wii) in the U.S. and Europe was approximately 183 million units as of December 31, 2012, as compared to 166 million units at December 31,
2011, according to The NPD Group, with respect to North America, and GfK Chart-Track, with respect to Europe, representing an increase of
11% in units year-over-year. The installed base of PS3 and Xbox 360 hardware units increased 15% year-over-year, while the installed base of
Wii hardware units increased 5% year-over-year. During the 2012 year-end holiday season, Nintendo released a new “next-generation” high-
definition version console, the Wii U. On February 20, 2013, Sony announced that it intends to launch PlayStation 4, its next-generation
computer entertainment system, by the 2013 year-end holiday buying season.
We continually monitor console hardware sales, as well as the development of “next-generation” consoles. We manage our product
delivery on each current and future platform in a manner we believe to be most effective to maximize our revenue opportunities and achieve the
desired return on our investments in product development.
Conditions in the Retail Distribution Channels
Conditions in the retail channels of the interactive entertainment industry remained challenging through 2012. In North America and
Europe, retail sales within the industry experienced a combined overall decrease of approximately 21% in 2012, as compared to 2011, according
to The NPD Group and GfK Chart-Track. The declines in the North America and European retail channels were impacted by fewer releases and
catalog sales in 2012 as compared to 2011, as well as price declines over the prior year. In addition, the decline in sales to the retail channels
continue to be more pronounced for casual titles on the Nintendo Wii and handheld platforms (down over 35% year-over-year), than titles on
high-definition platforms (i.e., Xbox 360 and PS3).