Activision 2015 Annual Report Download - page 24

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We currently define sales via digital online channels as revenues from digitally distributed subscriptions, licensing royalties,
value-added services, downloadable content, microtransactions, and products. This definition may differ from that used by our
competitors or other companies.
According to Activision Blizzard internal estimates, digital gaming revenues for the interactive entertainment industry in 2015,
increased by approximately 20% as compared to 2014. The primary drivers of the increase in digital gaming revenues were increases
in microtransactions and consumer purchases of full games via digital channels. In addition to increasing microtransactions within
free-to-play games, the increase includes microtransactions within purchased game software, as publishers offer increasingly new
opportunities for monetization within their games to extend and enlarge the monetization cycle. Digital revenues are an important part
of our business, and we continue to focus on and develop products, such as downloadable content, that can be delivered via digital
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. Our sales of digital downloadable content are driven in part by sales of, and engagement by players in, our retail
products. As such, lower revenues in our retail distribution channels in one year may impact our revenues through digital online
channels in the subsequent year.
For the year ended December 31, 2015, net revenues through digital online channels increased by $605 million, as compared to 2014,
and represented 54% of our total consolidated net revenues, as compared to 43% in 2014. On a non-GAAP basis (which excludes the
impact of deferred revenues), net revenues through digital online channels for the year ended December 31, 2015 increased by
$430 million, as compared to 2014, and represented 57% of our total non-GAAP net revenues, as compared to 46% in 2014.
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.
Console Platform Transition
In November 2013, Sony released the PS4 and Microsoft released the Xbox One, their respective next-generation game consoles and
entertainment systems. According to The NPD Group and GfK Chart-Track in North America and Europe, as of December 31, 2015,
the combined installed base of PS4 and Xbox One hardware was approximately 43 million units, representing growth of
approximately 82% over the combined installed base of approximately 24 million units as of December 31, 2014. While the combined
installed base of PS3 and Xbox 360 hardware was approximately 124 million units as of December 31, 2015, at the comparable point
in their release cycle, the prior-generation platforms had only 28 million units installed.
When new console platforms are announced or introduced into the market, consumers reduce their purchases of game console
software products for prior-generation console platforms in anticipation of new platforms becoming available. During these periods,
sales of the game console software products we publish slow or even decline until the new platforms introduced achieve wide
consumer acceptance, which we believe had largely occurred with respect to the next-generation platforms by the end of 2015. We
believe that for 2016, the sales impact from the console transition will not be a meaningful driver of the business.
During platform transitions, we simultaneously incur costs to develop and market new titles for prior-generation video game platforms
and to develop and market products for next-generation platforms. We continually monitor console hardware sales and manage our
product delivery on each of the prior- and next-generation platforms 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.
Concentration of Top Titles
The concentration of retail revenues among key titles has continued as a trend in the overall interactive software industry. According
to The NPD Group, the top 10 titles accounted for 33% of the retail sales in the U.S. interactive entertainment industry in 2015.
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, the Call of Duty, World of
Warcraft, Skylanders, and Destiny franchises combined accounted for 71%, 72%, and 80% of our consolidated net revenues for the
years ended December 31, 2015, 2014, and 2013, respectively, and a significantly higher percentage of our operating income. As a
result, successful competition against these titles can significantly impact our performance. Notably in 2015, the toys to life category
became more competitive with a new entrant competing directly with us and other incumbents.
We are continually exploring additional investments in existing and future franchises. During 2015, we released Heroes of the Storm,
as well as Call of Duty Online in China. In the fourth quarter of 2015, we released Overwatch into closed beta with an anticipated
game release in spring of 2016. There is no guarantee these investments will result in an established franchise.
Additionally, on February 23, 2016, we completed the King Acquisition, diversifying our portfolio of key franchises.
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