Blizzard 2005 Annual Report Download - page 22

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OVERVIEW
Our Business
We฀are฀a฀leading฀international฀publisher฀of฀interactive฀entertainment฀software฀products.฀We฀have฀built฀a฀company฀with฀a฀diverse฀portfolio฀of฀products฀that฀spans฀a฀wide฀
range฀of฀categories฀and฀target฀markets฀and฀that฀is฀used฀on฀a฀variety฀of฀game฀hardware฀platforms฀and฀operating฀systems.฀We฀have฀created,฀licensed฀and฀acquired฀a฀group฀of฀
highly฀recognizable฀brands,฀which฀we฀market฀to฀a฀variety฀of฀consumer฀demographics.฀Our฀fiscal฀2005฀product฀portfolio฀included฀such฀best-selling฀products฀as฀
Spider-Man 2:
The Movie (“Spider-Man 2”), Shrek 2, Tony Hawk’s Underground 2 (“THUG 2”), Call of Duty: Finest Hour, Shark Tale, DOOM 3
฀and฀
X-Men Legends
.
Our฀products฀cover฀diverse฀game฀categories฀including฀action/adventure,฀action฀sports,฀racing,฀role-playing,฀simulation,฀first-person฀action฀and฀strategy.฀Our฀target฀customer฀
base฀ranges฀from฀casual฀players฀to฀game฀enthusiasts,฀children฀to฀adults฀and฀mass-market฀consumers฀to฀“value”฀buyers.฀We฀currently฀offer฀our฀products฀primarily฀in฀
versions฀ that฀ operate฀ on฀ the฀ Sony฀ PlayStation฀ 2฀ (“PS2”),฀ Nintendo฀ GameCube฀ (“GameCube”)฀ and฀ Microsoft฀ Xbox฀ (“Xbox”)฀ console฀ systems,฀ Nintendo฀ Game฀ Boy฀
Advance฀(“GBA”),฀Sony฀PlayStation฀Portable฀(“PSP”)฀and฀Nintendo฀Dual฀Screen฀(“NDS”)฀hand-held฀devices฀and฀the฀personal฀computer฀(“PC”).฀The฀installed฀base฀for฀this฀
current฀generation฀of฀hardware฀platforms฀is฀significant฀and฀growing฀and฀the฀fiscal฀2005฀release฀of฀two฀new฀handheld฀devices,฀NDS,฀which฀was฀released฀worldwide,฀and฀
PSP,฀which฀was฀released฀in฀North฀America,฀will฀also฀help฀expand฀the฀software฀market.฀We฀successfully฀executed฀our฀strategy฀of฀having฀a฀high-quality฀product฀presence฀
at฀the฀launch฀of฀the฀NDS฀and฀PSP฀with฀one฀title฀based฀on฀the฀Spider-Man฀franchise฀at฀the฀launch฀of฀the฀NDS฀and฀two฀titles฀based฀on฀the฀Spider-Man฀and฀Tony฀Hawk฀
franchises฀for฀the฀launch฀of฀the฀PSP.฀We฀are฀currently฀developing฀additional฀titles฀for฀the฀PSP฀and฀the฀NDS฀while฀continuing฀to฀develop฀games฀for฀the฀GBA฀given฀its฀large฀
and฀growing฀base.
We฀also฀intend฀to฀develop฀titles฀for฀the฀next-generation฀console฀systems฀which฀are฀being฀developed฀by฀Sony,฀Nintendo฀and฀Microsoft.฀Microsoft฀recently฀unveiled฀their฀
next-generation฀console,฀the฀Xbox฀360,฀which฀is฀expected฀to฀be฀released฀in฀November฀2005.฀We฀are฀currently฀developing฀four฀titles฀for฀release฀on฀the฀Xbox฀360,฀
Tony Hawk’s
American Wasteland, Call of Duty 2, Quake IV
฀and฀
GUN
.฀Sony฀and฀Nintendo฀recently฀unveiled฀their฀next-generation฀consoles,฀the฀PlayStation฀3฀and฀Revolution,฀respectively,฀and฀
both฀are฀expected฀to฀be฀released฀in฀calendar฀2006.฀Though฀there฀are฀still฀many฀unknowns฀relating฀to฀these฀new฀platforms,฀our฀aim฀is฀to฀have฀a฀significant฀presence฀at฀the฀
launch฀of฀each฀new฀platform฀while฀being฀careful฀not฀to฀move฀away฀too฀quickly฀from฀the฀current฀generation฀platforms฀given฀their฀large฀and฀still฀growing฀installed฀base.
Our฀publishing฀business฀involves฀ the฀development,฀marketing฀and฀sale฀of฀products฀directly,฀by฀ license฀or฀ through฀ our฀ affiliate฀label฀program฀ with฀certain฀ third-party฀
publishers.฀In฀the฀United฀States฀and฀Canada,฀we฀primarily฀sell฀our฀products฀on฀a฀direct฀basis฀to฀mass-market฀retailers,฀consumer฀electronics฀stores,฀discount฀warehouses฀
and฀game฀specialty฀stores.฀We฀conduct฀our฀international฀publishing฀activities฀through฀offices฀in฀the฀United฀Kingdom฀(“UK”),฀Germany,฀France,฀Italy,฀Spain,฀the฀Netherlands,฀
Australia,฀Sweden,฀Canada฀and฀Japan.฀Our฀products฀are฀sold฀internationally฀on฀a฀direct-to-retail฀basis,฀through฀third-party฀distribution฀and฀licensing฀arrangements฀
and฀through฀our฀wholly-owned฀European฀distribution฀subsidiaries.฀Our฀distribution฀business฀consists฀of฀operations฀located฀in฀the฀UK,฀the฀Netherlands฀and฀Germany฀
that฀provide฀logistical฀and฀sales฀services฀to฀third-party฀publishers฀of฀interactive฀entertainment฀software,฀our฀own฀publishing฀operations฀and฀manufacturers฀of฀interactive฀
entertainment฀hardware.
Our฀profitability฀is฀directly฀affected฀by฀the฀mix฀of฀revenues฀from฀our฀publishing฀and฀distribution฀businesses.฀Operating฀margins฀realized฀from฀our฀publishing฀business฀
are฀substantially฀higher฀than฀margins฀realized฀from฀our฀distribution฀business.฀Operating฀margins฀in฀our฀publishing฀business฀are฀affected฀by฀our฀ability฀to฀release฀highly฀
successful฀or฀“hit”฀titles.฀Though฀many฀of฀these฀titles฀have฀substantial฀production฀or฀acquisition฀costs฀and฀marketing฀budgets,฀once฀a฀title฀recoups฀these฀costs,฀incremental฀
net฀revenues฀directly฀and฀positively฀impact฀our฀operating฀margin.฀Operating฀margins฀in฀our฀distribution฀business฀are฀affected฀by฀the฀mix฀of฀hardware฀and฀software฀sales,฀
with฀software฀producing฀higher฀margins฀than฀hardware.
page 20
Activision, Inc. — 2005 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations