THQ 2005 Annual Report Download - page 28

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5
•In fiscal 2004, Disney/Pixar’s Finding Nemo, SpongeBob SquarePants™: Batt le for Bikini Bottom™,
and WWE SmackDown!, Here comes the Pain™; and
•In the twelvemonths ended March 31, 2003, WWE SmackDown! Shut Your Mouth.
ValuSoft, a division of THQ, develops and publishes value-priced interactive entertainment and
productivity software for PC. This allows us to sell our products to the casual gaming market. In fiscal
2005, ValuSoft released 67 titles, including World Poker Championship.
All of our games are based on intellectual property that is either wholly-owned by us or licensed from third
parties. We develop our games using both internal development resources and external development
resources working for us pursuant to contractual agreements. Whether a game is developed internally or
externally, upon completion of development we extensively play-test each game, and if required, send the
game to the manufacturer for its review and approval. Other than games that we release for PCs or
wireless devices, the manufacturers or their authorized vendors manufacture our products for us. We then
market and distribute our games for sale throughout the world.
Intellectual Property
Our business process begins with the creation of intellectual property or acquisition of intellectual property
rights. Traditionally, most of our titles were based upon licensed properties which have attained a high
level of consumer recognition or acceptance. We have relationships with many well-knownlicensors,
including Disney, Pixar, Nickelodeon, World Wrestling Entertainment, Warner Brothers and Marvel.
Our intellectual property licenses usually grant us the exclusive use of the property for specified titles, on
specified platforms, within a defined territory and during the license term. All of our licenses are of varying
duration and may in some instances be renewable upon payment of certain minimum royalties or the
attainment of specified sales levels. We pay royalties to our property licensors that generally range from
3% to 20% of our net sales of the title which includes the licensor’s intellectual property. We typically
advance payments against minimum guaranteed royalties over the license term. Royalty rates are generally
higher for properties with proven popularity and less perceived risk of commercial failure.
Our original intellectual property is created either by one of our ten development studios or by a third-
party developer that we contract with, in which instance, we retain all ownership rights in the intellectual
property. If a third-party developer created the intellectual property and develops the game, we obtain a
license that is typically exclusive and we try to retain rights to any future products based on the intellectual
property.
Platform Licenses
In addition to obtaining licenses to develop intellectual property, our business is dependent upon entering
into license agreements with the platform manufacturers which allow us the right to develop, publish and
distribute titles for use on such manufacturer’s platform. Our key platform licenses currently include:
•licenses with Nintendo to develop games for the GameCube, Game Boy Advance and DS;
•licenses with Sony to develop games for the PlayStation 2 and PlayStation Portable; and
•licenses with Microsoft to develop games for the Xbox.
Each license is for a fixed term, and as each license expires, we generally enter into a new agreement or an
amendment with the licensor to extend the term of the agreement. Certain agreements, such as the
licenses withSony for the PlayStation 2, automatically renew each year unless either party gives notice by
the applicable date that it intends to terminate the agreement. Additionally, each agreement designates a
territory in which we can publish and distribute titles. We currently are licensed to publish and distribute
titles on all platforms which are currently sold in the United States and Canada. We are licensed to publish