THQ 2005 Annual Report Download - page 29

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and distribute titles for GameCube, PlayStation 2, Xbox and Game Boy Advance in various additional
territories, including Europe, Australia and New Zealand, parts of Asia and Central and South America.
We expect to enter into additional platform licensesor extend current licenses as new platforms are
launched or our current agreements expire.
The platform licenses are not exclusive and require that each title be approved by the manufacturer prior
to development of the software, and once developed, manufactured solely by such manufacturer or a
designated vendor of the manufacturer. The licenses establish the fees that we must pay to the
manufacturer for each cartridge or disc made. Nintendo charges us a fixed amount for each Game Boy
Advance cartridge manufactured. This amountvaries based, in part, on the memory capacity of the
cartridge. Our Nintendo, Sony and Microsoft console agreements include a charge for every disc
manufactured. The amounts charged by the manufacturers for both console discs and handheld cartridges
include a manufacturing, printing and packaging fee as well as a royalty for the use of the manufacturer’s
name, proprietary information and technology, and are subject to adjustment by the manufacturers at their
discretion. The manufacturers have the right to review, evaluate and approve a prototype of each title and
the title’s packaging.
In addition, we must indemnify the manufacturers with respect to all loss, liability and expense resulting
from any claim against the manufacturer involving the development, marketing, sale, or use of our games,
including any claims for copyright or trademark infringement brought against the manufacturer. As a
result, we bear a risk that the properties upon which the titles are based, or that the information and
technology licensed from others and incorporated in the products, may infringe the rights of third parties.
Conversely, our agreements with our independent software developersand property licensors typically
provide for us to be indemnified with respect to certain matters. If any claim is brought by a manufacturer
against us for indemnification, however, our developers or licensors may not have sufficient resources to,
in turn, indemnify us. Furthermore, these parties’ indemnification of us may not cover the matter that gives
rise to the manufacturer’s claim.
Each platform license may be terminated by the manufacturer if a breach or default by us isnot cured after
we receive written notice from the manufacturer, or if we become insolvent. Upon termination of a
platform license for any reason other thanour breach or default, we have a limited period of time to sell
any existing product inventory remaining as of the date of termination. The length of this sell-off period
varies between 90and 180 days, depending upon the platform agreement. We must destroy any such
inventory remaining after the end of the sell-off period. Upon termination as a result of our breach or
default, we must destroy any remaining inventory.
Product Development
We develop our products using both internal and external development resources. We make the decision
as to which development resources to use based upon the creative and technical challenges of the product,
whether the intellectual property which is being developed into a game is licensed, an original concept that
we created, or an original concept created by a third-party developer.
In fiscal 2005, 39% of our revenue was from titles developed by our internal studios. Our internal studio
organization consists of ten studios, which are staffed by producers, game designers, software engineers,
artists, animators and game testers. We also contract with third-party software developers to develop
games. We typically select these third-party developers for their expertise in developing products in a
certain category. Each third-party developer is under contract with us to develop specific or multiple titles.
For externally developed products, we generally pay either a royalty compensation, which ranges from 4%
to 20% of net sales, or we pay a development fee. We typically pay our independent developers
installments of the development fee (and, in the case of royalty compensation, advances against future
royalty payments) based either on specific development milestones or on agreed-upon payment schedules.