THQ 2008 Annual Report Download - page 12

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industries. According to the International Development Group, Inc. (‘‘IDG’’), an independent consulting
and advisory services company that analyzes the consumer electronics and interactive entertainment
industries, sales of console, handheld and PC games (excluding wireless) reached $10.0 billion in North
America, and $9.9 billion in Europe in calendar 2007.
The first modern video game platform was introduced by Nintendo in 1985. Advances in technology over
the past 23 years have resulted in continuous increases in the processing power of the chips that power
both the consoles and PC. Today’s video game consoles—the Sony PlayStation 3, Microsoft Xbox 360 and
Nintendo Wii—are not simply gaming platforms, but also function as multimedia hubs that can deliver
high-quality digital movies and television programs. Video games are also played on personal computers
that contain powerful graphics cards, and on advanced handheld devices such as PSP (PlayStation
Portable), Nintendo DS and Nintendo GameBoy Advance. Additionally, both online gaming and wireless
gaming have become popular platforms for video game players over the last several years.
Our Products
We develop, market and sell video games and other interactive software and content for play on console
platforms, handheld platforms, mobile devices, PCs and online. The following games generated a
significant portion of our sales during the fiscal years ended March 31, 2008, 2007 and 2006:
• in fiscal 2008, WWE SmackDown vs. Raw 2008, Disney•Pixar’s Ratatouille, and MX vs. ATV
Untamed;
• in fiscal 2007, Disney•Pixar’s Cars, WWE SmackDown vs. Raw 2007, Saints Row, Nickelodeon titles
Avatar: The Last Airbender and SpongeBob SquarePants: Creature from the Krusty Krab, and Bratz:
Forever Diamondz; and
• in fiscal 2006, WWE SmackDown vs. Raw 2006, Juiced, Destroy All Humans!, SpongeBob
SquarePants: Lights, Camera, PANTS! and The Incredibles: Rise of the Underminer.
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 we release for PCs or wireless
devices, the console manufacturers or their authorized vendors manufacture our products for us. We then
market and distribute our games for sale throughout the world.
Creating and Acquiring Our Intellectual Property
Our business process begins with an idea. Inspiration for our interactive entertainment software comes
from many sources—from our internal studios, from our external studio partners, or from existing
intellectual properties that we either license or acquire. Traditionally, most of our titles were based upon
licensed properties that have attained a high level of consumer recognition or acceptance. We have
relationships with many well-known licensors and have created games based on their properties, including
Disney•Pixar, Nickelodeon, World Wrestling Entertainment, Warner Bros. and MGA Entertainment.
These intellectual property licenses usually grant us the exclusive use of the property for specified titles, on
specified platforms, within a defined territory and for a specified license term. The licenses are of varying
duration, and we pay royalties to our property licensors generally based on our net sales of the title that
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.
A cornerstone of our strategy is to create or acquire new intellectual properties that we own. Our owned
intellectual property is generally created either by one of our development studios or by a third-party
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