THQ 2008 Annual Report Download - page 34

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Development Costs. The current generation consoles have increased functionality (e.g. realistic
environments and artificial intelligence) over their legacy counterparts. The increased functionality
delivers a more exciting gaming experience but adds complexity to the development of video games for
these new consoles. This complexity increases the overall cost to develop these games and accordingly,
during fiscal 2009, we expect our average software development costs to increase as we develop more
games for these new consoles.
Online Gaming. Online gaming is growing rapidly in popularity. According to the NPD report, ‘‘Online
Gaming 2007: The Virtual Landscape,’’ 62% of gamers report playing games online. With technology
advances over the past few years, gamers can play online via PC, console and handheld systems. In fiscal
2008, we launched Frontlines: Fuel of War, which had online capability. MMO gaming has become popular,
especially in Asia. In fiscal 2009, we plan to launch Company of Heroes Online in the Chinese market,
which marks our first entry into the free-to-play, pay for download model of video games.
Platform Market Segmentation. In fiscal 2008, our industry continued to transition from the legacy
consoles to the current generation consoles, Microsoft Xbox 360, Sony PlayStation 3 (‘‘PS3’’) and
Nintendo Wii. Additionally, the Nintendo DS and Sony PSP handhelds continued to grow. With the
current generation of console systems and current handheld platforms, we believe segmenting our market
will be extremely important. We have designed our publishing strategy to take advantage of the unique
feature sets of the new consoles, handhelds and PC. Our strategy to reach core gamers focuses on the
Xbox 360, PS3 and PC platforms. Our mass-market brands are targeted primarily for the Nintendo Wii,
PS2 and DS platforms. We plan to publish some of our licensed brands, such as WWE and Disney•Pixar
across all viable platforms.
International growth. Over the past few years, sales of video games outside of the United States have
grown significantly. In fiscal 2008, international net sales increased 24% to $527.3 million, from
$426.7 million in fiscal 2007. The international installed base of video game platforms continues to
increase, and we are focused on expanding our international presence by identifying territories where we
see opportunity and establishing a direct sales presence to seize such opportunities. In addition to our sales
force presence, we are focused on releasing and aggressively marketing titles with international appeal. We
continue to evaluate new business opportunities in the Asia Pacific region.
Critical Accounting Estimates
The Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses
our consolidated financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these consolidated financial
statements requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. The
estimates discussed below are considered by management to be critical because they are both important to
the portrayal of our financial condition and results of operations and because their application places the
most significant demands on management’s judgment, with financial reporting results relying on estimates
about the effect of matters that are inherently uncertain. Specific risks for these critical accounting
estimates are described in the following paragraphs. For all of these estimates, we caution that actual
results may differ materially from these estimates under different assumptions or conditions.
Accounts receivable allowances. We derive revenue from sales of packaged software for video game
systems and personal computers and sales of content and services for wireless devices. Product revenue is
recognized net of allowances for price protection and returns and various customer discounts. We typically
only allow returns for our personal computer products; however, we may decide to provide price
protection or allow returns for our video games after we analyze the following:
• inventory remaining in the retail channel,
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