THQ 2010 Annual Report Download - page 23

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15
competitive threat if customers and potential customers spend less of their available time using interactive
entertainment software and more of their time using the Internet and online services.
Competition for qualified personnel is intense in the interacti ve entertainment software indus tr y
and failure to hire and retain qualified personnel could seriously harm our business.
To a substantial extent, we rely on the management, marketing, sales, technical and software development
skills of a limited number of employees to formulate and implement our business plan. To a significant extent,
our success depends upon our ability to attract and retain key personnel. Competition for employees can be
intense and the process of locating key personnel with the right combination of skills is often lengthy. The
loss of key personnel could have a material adverse impact on our business.
We rely on external developers for the development of some of our ti tles .
A large percentage of our net sales are derived from games developed by third- party developers. While we
own approximately 15% of Yuke’s, the developer of our UFC Undisputed and WWE SmackDown vs. Raw
games, we do not have direct control over the business, finances and operational practices of these external
developers, including Yuke’s. A delay or failure to complete the work performed by external developers has
and may in the future result in delays in, or cancellations of, product releases. Additionally, the future
success of externally-developed titles will depend on our continued ability to maintain relationships and
secure agreements on favorable terms with skilled external developers. Our competitors may acquire the
businesses of key developers or sign them to exclusive development arrangements. In either case, we would
not be able to continue to engage such developers’ services for our products, except for those that they are
contractually obligated to complete for us. We cannot guarantee that we will be able to establish or maintain
such relationships with external developers, and failure to do so could result in a material adverse impact on
our business and financial results.
Defects in our game software could harm our reputation or decrease the market ac ceptance of
our product s.
Our game software may contain defects. In addition, because we do not manufacture our games for console
platforms, we may not discover defects until after our products are in use by retail customers. Any defects in
our software could damage our reputation, cause our customers to terminate relationships with us or to
initiate product liability suits against us, divert our engineering resources, delay market acceptance of our
products, increase our costs or cause our net sales to decline.
We may not be able to protect our intellec tual property rights against piracy, infringement by
third parties, or declining legal protection for intellectual property.
We defend our intellectual property rights and combat unlicensed copying and use of software and
intellectual property rights through a variety of techniques. Preventing unauthorized use or infringement of
our rights is difficult. Unauthorized production occurs in the computer software industry generally, and if a
significant amount of unauthorized production of our products were to occur, it could materially and adversely
impact our results of operations. We hold copyrights on the products, manuals, advertising and other
materials owned by us and we maintain certain trademark rights. We regard our titles, including the
underlying software, as proprietary and rely on a combination of trademark, copyright and trade secret laws
as well as employee and third-party nondisclosure and confidentiality agreements, among other methods, to
protect our rights. We include with our products a “shrink-wrap” or “click-wrap” license agreement which
imposes limitations on use of the software. It is uncertain to what extent these agreements and limitations are
enforceable, especially in foreign countries. Policing unauthorized use of our products is difficult, and
software piracy is a persistent problem, especially in some international markets. Further, the laws of some
countries where our products are or may be distributed, either do not protect our products and intellectual
property rights to the same extent as the laws of the U.S., or are poorly enforced. Legal protection of our
rights may be ineffective in such countries. We cannot be certain that existing intellectual property laws will
provide adequate protection for our products.
Soft ware piracy may negatively impact our business.
Software piracy is increasing rapidly in the video game industry. Piracy related to customers obtaining
products through peer-to-peer networks and other Internet channels has increased substantially. Modified
chips for the Xbox 360 and Wii systems have allowed increased piracy of games for those systems, and the
R4 chip has dramatically increased illegal downloads of DS games. While we are taking various steps to