THQ 2011 Annual Report Download - page 30

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price of $39.99 in the U.S., which is a lower price point than previous installments from this franchise as part of a new digital
download strategy. It features the franchise's most popular tracks and modes and has an in-game digital store that allows
players to customize their game experience with a myriad of downloadable items, bikes, tracks and more.
• We also launched our first UFC games for Facebook: UFC Undisputed Fight Nation and UFC Undisputed for iPhone/iPad,
and announced the upcoming Facebook and mobile games based on Jimmy Buffet's Margaritaville.
• We continued development of our massively multiplayer online game, Warhammer 40,000: Dark Millennium Online, which
is scheduled for release in fiscal 2013.
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During the third quarter of fiscal 2011, we reevaluated our strategy of adapting certain Western content for free-to-play online
games in Asian markets. As a result, we cancelled two games, eliminated certain positions, and closed our Korean support office.
In the fourth quarter of fiscal 2011, we performed an assessment of our product development and publishing staffing models. This
resulted in a change to our staffing plans to better address peak service periods, as well as better utilize shared-services and more
cost-effective locations. (See "Note 10 — Restructuring and Other Charges" in the notes to the consolidated financial statements
in Item 8 for additional information.)
We continue to shift the focus of our casual and lifestyle business away from traditional kids movie-based licensed titles. We
reevaluated the sales potential of games based on our kids movie-based licenses during the preparation of our fiscal 2011 third
quarter financial statements. Consistent with recent industry trends, we lowered expectations for this category, which resulted in
an impairment of $30.3 million of kids movie-based licenses for titles that are expected to be released in fiscal 2012 and beyond.
In January 2011, we sold certain wireless carrier contracts and one of our wholly-owned subsidiaries that had been involved in
publishing and developing a portion of our content sold on legacy wireless platforms for an insignificant gain. We are continuing
our investment in the wireless platforms with the carrier contracts retained, focusing on the development of products for use in
products based on the Apple iOS, Google Android and Microsoft Windows Mobile operating systems.
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The following trends affect our business:
Increasing Shift to Online Content and Digital Downloads
We provide our products through both the retail channel and through online digital delivery methods. Recently, the interactive
entertainment software industry is delivering a growing amount of games, downloadable content and product add-ons by direct
digital download through the Internet and gaming consoles. We believe that much of the growth in the industry will come via
online distribution such as massively multiplayer games (both subscription and free-to-play), casual micro-transaction based
games, paid downloadable content and digital downloads of games, including those on wireless platforms, and conversely, we
believe retail sales will be a decreasing revenue source. For the year ended December 31, 2010, retail software sales in the U.S.
decreased 5% compared to 2009 according to The NPD Group; for the same period, across the U.K., Germany, France and Spain,
aggregated retail software sales decreased almost 4% compared to 2009 according to GfK. Accordingly, we plan to continue
integrating a digital component into our franchises where applicable. As our involvement in the undelivered online service elements
within our games increases, more of our revenue will be deferred, which will impact the timing of our revenue recognition but
not our cash flow from operations.
Sales of Used Video Games
Large retailers, such as GameStop and Best Buy, have increased their focus on selling used video games, which provides higher
margins for the retailers than sales of new games. This focus reduces demand for new copies of our games. We believe customer
retention through compelling online play and downloadable content offers may reduce consumers' propensity to trade in games.
Additionally, for the first time in fiscal 2011, certain of our titles included free access to online content through a code on the back
of the video game manual for first-time purchasers. This new structure created a new revenue stream, as we were able to offer
second-time buyers of these titles the opportunity to separately purchase the online content.
Sales Concentration of Top Titles
The majority of money spent by consumers on video game software is spent on select top titles. Because of the demand for select
“hit” titles and the costs to develop our games, we believe that it is important to focus our development efforts on bringing a select
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