Electronic Arts 2004 Annual Report Download - page 90

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Below is a discussion of the Prior Agreement and the changes in our relationship with AOL that are reÖected
in the New Agreement.
Carriage Fee
The Prior Agreement provided for total payments of $81.0 million in carriage fees to AOL over the term of the
Prior Agreement. Of this amount, $36.0 million was paid upon signing the Prior Agreement with the
remainder due in four equal annual installments of $11.25 million beginning with the Ñrst anniversary of the
initial payment. We made carriage payments to AOL of $11.25 million in each of the Ñscal years 2003, 2002
and 2001. Due to the termination of the Prior Agreement in June 2003, we are no longer required to make the
last $11.25 million carriage payment.
Carriage fee amounts paid under the Prior Agreement were capitalized as a prepaid asset as payments were
made to AOL. Until April 1, 2003, the total carriage fee of $81.0 million that was provided for in the Prior
Agreement was being expensed using the straight-line method over the remaining life of the Prior
Agreement subsequent to EA.com's site launch in October 2000. As the carriage fee was expensed, we
applied the portion that had been paid against the prepaid asset and recorded the remaining amount as a
liability. Amortization expense was classiÑed as ""Marketing and sales'' expense in our Consolidated
Statements of Operations. The prepaid asset and liability balances were classiÑed as ""Other assets'' and
""Accrued and other liabilities'', respectively, on our Consolidated Balance Sheets.
Under the New Agreement, in July 2003, AOL refunded $18.0 million in carriage fees that we had previously
paid to AOL under the Prior Agreement. This refund was applied against the prepaid balance and the
remaining asset, $6.4 million, is being amortized over the term of the New Agreement as a reduction to
revenue. As of March 31, 2004, $3.6 million of this asset remained to be amortized.
Programming Fee
The New Agreement provides for AOL to make payments to us of $27.5 million over the two-year term of the
New Agreement as a programming fee. Of the total $27.5 million, $20.8 million pertains to existing online
games content and services that we currently provide on the ""Games'' channels/areas of the AOL properties,
and is being recognized as revenue ratably over the term of the New Agreement. The remaining $6.7 million
pertains to new online games content and services to be delivered during the term of the New Agreement.
This portion of the programming fee will be recognized as revenue as the required new content and services
are delivered. During the year ended March 31, 2004, we recognized $10.4 million as programming fee
revenue.
Advertising Commitment
Under the Prior Agreement, we also made a commitment to spend $15.0 million in oÉine media
advertisements prior to March 31, 2005. We were free to purchase this advertising from any television, radio,
print or outdoor media property that we chose, not necessarily from any AOL-aÇliated media property. We
did not purchase any advertisements from AOL, though we purchased some qualifying advertising from
AOL aÇliates. Through March 31, 2003, we expensed the advertising as it was incurred. These costs were
classiÑed as ""Marketing and sales'' expense in our Consolidated Statements of Operations. As of March 31,
2003, we had spent approximately $4.3 million against this commitment.
Upon the termination of the Prior Agreement, this advertising commitment was extinguished, and there is no
similar commitment provided for in the New Agreement.
Advertising Revenue and Revenue Sharing
Advertising revenue is derived principally from the sale of banner and in-game advertisements. Banner and in-
game advertising is typically generated from contracts in which either we or AOL provide a minimum
number of impressions over the term of the agreed-upon commitment. Revenue is recognized as the
impressions are delivered, provided that no signiÑcant obligations remain and collection of the related
receivable is probable. Under the Prior Agreement, advertising revenue generated on the AOL Games
Channel was recorded net of the applicable revenue share owed to AOL.
75