Electronic Arts 2005 Annual Report Download - page 67

franchises such as Madden NFL, FIFA Soccer and NBA Live. Products marketed under the EA SPORTS
BIG brand typically feature extreme sports or modiÑed traditional sports in an arcade-style game and include
such titles as Def Jam Fight for NY, FIFA STREET and NFL STREET 2: Unleashed.
Formerly known as Electronic Arts Distribution, our EA Partners global business unit operates under a variety
of deal types and structures with the intent of generating, leveraging and/or owning intellectual properties
conceived by other developers, publishers or licensors worldwide. Through EA Partners we provide direct
development expertise to our partners via an internal production staÅ, while also making available our
publishing resources to provide sales, marketing and distribution services on a global basis. EA Partners
currently has relationships with Lionhead, Crytek, Free Radical Design and Eurocom Entertainment
Software, among others.
EA Partners also distributes Ñnished goods on behalf of other publishers. These titles are developed and
manufactured by other publishers and delivered to us as completed products, for which we provide distribution
services. In Ñscal 2005, our distribution partners included Capcom and Namco.
The interactive software game business is ""hit'' driven, requiring signiÑcantly greater expenditures for
marketing and advertising of our products. There can be no assurance that we will continue to produce ""hit''
titles, or that advertising for any product will increase sales suÇciently to recoup those advertising expenses.
We generated approximately 95 percent of our North American net revenue from direct sales to retailers. The
remaining 5 percent of our North American sales were made through a limited number of specialized and
regional distributors and rack jobbers in markets where we believe direct sales would not be economical. We
had direct sales to one customer, Wal-Mart Stores, Inc., which represented 14 percent of total net revenue in
Ñscal 2005, 13 percent in Ñscal 2004 and 12 percent in Ñscal 2003.
Outside of North America, we derive revenues primarily from direct sales to retailers. Our largest indirect
sales relationship is with Pinnacle in Europe. Sales of our products through Pinnacle make up approximately
10 percent of our total net revenue. We use Pinnacle to provide logistical and collection services to our retail
customers. Under the terms of our distribution agreement with Pinnacle, product is held by Pinnacle on
consignment until shipment to the retailer. In addition, we authorize returns from, or price protection to,
retailers and are obliged to give Pinnacle the corresponding credit. In a few of our smaller markets, we sell our
products through distributors with whom we have written agreements or informal arrangements, depending on
the business customs of the territories.
In North America, we have stock-balancing programs for our PC products, which allow for the exchange of
Annual Report
PC products by resellers under certain circumstances. In all of our major geographical markets, we accept
product returns on our PC products and we may decide to accept product returns or provide price protection
under certain circumstances for our console products after we analyze inventory remaining in the channel, the
rate of inventory sell-through in the channel, and our remaining inventory on hand. It is our policy to exchange
products or give credits, rather than give cash refunds. We actively monitor and manage the volume of our
sales to retailers and distributors and their inventories as substantial overstocking in the distribution channel
can result in high returns or the requirement for substantial price protection in subsequent periods.
The distribution channels through which our games are sold have been characterized by change, including
consolidations and Ñnancial diÇculties of certain distributors and retailers. The bankruptcy or other business
diÇculties of a distributor or retailer could render our accounts receivable from such entity uncollectible,
which could have an adverse eÅect on our operating results and Ñnancial condition. In addition, an increasing
number of companies are competing for access to our distribution channels. Our arrangements with our
distributors and retailers may be terminated by either party at any time without cause. Distributors and
retailers often carry products that compete with ours. Retailers of our products typically have a limited amount
of shelf space and promotional resources that they are willing to devote to the software games category, and
there is intense competition for these resources. There can be no assurance that distributors and retailers will
continue to purchase our products or provide our products with adequate levels of shelf space and promotional
support.
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