Electronic Arts 2006 Annual Report Download - page 107

games such as Ultima Online
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, PC-based downloadable content and online-enabled packaged goods. As
the nature of online game oÅerings expands and evolves, we anticipate long-term opportunities for growth
in this business. For example, we expect that consumers will take advantage of the online connectivity of
next-generation consoles at a much higher rate than they have so far on current-generation consoles,
allowing more consumers to enhance their gameplay experience through multiplayer activity, community-
building and downloading content. We also plan to increase the amount of content available for download
on the PC and consoles, and to enable entire PC-based games to be downloaded electronically. In
addition, we plan to expand our casual game oÅerings internationally and to invest in growing genres such
as advanced casual games. Although we intend to make signiÑcant investments in online products,
infrastructure and services and believe that online gameplay will become an increasingly important part of
our business in the long term, we do not expect revenue from persistent state world games or online
gameplay and distribution to be signiÑcant in Ñscal 2007.
International Expansion. Net revenue from international sales accounted for approximately 46 percent of
our total net revenue during Ñscal 2006. We expect international sales to remain a fundamental part of our
business. We believe that in order to succeed in Asia, it is important to locally develop content that is
speciÑcally directed toward Asian cultures and consumers. As such, we expect to continue to devote
resources to hiring local development talent and expanding our infrastructure outside of North America,
most notably, through the expansion and creation of local studio facilities in Asia. In addition, we are in
the process of establishing online game marketing, publishing and distribution functions in China. Further,
we are planning to expand our development and publishing activities in the cellular handset games
business in Europe and Asia. As part of our international expansion strategy, we may seek to partner with
established local companies through acquisitions, joint ventures or other similar arrangements.
Sales of ""Hit'' Titles. Sales of ""hit'' titles, several of which were top sellers in a number of countries,
contributed signiÑcantly to our net revenue. Our top-selling titles across all platforms worldwide during the
year ended March 31, 2006 were Need for Speed Most Wanted, Madden NFL 06, FIFA 06, The Sims 2,
and Harry Potter and the Goblet of Fire. Hit titles are important to our Ñnancial performance because they
beneÑt from overall economies of scale. We have developed, and it is our objective to continue to develop,
many of our hit titles to become franchise titles that can be regularly iterated.
Increasing Licensing Costs. We generate a signiÑcant portion of our net revenue and operating income
from games based on licensed content such as Madden NFL Football, FIFA Soccer, Harry Potter and
ESPN. We have recently entered into new licenses and renewed older licenses, some of which contain
higher royalty rates than similar license agreements we have entered into in the past. We believe these
licenses, and the product franchises they support, will continue to be important to our future operations,
Annual Report
but the higher costs of these licenses will negatively impact our gross margins.
International Foreign Exchange Impact. Net revenue from international sales accounted for approxi-
mately 46 percent of our total net revenue during Ñscal 2006 and approximately 47 percent of our total net
revenue during Ñscal 2005. Our international net revenue was primarily driven by sales in Europe and, to a
lesser extent, in Asia. Foreign exchange rates had an unfavorable impact on our net revenue of
$36 million, or 1 percent, for the year ended March 31, 2006 as compared to the year ended March 31,
2005.
Acquisitions, Investments and Strategic Transactions. We have engaged in, evaluated, and expect to
continue to engage in and evaluate, a wide array of potential strategic transactions, including
(1) acquisitions of companies, businesses, intellectual properties, and other assets, and (2) investments in
new interactive entertainment businesses (for example, online and mobile games). In Ñscal 2006, we
acquired JAMDAT as part of our eÅorts to accelerate our growth in mobile gaming, and in Ñscal 2005 we
acquired Criterion Software Group, Ltd. (""Criterion''), and took a controlling interest in Digital Illusions
C.E. (""DICE''). We signed an agreement to fully merge DICE into EA, which will allow DICE to
become an integrated studio. The merger is expected to be completed during our Ñscal quarter ending
September 30, 2006.
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