Electronic Arts 2006 Annual Report Download - page 93

number of ""hit'' titles accounts for a signiÑcant portion of total revenue in our industry. Hit products or
services oÅered by our competitors may take a larger share of consumer spending than we anticipate,
which could cause revenue generated from our products and services to fall below expectations. If our
competitors develop more successful products or services, oÅer competitive products or services at lower
price points or based on payment models perceived as oÅering a better value proposition (such as pay-for-
play or subscription-based models), or if we do not continue to develop consistently high-quality and well-
received products and services, our revenue, margins, and proÑtability will decline.
If we are unable to maintain or acquire licenses to intellectual property, we will publish fewer hit titles
and our revenue, proÑtability and cash Öows will decline. Competition for these licenses may make them
more expensive and increase our costs.
Many of our products are based on or incorporate intellectual property owned by others. For example, our
EA SPORTS products include rights licensed from major sports leagues and players' associations.
Similarly, many of our other hit franchises, such as The Godfather, Harry Potter and Lord of the Rings,
are based on key Ñlm and literary licenses. Competition for these licenses is intense. If we are unable to
maintain these licenses or obtain additional licenses with signiÑcant commercial value, our revenues and
proÑtability will decline signiÑcantly. Competition for these licenses may also drive up the advances,
guarantees and royalties that we must pay to the licensor, which could signiÑcantly increase our costs.
If patent claims continue to be asserted against us, we may be unable to sustain our current business
models or proÑts, or we may be precluded from pursuing new business opportunities in the future.
Many patents have been issued that may apply to widely-used game technologies, or to potential new
modes of delivering, playing or monetizing game software products. For example, infringement claims
under many issued patents are now being asserted against interactive software or online game sites. Several
such claims have been asserted against us. We incur substantial expenses in evaluating and defending
against such claims, regardless of the merits of the claims. In the event that there is a determination that
we have infringed a third-party patent, we could incur signiÑcant monetary liability and be prevented from
using the rights in the future, which could negatively impact our operating results. We may also discover
that future opportunities to provide new and innovative modes of game play and game delivery to
consumers may be precluded by existing patents that we are unable to license on reasonable terms.
Other intellectual property claims may increase our product costs or require us to cease selling aÅected
products.
Annual Report
Many of our products include extremely realistic graphical images, and we expect that as technology
continues to advance, images will become even more realistic. Some of the images and other content are
based on real-world examples that may inadvertently infringe upon the intellectual property rights of
others. Although we believe that we make reasonable eÅorts to ensure that our products do not violate the
intellectual property rights of others, it is possible that third parties still may claim infringement. From
time to time, we receive communications from third parties regarding such claims. Existing or future
infringement claims against us, whether valid or not, may be time consuming and expensive to defend.
Such claims or litigations could require us to stop selling the aÅected products, redesign those products to
avoid infringement, or obtain a license, all of which would be costly and harm our business.
From time to time we may become involved in other litigation which could adversely aÅect us.
We are currently, and from time to time in the future may become, subject to other claims and litigation,
which could be expensive, lengthy, and disruptive to normal business operations. In addition, the outcome
of any claims or litigation may be diÇcult to predict and could have a material adverse eÅect on our
business, operating results, or Ñnancial condition. For further information regarding certain claims and
litigation in which we are currently involved, see ""Part I Ì Item 3. Legal Proceedings'' below.
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