Electronic Arts 2007 Annual Report Download - page 103

stock units and our employee stock purchase plan included in our Consolidated Statements of Operations for
the fiscal years ended March 31, 2007, 2006 and 2005 (in millions):
2007 2006 2005
Year Ended March 31,
Cost of goods sold ................................................... $ 2 $— $—
Marketing and sales .................................................. 17 — —
General and administrative ............................................. 37 1 —
Research and development ............................................. 77 2 6
Stock-based compensation expense ..................................... 133 3 6
Benefit from income taxes.............................................. (26) (1) (2)
Stock-based compensation expense, net of tax ............................. $107 $ 2 $ 4
As of March 31, 2007, our total unrecognized compensation cost related to stock options was $153 million
and is expected to be recognized over a weighted-average service period of 1.6 years. As of March 31, 2007,
our total unrecognized compensation cost related to restricted stock and restricted stock units (collectively
referred to as “restricted stock rights”) was $82 million and is expected to be recognized over a weighted-
average service period of 2.3 years.
Management’s Overview of Historical and Prospective Business Trends
Transition to A New Generation of Consoles. Video game hardware systems have historically had a life cycle
of four to six years, which causes the video game software market to be cyclical as well. Microsoft launched
the Xbox 360 in November 2005, while Sony and Nintendo launched the PLAYSTATION 3 and the Wii,
respectively, in November 2006. We have continued to develop and market new titles for prior-generation
video game systems such as the PlayStation 2 while also making significant investments in products for the
new systems. As the prior-generation systems reach the end of their life cycle and the installed base of the
new systems continues to grow, our sales of video games for prior-generation systems will continue to decline
as (1) we produce fewer titles for prior-generation systems, (2) consumers replace their prior-generation
systems with the new systems, and/or (3) consumers reduce game software purchases for certain prior-
generation consoles generally, for example, until they are able to purchase a new video game hardware system.
This decline in prior-generation product sales could ultimately be greater than we anticipate, and sales of
products for the new platforms may be lower than we anticipate. Moreover, we expect development costs for
the new video game systems to be greater on a per-title basis than development costs for prior-generation
video game systems.
We have incurred increased costs during this transition as we have continued to develop and market new titles
for certain prior-generation video game platforms while also making significant investments in products for the
new generation platforms. As we move through the life cycle of prior-generation consoles, we will continue to
devote significant resources to the development of prior-generation titles while at the same time spending more
for the new generation of platforms and technology. As a result of these factors, we expect research and
development expenses to increase in fiscal 2008.
Investment in Online. Today, we generate net revenue from a variety of online products and services,
including casual games and downloadable content marketed under our Pogo brand, persistent state world
games such as Ultima Online and Dark Age of Camelot, PC-based downloadable content and online-enabled
packaged goods. As the nature of online game offerings expands and evolves, we anticipate long-term
opportunities for growth in this area. For example, we expect that consumers will take advantage of the online
connectivity of the new generation of consoles at a much higher rate than they have on prior-generation
consoles, allowing more consumers to enhance their gameplay experience through multiplayer activity,
community-building and downloading content. We plan to increase the amount of content available for
download on the PC, consoles and cell phones, increase the number of games with dynamic in-game
advertising and to increase the number of PC-based games that can be downloaded digitally. In addition, we
plan to expand our casual game offerings internationally and to invest in growing genres such as mid-session
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