Electronic Arts 2007 Annual Report Download - page 104

games. To further enhance our online offerings, we acquired Mythic, a developer and publisher of massively
multiplayer online role-playing games, in July 2006. We intend to make significant 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.
Significantly Increased Deferred Revenue for Online-Enabled Games. The ubiquity of high-speed Internet
access and the integration of network connectivity into new generation game consoles are expected to increase
demand for games with online-enabled features. To address this demand, many of our software products are
developed with the ability to be connected to and played via the Internet. In order for consumers to participate
in online communities and play against one another via the Internet, we (or through outsourced arrangements
with third parties) have servers which support the various online services we provide to consumers such as
matchmaking, roster updates, tournaments and player rankings. In situations where we do not separately sell
these online services, we consider the sale of the software product as a “bundle” sale or multiple element
arrangement in which we sell both the software product and the online service for one combined price.
Through fiscal 2007, for accounting purposes, vendor specific objective evidence of fair value existed for the
online service. Accordingly, we allocated the revenue collected from the sale of the software product between
the online service and the software product and recognized the amounts allocated to each element separately.
However, starting in fiscal 2008, for accounting purposes, the required vendor specific objective evidence of
fair value will not exist for the online services. This will prevent us from allocating and recognizing revenue
related to the software product and the online services separately. Accordingly, we will begin to recognize all
of the revenue from the sale of our online-enabled software products related to the PC, PlayStation 2,
PLAYSTATION 3 and the PSP platforms over the estimated online service period (currently expected to be
recognized over six months after the month of sale). We anticipate that, in fiscal 2008, we will likely defer
approximately $400 to $500 million in net revenue from the sale of these online-enabled software products
into fiscal 2009. On a quarterly basis, this amount will vary significantly depending upon the timing of the
release of the online-enabled software product and the sales volume of such products. In addition, we will
expense the cost of goods sold related to these transactions when delivered. As of March 31, 2007, deferred
net revenue related to packaged goods and digital content (i.e., content delivered to the consumer via the
Internet including (1) digital downloads and (2) certain incremental content related to our core subscription
services playable only online, which are types of “micro-transactions”) was $23 million.
Expansion of Mobile Platforms. Advances in mobile technology have resulted in a variety of new and
evolving platforms for on-the-go interactive entertainment that appeal to a broader demographic of consumers.
Our efforts to capitalize on the growth in mobile interactive entertainment are focused in two broad areas —
packaged goods games for handheld game systems and downloadable games for cellular handsets.
We have developed and published games for a variety of handheld platforms, including the Nintendo Game
Boy and Game Boy Advance, for several years. The introductions of the Sony PSP and the Nintendo DS, with
their enhanced graphics, deeper gameplay, and online functionality, provide a richer mobile gaming experience
for consumers.
We expect sales of games for cellular handsets to continue to be an increasingly important part of our business
worldwide. To accelerate our position in this growing segment, in February 2006, we acquired JAMDAT
Mobile Inc., a global publisher of wireless games and other wireless entertainment applications. As a result of
this acquisition, our net revenue from games for cellular handsets increased significantly in fiscal 2007 as
compared to prior years. Likewise, the acquisition, along with the additional investment required to grow this
portion of our business globally, resulted in increased license royalties, development and operating expenses in
fiscal 2007.
As mobile technology continues to evolve and the installed base of both handheld game systems and game-
enabled cellular phones continues to expand, we anticipate that sales of our titles for mobile platforms — for
both handhelds and cellular handsets — will become an increasingly important part of our business.
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
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