Electronic Arts 2007 Annual Report Download - page 87

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Item 1A: Risk Factors
Our business is subject to many risks and uncertainties, which may affect our future financial performance. If
any of the events or circumstances described below occurs, our business and financial performance could be
harmed, our actual results could differ materially from our expectations and the market value of our stock
could decline. The risks and uncertainties discussed below are not the only ones we face. There may be
additional risks and uncertainties not currently known to us or that we currently do not believe are material
that may harm our business and financial performance.
Our business is highly dependent on the success and availability of video game hardware systems
manufactured by third parties, as well as our ability to develop commercially successful products for
these systems.
We derive most of our revenue from the sale of products for play on video game hardware systems (which we
also refer to as “platforms”) manufactured by third parties, such as Sony’s PlayStation 2 and PLAYSTATION 3,
Microsoft’s Xbox 360 and Nintendo’s Wii. The success of our business is driven in large part by the
commercial success and adequate supply of these video game hardware systems, our ability to accurately
predict which systems will be successful in the marketplace, and our ability to develop commercially
successful products for these systems. We must make product development decisions and commit significant
resources well in advance of anticipated product ship dates. A platform for which we are developing products
may not succeed or may have a shorter life cycle than anticipated. If consumer demand for the systems for
which we are developing products are lower than our expectations, our revenue will suffer, we may be unable
to fully recover the investments we have made in developing our products, and our financial performance will
be harmed. Alternatively, a system for which we have not devoted significant resources could be more
successful than we had initially anticipated, causing us to miss out on meaningful revenue opportunities.
Our industry is cyclical and is beginning its next cycle. During the transition, consumers may be slower
to adopt new video game systems than we anticipate, and our operating results may suffer and become
more difficult to predict.
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 defer game
software purchases until they are able to purchase a new video game hardware system. This decline in prior-
generation product sales may 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. As a result of
these factors, during the next several quarters, we expect our operating results to be more volatile and difficult
to predict, which could cause our stock price to fluctuate significantly.
If we do not consistently meet our product development schedules, our operating results will be
adversely affected.
Our business is highly seasonal, with the highest levels of consumer demand and a significant percentage of
our sales occurring in the December quarter. In addition, we seek to release many of our products in
conjunction with specific events, such as the release of a related movie or the beginning of a sports season or
major sporting event. If we miss these key selling periods for any reason, including product delays or delayed
introduction of a new platform for which we have developed products, our sales will suffer disproportionately.
Annual Report
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