Electronic Arts 2009 Annual Report Download - page 108

Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
The following overview is a top-level discussion of our operating results, as well as some of the trends and
drivers that affect our business. Management believes that an understanding of these trends and drivers is
important in order to understand our results for the fiscal year ended March 31, 2009, as well as our future
prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed
discussion and analysis provided elsewhere in this Form 10-K, including in the “Business” section and the “Risk
Factors” above, the remainder of “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” or the Consolidated Financial Statements and related notes.
About Electronic Arts
We develop, market, publish and distribute video game software and content that can be played by consumers on
a variety of platforms, including video game consoles (such as the PLAYSTATION®3, Microsoft Xbox 360™
and Nintendo Wii™), personal computers, handheld game players (such as the PlayStation®Portable (“PSP™”)
and the Nintendo DS™) and wireless devices (such as cellular phones and smart phones including the Apple
iPhone). Some of our games are based on content that we license from others (e.g., Madden NFL Football, Harry
Potter™ and FIFA Soccer), and some of our games are based on our own wholly-owned intellectual property
(e.g., The Sims™, Need for Speed™, Dead Space™ and Pogo™). Our goal is to publish titles with global mass-
market appeal, which often means translating and localizing them for sale in non-English speaking countries. In
addition, we also attempt to create software game “franchises” that allow us to publish new titles on a recurring
basis that are based on the same property. Examples of this franchise approach are the annual iterations of our
sports-based products (e.g., Madden NFL Football, NCAA®Football and FIFA Soccer), wholly-owned
properties that can be successfully sequeled (e.g., The Sims, Need for Speed and Battlefield) and titles based on
long-lived literary and/or movie properties (e.g., The Godfather®and Harry Potter).
Special Note Regarding Deferred Net Revenue
Many of our software products are developed with the ability to connect to the Internet. Depending on the type of
product, this feature permits consumers to play against others via the Internet and/or receive additional updates or
content from us. For those games that consumers can play via the Internet, we may provide a “matchmaking”
online service which permits consumers to connect with other consumers to play against each other. In those
situations where we do not separately sell this online service, we account for 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 year 2007, for accounting purposes, VSOE existed for the online
service. Accordingly, we allocated the revenue collected from the sale of the software product between the online
service offered and the software product and recognized the amounts allocated to each element separately.
However, starting in fiscal year 2008, VSOE did not exist for the online service and we began to recognize all of
the revenue from the sale of these bundle sales on a deferred basis over an estimated online service period, which
we estimate to be six months beginning in the month after shipment.
In addition, we also provide updates or additional content (“digital content”) for some software products to be
delivered via the Internet. For some software products, at the date of sale we had an obligation to make available
for download via the Internet incremental unspecified future digital content without an additional fee. In those
transactions, we also accounted for the sale of the software product as a bundle sale and recognized the revenue
on a deferred basis over the period in which we expect to make available the incremental unspecified digital
content.
On a quarterly basis, the deferral amount will vary significantly depending upon the number of titles we release,
the timing of their release, sales volume, returns and price protection provided for these online-enabled software
products. In addition, we expense the cost of goods sold related to these transactions during the period in which
the product is delivered (rather than on a deferred basis), which inherently creates volatility in our reported gross
profit percentages.
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