Electronic Arts 2010 Annual Report Download - page 96

and continued in 2006 when Sony and Nintendo launched their next-generation systems, the PLAYSTATION 3
and the Wii, respectively. Sales of software designed for these hardware systems represent the majority of our
revenue, so our growth and success is highly correlated to sales of video game hardware systems. While there are
indications that this current cycle may be extended longer than prior cycles — in part, due to the growth of online
services and content, the greater graphic and processing power of the current generation hardware, and the
introduction of new peripherals — growth in the installed base of the current generation of video game systems is
likely to slow down in the coming years. This slow-down in sales of video game players may cause a
corresponding slow-down in the growth of sales of video game software, which could significantly affect our
operating results.
Technology changes rapidly in our business and if we fail to anticipate or successfully implement new
technologies in our games, the quality, timeliness and competitiveness of our products and services will
suffer.
Rapid technology changes in our industry require us to anticipate, sometimes years in advance, which
technologies we must implement and take advantage of in order to make our products and services competitive in
the market. Therefore, we usually start our product development with a range of technical development goals that
we hope to be able to achieve. We may not be able to achieve these goals, or our competition may be able to
achieve them more quickly and effectively than we can. In either case, our products and services may be
technologically inferior to our competitors’, less appealing to consumers, or both. If we cannot achieve our
technology goals within the original development schedule of our products and services, then we may delay their
release until these technology goals can be achieved, which may delay or reduce revenue and increase our
development expenses. Alternatively, we may increase the resources employed in research and development in
an attempt to accelerate our development of new technologies, either to preserve our product or service launch
schedule or to keep up with our competition, which would increase our development expenses.
The video game hardware manufacturers are among our chief competitors and frequently control the
manufacturing of and/or access to our video game products. If they do not approve our products, we will
be unable to ship to our customers.
Our agreements with hardware licensors (such as Sony for the PLAYSTATION 3, Microsoft for the Xbox 360,
and Nintendo for the Wii) typically give significant control to the licensor over the approval and manufacturing
of our products, which could, in certain circumstances, leave us unable to get our products approved,
manufactured and shipped to customers. These hardware licensors are also among our chief competitors.
Generally, control of the approval and manufacturing process by the hardware licensors increases both our
manufacturing lead times and costs as compared to those we can achieve independently. While we believe that
our relationships with our hardware licensors are currently good, the potential for these licensors to delay or
refuse to approve or manufacture our products exists. Such occurrences would harm our business and our
financial performance.
We also require compatibility code and the consent of Sony, Microsoft and Nintendo in order to include online
capabilities in our products for their respective platforms and to digitally distribute our products through their
proprietary networks. As online capabilities for video game systems become more significant, Sony, Microsoft
and Nintendo could restrict the manner in which we provide online capabilities for our products. They may also
restrict the number of products that we may distribute digitally on their networks. If Sony, Microsoft or Nintendo
refuse to approve our products with online capabilities, restrict our digital download offerings on their
proprietary networks, or significantly impact the financial terms on which these services are offered to our
customers, our business could be harmed.
The video game hardware manufacturers set the royalty rates and other fees that we must pay to publish
games for their platforms, and therefore have significant influence on our costs. If one or more of these
manufacturers change their fee structure, our profitability will be materially impacted.
In order to publish products for a video game system such as the Xbox 360, PLAYSTATION 3 or Wii, we must
take a license from Microsoft, Sony and Nintendo, respectively, which gives these companies the opportunity to
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