Electronic Arts 2012 Annual Report Download - page 101

Annual Report
development decisions and commit significant resources well in advance of anticipated product ship dates. A
platform for which we are developing products and services may not succeed or may have a shorter life cycle
than anticipated. If consumer demand for the systems for which we are developing products and services is 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 services, 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, driven by the periodic introduction of new video game hardware systems. As we
transition to new console platforms, our operating results may be more volatile.
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. The current cycle began with Microsoft’s launch of the Xbox 360 in 2005,
and continued in 2006 when Sony and Nintendo launched the PLAYSTATION 3 and the Wii, respectively. We
have seen a decline in the market for video game systems overall driven by reduced demand for standard
definition systems. This decline in sales of video game systems has caused a corresponding decline in the sales of
packaged goods video game software.
We anticipate the transition to new console platforms in the next few years. During this transition, we will incur
costs to develop and market products and services for current-generation video game platforms, as well as
developing products and services for next-generation platforms. For fiscal year 2013, we plan to invest $80
million toward next-generation platforms. The hardware manufacturers are not required to enter into agreements
with us for next-generation video game platforms and may choose to impose more restrictive terms or adopt very
different business models and fee structures for the next-generation platforms. As a result, our operating results
during this transitional period may be more volatile and difficult to predict.
The video game hardware manufacturers are among our chief competitors and frequently control the
manufacturing of and/or access to our video game products and services. If they do not approve our
products and services, we will not be able to make the products and services available 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 hardware licensor over the approval,
manufacturing and distribution of our products and services, which could, in certain circumstances, leave us
unable to get our products and services approved, manufactured and provided to customers. For our digital
products and services delivered direct to the consumers via Sony’s PlayStation Network and Microsoft’s Xbox
LIVE Marketplace, the hardware licensor controls the distribution of these titles. 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 our products and services exists. Such occurrences
would harm our business and our financial performance.
We also require technical and operational support and the consent of Sony, Microsoft and Nintendo in order to
include online capabilities in our products and services for their respective platforms and to digitally distribute
our products and services 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 and services and demand more restrictive terms for the next-generation console
platforms. They may also restrict the number of products and services that we may distribute digitally on their
networks. If Sony, Microsoft or Nintendo refuse to approve our products and services with online capabilities,
restrict our digital 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.
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