Item 1. BUSINESS
Overview
Activision Blizzard, Inc. is a leading global developer and publisher of interactive entertainment content and services. We develop and
distribute content and services on video game consoles, personal computers ("PC"), and mobile devices. We also operate esports events and leagues
and create film and television content based on our games. The terms "Activision Blizzard," the "Company," "we," "us," and "our" are used to refer collectively to Activision Blizzard, Inc. and
its subsidiaries.
The
Company was originally incorporated in California in 1979 and was reincorporated in Delaware in December 1992. In connection with the 2008 business combination (the "Business
Combination") by and among the Company (then known as Activision, Inc.), Vivendi S.A. ("Vivendi"), and Vivendi Games, Inc. ("Vivendi Games"), an indirect wholly-owned subsidiary
of Vivendi, we were renamed Activision Blizzard, Inc.
The
common stock of Activision Blizzard is traded on The Nasdaq Stock Market under the ticker symbol "ATVI."
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The King Acquisition
On February 23, 2016 (the "King Closing Date"), we acquired King Digital Entertainment, a leading interactive mobile entertainment
company ("King"), by purchasing all of its outstanding shares (the "King Acquisition"). We made this acquisition because we believed that the addition of King's highly complementary mobile business
positioned us as a global leader in interactive entertainment across mobile, console, and PC platforms, and aligned us for future growth. The aggregate purchase price of approximately
$5.8 billion was funded with $3.6 billion of existing cash and $2.2 billion of cash from new debt issued by the Company. King's results of operations since the King Closing Date
are included in our consolidated financial statements.
Our Strategy and Vision
Our objective is to continue to be a worldwide leader in the development, publishing, and distribution of high-quality interactive entertainment
content and services, as well as related media, that deliver engaging entertainment experiences on a year-round basis. In pursuit of this
objective we focus on three strategic pillars: expanding audience reach; driving deep consumer engagement; and providing more opportunities for player investment.
Expanding audience reach.
Building on our strong established franchises and creating new franchises through compelling new content is at
the core of
our business. We endeavor to reach as many consumers as possible either through: (1) the purchase of our content and services; (2) engagement in our free-to-play games, which allow
consumers to play games with no up-front cost but provide for player investment through sales of downloadable content or via microtransactions; or (3) engagement in other types of media based
on our franchises, such as esports and film and television content.
Driving deep consumer engagement.
Our high-quality entertainment content not only expands our audience reach, but it also drives deep
engagement with
our franchises. We design our games, as well as related media, to provide a depth of content that keeps consumers engaged for a long period of time following a game's release, delivering more value to
our players and additional growth opportunities for our franchises.
Providing more opportunities for player investment.
Increasingly, our consumers are connected to our games online through consoles, PCs,
and mobile
devices. This allows us to offer additional digital player investment opportunities directly to our consumers on a year-round basis. In addition to purchasing full games or subscriptions, players can
invest in certain of our games and franchises by purchasing incremental "in-game" content (including larger downloadable content or smaller content, via microtransactions). These digital revenue
streams tend to be recurring and have relatively higher profit margins. Further, if executed properly, additional player investment can increase engagement as it provides more frequent and incremental
content for our players. In addition, we believe there is an opportunity for advertising within certain of our franchises, as well as opportunities to drive new forms of player investment through
esports, film and television, and consumer products. We are in the early stages of developing these new revenue streams.
Our
strategy is ultimately aimed at creating shareholder value and enhancing returns. We strive to increase profitability, cash flows, and return on capitaland to do so
while keeping our company a great place to work for our employees.
Reportable Segments
As part of the continued implementation of our esports strategy, we instituted changes to our internal organization and reporting structure such
that the Major League Gaming ("MLG") business now operates as a division of Blizzard Entertainment, Inc. ("Blizzard"). As such, commencing with the
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second
quarter of 2017, MLG, which was previously a separate operating segment, is now a component of the Blizzard operating segment. MLG is responsible for the operations of the Overwatch
League, along with other esports events, and will also continue to serve as a multi-platform network for other Activision Blizzard esports content.
Based
upon our organizational structure, we conduct our business through three reportable segments as follows:
(i) Activision Publishing, Inc.
Activision Publishing, Inc. ("Activision"), is a leading global developer and publisher of interactive software products and entertainment content,
particularly for the console platform. Activision primarily delivers content through retail and digital channels, including full-game and in-game sales, as well as by licensing software to third-party
or related-party companies that distribute Activision products. Activision develops, markets, and sells products based on our internally developed intellectual properties, as well as some licensed
properties. We have also established a long-term alliance with Bungie to publish its game universe, Destiny.
Activision's
key product franchises include: Call of Duty®, a first-person shooter for the console and PC platforms, and Destiny, an online universe of first-person action
gameplay (which we call a "shared-world shooter") for the console and PC platforms. Call of Duty, Activision's leading franchise, has been the number one console franchise globally for eight of the
last nine years, based on data from The NPD Group, GfK Chart-Track, and GSD, and our internal estimates.
(ii) Blizzard Entertainment, Inc.
Blizzard is a leading global developer and publisher of interactive software products and entertainment content, particularly for the PC platform. Blizzard
primarily delivers content through retail and digital channels, including subscriptions, full-game, and in-game sales, as well as by licensing software to third-party or related-party companies that
distribute Blizzard products. Blizzard also maintains a proprietary online gaming service, Blizzard Battle.net®, which facilitates digital distribution of Blizzard content, along with
Activision's
Destiny 2
PC content, online social connectivity, and the creation of user-generated content. As noted above, Blizzard also includes the
activities of our MLG business, which is responsible for the operations of the Overwatch League, along with other esports events, and will also continue to serve as a multi-platform network for other
Activision Blizzard esports content.
Blizzard's
key product franchises include: World of Warcraft®, a subscription-based massive multi-player online role-playing game ("MMORPG") for PC; StarCraft®, a
real-time strategy PC franchise; Diablo®, an action role-playing franchise for the PC and console platforms; Hearthstone®, an online collectible card franchise for the PC and
mobile platforms; Heroes of the Storm®, a free-to-play team brawler for PC; and Overwatch®, a team-based first-person shooter for the PC and console platforms. World of
Warcraft, which was initially launched in November 2004, is the leading subscription-based MMORPG in the world.
(iii) King Digital Entertainment
King is a leading global developer and publisher of interactive entertainment content and services, particularly on mobile platforms, such as Google Inc.'s
("Google") Android and Apple Inc.'s ("Apple") iOS. King also distributes its content and services on the PC platform, primarily via Facebook, Inc. ("Facebook"). King's games are free to
play, however, players can acquire in-game items, either with virtual currency the players purchase or directly using real currency.
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King's
key product franchises, all of which are for the mobile and PC platforms, include: Candy Crush, which features "match three" games; Farm Heroes, which
also features "match three" games; and Bubble Witch, which features "bubble shooter" games. King had two of the top 10 highest-grossing titles in the U.S. mobile app stores for the last
17
quarters in a row, according to App Annie Intelligence and internal estimates for the Apple App Store and the Google Play Store combined.
Other
We also engage in other businesses that do not represent reportable segments, including:
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the Activision Blizzard Studios ("Studios") business, which is devoted to creating original film and television content based on our library of
globally recognized intellectual properties, and which, in October 2017, released the second season of the animated TV series
Skylanders
Academy
on Netflix; and
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the Activision Blizzard Distribution ("Distribution") business, which consists of operations in Europe that provide warehousing, logistics, and
sales distribution services to third-party publishers of interactive entertainment software, our own publishing operations, and manufacturers of interactive entertainment hardware.
Products
We develop interactive entertainment content and services, principally for console, PC, and mobile devices, and we market and sell our games
through retail and digital distribution channels. Our products span various genres, including first-person shooter, action/adventure, role-playing, strategy, and "match three," among others. We
primarily offer the following products and services:
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full-games, which typically provide access to main game content, primarily for console or PC;
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downloadable content, which provides players with additional in-game content to purchase following the purchase of a full game;
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microtransactions, which typically provide relatively small pieces of additional in-game content or enhancements to gameplay, generally at
relatively low price points; and
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subscriptions for players in our World of Warcraft franchise that provide for continual access to the game content.
Providing
additional opportunities for player investment outside of full-game purchases has allowed us to shift from our historical seasonality to a more consistently recurring and
year-round revenue model. In addition, if executed properly, it allows us to increase player engagement as it provides more frequent and incremental content for our players.
Product Development and Support
We focus on developing enduring franchises backed by well-designed, high-quality games with regular content updates. We build interactive
entertainment content with the potential for broad reach, sustainable engagement and year-round player investment. It is our experience that enduring franchises then serve as the basis for sequels,
prequels and related new products and content that can be released over an extended period of time. We believe that the development and distribution of products and content based on proven franchises
enhances predictability of revenues and the probability of high unit volume sales and operating profits. We intend to continue development of owned franchises in the future.
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We
develop and produce our titles using a model in which a group of creative, technical, and production professionals, including designers, producers, programmers, artists, and sound
engineers, in coordination with our marketing, finance, analytics, sales, and other professionals, has responsibility for the entire development and production process, including the supervision and
coordination of internal and, where appropriate, external resources. We believe this model allows us to deploy the best resources for a given task, by supplementing our internal expertise with
top-quality external resources on an as-needed basis.
While
most of the content for our franchises is developed by internal studios, we periodically engage independent third-party developers to create content on our behalf. From time to
time, we also acquire the license rights to publish and/or distribute software products that are, or will be, independently created by third-party developers. Since 2010, Activision has been in a
long-term exclusive relationship with Bungie, the developer of game franchises including Halo, Myth, and Marathon, to publish games in the Destiny franchise. During the term of the agreement,
Activision has exclusive, worldwide rights to publish and distribute on multiple platforms all future Bungie games based on Destiny.
We
provide various forms of product support. Central technology and development teams review, assess, and provide support to products throughout the development process. Quality
assurance personnel are also involved throughout the development and production of published content. We subject all such content to extensive testing before public release to ensure compatibility
with appropriate hardware systems and configurations and to minimize the number of bugs and other defects found in the products. To support our content, we generally provide 24-hour game support to
players through various means, primarily online and by telephone.
Marketing, Sales, and Distribution
Many of our products contain software that enables us to connect with our gamers directly. This provides a significant marketing tool that
allows us to communicate and market directly to our customers, including through customized advertising and in-game messaging based on customer preferences and trends. Our marketing efforts also
include activities on Facebook, Twitter, Twitch, YouTube and other online social networks, other online advertising, other public relations activity, print and broadcast advertising, coordinated
in-store and industry promotions (including merchandising and point of purchase displays), participation in cooperative advertising programs, direct response vehicles, and product sampling through
demonstration software distributed through the Internet or the digital online services provided by our partners. From time to time, we also receive marketing support from hardware manufacturers,
producers of consumer products related to a game, and retailers in connection with their own promotional efforts, as well as co-marketing from promotional partners.
Our
physical products are available for sale in outlets around the world. These products are sold primarily on a direct basis to mass-market retailers (e.g., Target, Wal-Mart),
consumer electronics stores (e.g., Best Buy), discount warehouses, game specialty stores (e.g., GameStop), and other stores (e.g., Amazon) or through third-party distribution and
licensing arrangements.
Most
of our products and content are also available in a digital format, which allows consumers to purchase and download the content at their convenience directly to their console, PC,
or mobile device through our platform partners, including Microsoft Corporation ("Microsoft"), Sony Interactive Entertainment Inc. ("Sony"), Apple, Google, Nintendo Co., Ltd.
("Nintendo"), and Facebook. Blizzard utilizes its proprietary online gaming service, Blizzard Battle.net, to distribute most of Blizzard's content directly to PC consumers.
In
addition to serving as a distribution platform, Blizzard Battle.net offers players communications features, social networking, player matching and digital content delivery and is
designed to allow people
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to
connect regardless of which of our games on Blizzard Battle.net they are playing. It attracts millions of active players, making it one of the largest online game-related services in the world.
Manufacturing
We prepare master program copies for our products on each release platform. With respect to products for Microsoft, Sony, and Nintendo consoles,
our disk duplication, packaging, printing, manufacturing, warehousing, assembly and shipping are performed by third-party subcontractors or distribution facilities owned by us.
Microsoft,
Sony, and Nintendo generally specify or control the manufacturing and assembly of finished products and license their hardware technologies to us for which we pay an
applicable royalty per unit once the manufacturer fills the product order, even if the units do not ultimately sell. We deliver the master materials to the licensor or its approved replicator, who
then manufactures the finished goods and delivers them to us for distribution under our label.
Significant Customers and Top Franchises
Customers
While the Company does sell directly to end consumers in certain instances, such as sales through Blizzard's proprietary online gaming service
platform, Blizzard Battle.net, in other instances our customers may be platform providers, such as Sony, Microsoft, Google, and Apple, or retailers, such as Wal-Mart and GameStop, who act as
distributors of our content to end consumers. For the year ended December 31, 2017, we had three customersApple, Sony, and Googlewho accounted for 16%, 14%, and 10%,
respectively, of net revenues. For the year ended December 31, 2016, we had two customersSony and Applewho each accounted for 13% of net revenues. For the year ended
December 31, 2015, we had two customersSony and Microsoftwho accounted for 12% and 10%, respectively, of net revenues.
We
had three customersSony, Microsoft, and Applewho accounted for 17%, 14%, and 10%, respectively, of consolidated gross receivables at December 31,
2017. We had three customersSony, Microsoft, and Wal-Martwho accounted for 17%, 10%, and 10%, respectively, of consolidated gross receivables at December 31, 2016.
Top Franchises
For the years ended December 31, 2017 and 2016, our top four franchisesCall of Duty, Candy Crush, World of Warcraft, and
Overwatchcollectively accounted for 66% and 69% of our net revenues, respectively. For the year ended December 31, 2015, our top four franchisesCall of Duty, World of
Warcraft, Destiny, and Hearthstonecollectively accounted for 75% of our net revenues.
Competition
We compete for the leisure time and discretionary spending of consumers with other interactive entertainment companies, as well as with
providers of different forms of entertainment, such as film, television, social networking, music and other consumer products.
The
interactive entertainment industry is intensely competitive and new interactive entertainment software products and platforms are regularly introduced. We believe that the main
competitive factors in the interactive entertainment industry include: product features, game quality, and playability; brand name recognition; compatibility of products with popular platforms; access
to distribution channels; online capability and functionality; ease of use; price; marketing support; and quality of customer service.
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We
compete with other publishers of video game console, PC, and mobile interactive entertainment software. In addition to third-party software competitors, integrated video game console
hardware and software companies, such as Microsoft, Sony, and Nintendo, compete directly with us in the development of software titles for their respective platforms. A number of software publishers
have developed and commercialized, or are currently developing, online games for use by consumers.
Intellectual Property
Like other interactive entertainment companies, our business is significantly dependent on the creation, acquisition, use and protection of
intellectual property. Some of this intellectual property is in the form of copyrighted software code, patented technology, and other technology and trade secrets that we use to develop and run our
games. Other intellectual property is in the form of copyrighted audio-visual elements that consumers can see, hear and interact with when they are playing our games.
We
develop a majority of our products based on wholly-owned intellectual properties, such as Call of Duty, World of Warcraft, and Candy Crush, among others. In other cases, we obtain
intellectual
property through licenses and service agreements, such as for our Destiny franchise. Further, our products that play on consoles and mobile platforms include technology that is owned by the platform
provider and is licensed non-exclusively to us for use in the relevant product. We also license technology from providers other than console manufacturers in developing our content and services. While
we may have renewal rights for some licenses, our business is dependent on our ability to continue to obtain the intellectual property rights from the owners of these rights on reasonable terms and at
reasonable rates.
We
are actively engaged in enforcement of our copyright, trademark, patent, and trade secret rights against potential infringers of those rights along with other protective activities,
including monitoring online channels for distribution of pirated copies and participating in various enforcement initiatives, education programs and legislative activity around the world. For our PC
products, we use technological protection measures to prevent piracy and the use of unauthorized copies of our products. For other platforms, the platform providers typically incorporate technological
protections and other security measures in their platforms to prevent the use of unlicensed products on those platforms.
Executive Officers
Our executive officers and their biographical summaries are provided below:
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Name
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Age
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Position
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Robert A. Kotick
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54
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Chief Executive Officer of Activision Blizzard
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Collister Johnson
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41
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President and Chief Operating Officer of Activision Blizzard
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Dennis Durkin
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47
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Chief Corporate Officer of Activision Blizzard
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Spencer Neumann
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48
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Chief Financial Officer of Activision Blizzard
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Eric Hirshberg
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49
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President and Chief Executive Officer of Activision
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Michael Morhaime
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50
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President and Chief Executive Officer of Blizzard
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Brian Stolz
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42
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Chief People Officer of Activision Blizzard
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Christopher Walther
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51
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Chief Legal Officer of Activision Blizzard
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Riccardo Zacconi
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50
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Chief Executive Officer of King
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Robert A. Kotick, Chief Executive Officer of Activision Blizzard
Robert A. Kotick has been a director of Activision Blizzard since February 1991, following his purchase of a significant interest in the
Company, which was then on the verge of insolvency. Mr. Kotick was our Chairman and Chief Executive Officer from February 1991 until July 2008, when
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he
became our President and Chief Executive Officer in connection with the Business Combination. Mr Kotick served as our President from July 2008 until June 2017, when Mr. Johnson began
serving as our President and Chief Operating Officer. Mr. Kotick remains the Chief Executive Officer of Activision Blizzard. Mr. Kotick is also a member of the board of directors of The
Coca-Cola Company, a multinational beverage corporation, and the boards of trustees for The Center for Early Education and the Harvard-Westlake School. He is also vice chairman of the board and
chairman of the committee of trustees of the Los Angeles County Museum of Art. In addition, Mr. Kotick is the founder and co-chairman of the Call of Duty Endowment, a nonprofit, public benefit
corporation that seeks to help organizations that provide job placement and training services for veterans.
Collister Johnson, President and Chief Operating Officer of Activision Blizzard
Collister "Coddy" Johnson has served as our President and Chief Operating Officer since June 2017. Prior to that, he served as the chief
operating officer and co-founder of Altschool, a public benefit, education technology company, from April 2016 until May 2017. Prior to joining Altschool, he held a number of positions of increasing
responsibility at the Company from 2008 to 2016, serving as the chief financial officer and head of operations of Activision, one of our principal operating units, chief operating officer of
Activision studios, and senior vice president and chief of staff to our Chief Executive Officer. Mr. Johnson holds a B.A. degree in ethics, politics and economics from Yale University and an
M.B.A. degree from Stanford University.
Dennis Durkin, Chief Corporate Officer of Activision Blizzard
Dennis Durkin became our Chief Corporate Officer in June 2017. Prior to this, Mr. Durkin served as our Chief Financial Officer since
joining the Company in March 2012. Prior to joining the Company, Mr. Durkin held a number of positions of increasing responsibility at Microsoft Corporation, a computing hardware and software
manufacturer, most recently serving as the corporate vice president and chief operating and financial officer of Microsoft Corporation's interactive entertainment business, which included the Xbox
console business. Prior to joining Microsoft Corporation's interactive entertainment business in 2006, Mr. Durkin worked on Microsoft Corporation's corporate development and strategy team,
including two years where he was based in London, England, driving pan-European activity. Before joining Microsoft Corporation, Mr. Durkin was a financial analyst at Alex. Brown and Company.
Mr. Durkin holds a B.A. degree in government from Dartmouth College and an M.B.A. degree from Harvard University.
Spencer Neumann, Chief Financial Officer of Activision Blizzard
Spencer Neumann has served as our Chief Financial Officer since May 2017. Prior to joining the Company, Mr. Neumann held a number of
positions of increasing responsibility at The Walt Disney Company, most recently serving as the chief financial officer and executive vice president of Global Guest Experience of Walt Disney Parks and
Resorts, from 2012 until May 2017. From 2005 to 2012, Mr. Neumann worked at the private equity firms of Providence Equity Partners and Summit Partners. Prior to that, Mr. Neumann held
several other roles with Disney, which he initially joined in 1992, including executive vice president of the ABC Television Network from 2001 to 2004 and chief financial officer of the Walt Disney
Internet Group from 1999 to 2001. He is also a member of the national board of directors of Make-A-Wish America. Mr. Neumann holds a B.A. degree in economics from Harvard University and an
M.B.A. degree from Harvard University.
Eric Hirshberg, President and Chief Executive Officer of Activision
Eric Hirshberg became the President and Chief Executive Officer of Activision in September 2010. Prior to joining us, Mr. Hirshberg
served in positions of increasing responsibility with Deutsch LA, a marketing and advertising agency, most recently serving as its co-chief executive officer and its chief
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creative
officer. Prior to working at Deutsch LA, Mr. Hirshberg worked at Fattal & Collins, a marketing and advertising agency. Mr. Hirshberg holds a B.F.A. degree from the
University of California at Los Angeles.
Michael Morhaime, President and Chief Executive Officer of Blizzard
Michael Morhaime became Chief Executive Officer of Blizzard and an executive officer of Activision Blizzard in July 2008 in connection with the
Business Combination. Mr. Morhaime co-founded Blizzard in February 1991, and transitioned to the role of Blizzard's President in April 1998. Mr. Morhaime served on the executive
committee of Vivendi Games from January 1999, when Blizzard became a subsidiary of Vivendi Games, until the consummation of the Business Combination, when Blizzard became a subsidiary of the Company.
Mr. Morhaime holds a B.S. degree in electrical engineering from the University of California at Los Angeles.
Brian Stolz, Chief People Officer of Activision Blizzard
Brian Stolz became our Chief People Officer in May 2016. Prior to joining the Company, Mr. Stolz served as senior vice president of the
neurology, dental, and generics businesses of Valeant Pharmaceuticals, a pharmaceutical company. Before that, Mr. Stolz served as Valeant's executive vice president of administration and its
chief human capital officer. Prior to joining Valeant, Mr. Stolz held positions as a principal at ghSMART, a leadership consulting and advisory firm, and as an associate principal at
McKinsey & Co., a strategy consulting firm. Mr. Stolz holds a B.S. degree in finance from Georgetown University and an M.B.A. degree from Harvard University.
Christopher Walther, Chief Legal Officer of Activision Blizzard
Christopher Walther became our Chief Legal Officer in November 2009 and served as our Secretary from February 2010 until February 2011. Prior to
joining us, Mr. Walther held a number of positions of increasing responsibility within the legal department of The Procter & Gamble Company from 1992 to 2009, including serving as the
general counsel for Central and Eastern Europe, Middle East and Africa, general counsel for Northeast Asia and, most recently, as general counsel for Western Europe. Mr. Walther also led
Procter & Gamble's corporate and securities and mergers and acquisitions practices. Before joining Procter & Gamble, Mr. Walther served as a law clerk for Senior Judge Harry W.
Wellford of the United States Sixth Circuit Court of Appeals. Since 2012, Mr. Walther has served on the board of directors of the Alliance for Children's Rights. Mr. Walther has also
served as our representative on the board of directors of the Entertainment Software Association since 2013. Mr. Walther holds a B.A. degree in history and Spanish from Centre College and a
J.D. degree from the University of Kentucky College of Law.
Riccardo Zacconi, Chief Executive Officer of King
Riccardo Zacconi serves as the Chief Executive Officer of King and became an executive officer of Activision Blizzard in February 2016 in
connection with the King Acquisition. Mr. Zacconi co-founded King in March 2003, and has served as its chief executive officer since its founding. Prior to founding King, Mr. Zacconi
served as vice president of European sales and marketing at uDate.com, an online dating service, from 2002 until that company's acquisition later that year. From 2001 to 2002, Mr. Zacconi
served as entrepreneur in residence at Benchmark Capital Partners, a venture capital firm. Prior to joining Benchmark Capital, he was managing director for Spray Network, an online messaging portal
based in Hamburg, Germany, from 1999 until its sale in 2000. Prior to 1999, Mr. Zacconi served in various investment and consulting positions of increasing responsibility with The Boston
Consulting Group and LEK Consulting, both of which are management consulting firms. Mr. Zacconi holds a B.A. degree in economics from LUISS University in Italy.
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Employees
At December 31, 2017, we had approximately 9,800 total full-time and part-time employees. At December 31, 2017, approximately 175
of our full-time employees were subject to fixed-term employment agreements with us.
The
majority of our employees in France, Germany, Spain, and Italy are subject to collective agreements as a part of normal business practices in those countries. In addition, certain
employees in those countries are subject to collective bargaining agreements. To date, we have not experienced any labor-related work stoppages.
Additional Financial Information
See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 13 of the notes to
consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for certain additional information regarding operating segments and geographic areas. See the
Critical Accounting Policies section under Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of our practices with regard to
several working capital items, such as rights of return. See the "Management's Overview of Business Trends" under Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for a discussion of the impact of seasonality on our business. See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" for information
regarding product development expense during the past three years.
Available Information
Our website, located at https://www.activisionblizzard.com, allows free-of-charge access to our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those documents filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The information found on our website is not a part of, and is not incorporated by reference into, this or any other report that we file with or
furnish to the Securities and Exchange Commission ("SEC").
Our
SEC filings are also available to the public over the Internet at the SEC's website at https://www.sec.gov. Additionally, the public may read and copy any materials we file with the
SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330.
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Item 1A. RISK FACTORS
We wish to caution the reader that the following important risk factors, and those risk factors described elsewhere in
this report or in our other filings with the SEC, could cause our actual results to differ materially from those stated in forward
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looking statements
contained in this document and elsewhere. These risks are not presented in order of importance or probability of occurrence. Further, the risks described below are not the only risks that we face.
Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also impair our business operations. Any of these risks may have a material adverse effect on our
business, reputation, financial condition, results of operations, profitability, cash flows, liquidity, or stock price.
If we do not consistently deliver popular, high-quality content in a timely manner, or if consumers prefer
competing products, our business may be negatively impacted.
Consumer preferences for games are usually cyclical and difficult to predict, and even the most successful content remains popular for only
limited periods of time, unless refreshed with new content or otherwise enhanced. In order to remain competitive, we must continuously develop new products or enhancements to our existing products.
These products or enhancements may not be well-received by consumers, even if well-reviewed and of high quality. Further, competitors may develop content that imitates or competes with our
best-selling games, potentially taking sales away from them or reducing our ability to charge the same prices we have historically charged for our products. These competing products may take a larger
share of consumer spending than anticipated, which could cause product sales to fall below expectations. If we do not continue to develop consistently high-quality and well-received games, if our
marketing fails to resonate with our consumers, if consumers lose interest in a genre of games we produce, if the use of cross-promotion within our mobile games to retain consumers becomes less
effective, or if our competitors develop more successful products or offer competitive products at lower prices, our revenues and profit margins could decline. Further, a failure by us to develop a
high-quality product, or our development of a product that is otherwise not well-received, could potentially result in additional expenditures to respond to consumer demands, harm our reputation, and
increase the likelihood that our future products will not be well-received. The increased importance of downloadable content to our business amplifies these risks, as downloadable content for
poorly-received games typically generates lower-than-expected sales. In addition, our own best-selling products could compete with our other games, reducing sales for those other games.
Additionally,
consumer expectations regarding the quality, performance and integrity of our products and services are high. Consumers may be critical of our brands, games, services
and/or business practices for a wide variety of reasons, and such negative reactions may not be foreseeable or within our control to manage effectively. For example, if our games or services, such as
our proprietary online gaming service, do not function as consumers expect, whether because they fail to function as advertised or otherwise, our sales may suffer. The risk that this may occur is
particularly pronounced with respect to our games with online features because they involve ongoing consumer expectations, which we may not be able to consistently satisfy. Our games with online
features are also frequently updated, increasing the risk that a game may contain significant "bugs." If any of these issues occur, consumers may stop playing the game and may be less likely to return
to the game as often in the future, which may negatively impact our business.
Further,
delays in product releases or disruptions following the commercial release of one or more new products could negatively impact our business on our revenues and reputation and
could cause our results of operations to be materially different from expectations. If we fail to release our products in a timely manner, or if we are unable to continue to extend the life of
existing games by adding features and functionality that will encourage continued engagement with the game, our business may be negatively impacted.
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Additionally,
the amount of lead time and cost involved in the development of high-quality products is increasing, and the longer the lead time involved in developing a product and the
greater the allocation of financial resources to such product, the more critical it is that we accurately predict consumer demand for such product. If our future products do not achieve expected
consumer acceptance or generate sufficient revenues upon introduction, we may not be able to recover the substantial up-front development and marketing costs associated with those products.
We depend on a relatively small number of franchises for a significant portion of our revenues and profits.
We follow a franchise model and a significant portion of our revenues has historically been derived from products based on a relatively small
number of popular franchises. These products are responsible for a disproportionately high percentage of our profits. For example, revenues associated with the Call of Duty, Candy Crush, World of
Warcraft, and Overwatch franchises, collectively, accounted for approximately 66% of our net revenuesand a significantly higher percentage of our operating incomefor 2017. We
expect that a relatively limited number of popular franchises will continue to produce a disproportionately high percentage of our revenues and profits. Due to this dependence on a limited number of
franchises, the failure to achieve anticipated results by one or more products based on these franchises could negatively impact our business. Additionally, if the popularity of a franchise declines,
we may have to write off the unrecovered portion of the underlying intellectual property assets, which could negatively impact our business.
We may be unable to effectively manage the continued growth in the scope and complexity of our business,
including our expansion into new business models that are untested and into adjacent business opportunities with large, established competitors.
We have experienced significant growth in the scope and complexity of our business, including through the acquisition of King and the
development of our MLG, Studios and consumer products businesses, and remain ambitious as to the future growth in the scope and complexity of our business. Our future success depends, in part, on our
ability to manage this expanded business and our aspirations for continued expansion. We have dedicated resources both to new business models that are largely untested, as is the case with esports,
and to adjacent business opportunities in which very large competitors have an established presence, as is the case with our Studios and consumer products businesses. We do not know to what extent our
future expansions will
be successful. Further, even if successful, the growth of our business could create significant challenges for our management, operational, and financial resources, and could increase existing strain
on, and divert focus from, our core businesses. If not managed effectively, this growth could result in the over-extension of our operating infrastructure, and our management systems, information
technology systems, and internal controls and procedures may not be adequate to support this growth. Failure to adequately manage our growth in any of these ways may cause damage to our brand or
otherwise negatively impact our business. Further, any failure by these new businesses may damage our reputation or otherwise negatively impact our core business of interactive software products and
entertainment content.
The increasing importance of free-to-play games to our business exposes us to the risks of that business
model, including the dependence on a relatively small number of consumers for a significant portion of revenues and profits from any given game.
As a result of, among other things, the King Acquisition, we are more dependent on our ability to develop, enhance and monetize free-to-play
games, such as the games in our Candy Crush franchise and
Hearthstone.
As such, we are increasingly exposed to the risks of the free-to-play business
model. For example, we may invest in the development of new free-to-play interactive entertainment products that do not achieve significant commercial success, in which case our revenues from those
products likely will be lower than anticipated and we may not recover our development costs. Further, if: (1) we
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are
unable to continue to offer free-to-play games that encourage consumers to purchase our virtual currency and subsequently use it to buy our virtual items; (2) we fail to offer monetization
features that appeal to these consumers; (3) these consumers do not continue to play our free-to-play games or purchase virtual items at the same rate; (4) our platform providers make it
more difficult or expensive for players to purchase our virtual currency; or (5) we cannot encourage significant additional consumers to purchase virtual items in our free-to-play games, our
business may be negatively impacted.
Furthermore,
as there are relatively low barriers to entry to developing mobile or online free-to-play or other casual games, we expect new competitors to enter the market and existing
competitors to allocate more resources to developing and marketing competing games and applications. We compete, or may compete, with a vast number of small companies and individuals who are able to
create and launch casual games and other content using relatively limited resources and with relatively limited start-up time or expertise. Competition for the attention of consumers on mobile devices
is intense, as the number of applications on mobile devices has been increasing dramatically, which, in turn, has required increased marketing to garner consumer awareness and attention. This
increased competition could
negatively impact our business. In addition, a continuing industry shift to free-to-play games could result in a deprioritization of our other products by traditional retailers and distributors.
Our industry is subject to rapid technological change, and if we do not adapt to, and appropriately allocate
our resources among, emerging technologies and business models, our business may be negatively impacted.
Technology changes rapidly in the interactive entertainment industry. We must continually anticipate and adapt our products, distribution
channels and business models to emerging technologies and delivery platforms in order to stay competitive. Forecasting our revenues and profitability for these new products, distribution channels and
business models is inherently uncertain and volatile, and if we invest in the development of interactive entertainment products or distribution channels incorporating a new technology or for a new
platform that does not achieve significant commercial success, whether because of competition or otherwise, we may not recover the often substantial "up front" costs of developing and marketing those
products and distribution channels, or recover the opportunity cost of diverting management and financial resources away from other products or distribution channels. Further, our competitors may
adapt to an emerging technology or business model more quickly or effectively than we do, creating products that are technologically superior to ours, more appealing to consumers, or both.
If,
on the other hand, we elect not to pursue the development of products incorporating a new technology or for new platforms, or otherwise elect not to pursue new business models, that
achieve significant commercial success, it may have adverse consequences. It may take significant time and resources to shift product development resources to that technology, platform or business
model, as the case may be, and may be more difficult to compete against existing products incorporating that technology or for that platform or against companies using that business model.
The increasing importance of digital sales to our business exposes us to the risks of that business model,
including greater competition.
The proportion of our revenues derived from digital content delivery, as compared to traditional retail sales, continues to increase. The
increased importance of digital content delivery in our industry increases our potential competition, as the minimum capital needed to produce and publish a digitally delivered game, particularly a
new game for mobile platforms, may be significantly less than that needed to produce and publish one that is purchased through retail distribution and is played on a game console or PC. Also, while
digitally-distributed products generally have higher profit margins than retail sales, the risk profile for us, as the publisher, may be increased as business shifts to digital distribution, since the
volume of initial orders from retailers for physical discs could be reduced.
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Further,
the providers of the platforms through which we digitally distribute content are also publishers of their own content distributed on those platforms, and, therefore, a platform provider may
give priority to its own products or those of our competitors.
Competition within, and to, the interactive entertainment industry is intense, and competitors may succeed in
reducing our sales.
Within the interactive entertainment industry, we compete with other publishers of interactive entertainment software, both within and outside
the United States. Our competitors include very large corporations with significantly greater financial, marketing and product development resources than we have. Our larger competitors may be able to
leverage their greater financial, technical, personnel and other resources to provide larger budgets for development and marketing and make higher offers to licensors and developers for commercially
desirable properties, as well as adopt more aggressive pricing policies to develop more commercially successful video game products than we do. In addition, competitors with large product lines and
popular games typically have greater leverage with retailers, distributors and other customers, who may be willing to promote products with less consumer appeal in return for access to those
competitors' more popular games.
Additionally,
we compete with other forms of entertainment and leisure activities. As our business continues to expand in complexity and scope, we have increased exposure to additional
competitors, including those with access to large existing user bases and control over distribution channels. Further, it is difficult to predict and prepare for rapid changes in consumer demand that
could materially alter public preferences for different forms of entertainment and leisure activities. Failure to adequately identify and adapt to these competitive pressures could negatively impact
our business.
If we are unable to sustain traditional pricing levels for our products, our business may be negatively
impacted.
If we are unable to sustain traditional pricing levels for our console or PC titles or the associated downloadable content, whether due to
competitive pressure, because retailers or other third parties elect to price these products at a lower price, or otherwise, it could have a negative impact on our business. Further, our decisions
around the development of new game content are grounded in assumptions about eventual pricing levels. If there is price compression in the market after these decisions are made, it could have a
negative impact on our business.
If we do not continue to attract and retain skilled personnel, we will be unable to effectively conduct our
business.
Our employees are our greatest asset. As such, our success depends to a significant extent on our ability to identify, attract, hire, retain,
and utilize the abilities of qualified personnel, particularly personnel with the specialized skills needed to create and sell the high-quality, well-received content upon which our business is
substantially dependent. Our industry is generally characterized by a high level of employee mobility, competitive compensation programs, and aggressive recruiting among competitors for employees with
technical, marketing, sales, engineering, product development, creative, and/or management skills. We may have difficulties in attracting and retaining skilled personnel or may incur significant costs
in order to do so. If we are unable to attract additional qualified employees or retain and utilize the services of key personnel, it could have a negative impact on our business.
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We rely on external developers to develop some of our software products.
We rely on external software developers to develop some of our software products. Because we depend on these developers, we are subject to the
following risks:
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continuing strong demand for top-tier developers' resources, combined with the recognition they receive in connection with their work, may
cause developers who worked for us in the past either to work for a competitor in the future or to renegotiate agreements with us on terms less favorable to us;
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limited financial resources and business expertise and inability to retain skilled personnel may force developers out of business prior to
completing products for us or require us to fund additional costs;
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a competitor may acquire the business of one or more key developers or sign them to exclusive development arrangements and, in either case, we
would not be able to continue to engage such developers' services for our products, except for any period of time for which the developer is contractually obligated to complete development for us; and
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reliance on external developers reduces our visibility into, and control over, development schedules and operational outcomes compared to those
when utilizing internal development resources.
Increased
competition for skilled third-party software developers also has compelled us to agree to make significant advance payments on royalties to game developers. If the products
subject to these arrangements do not generate sufficient revenues to recover these royalty advances, we would have to write off unrecovered portions of these payments, which could negatively impact
our business. Typically, we pay developers a royalty based on a percentage of net revenues from product sales, less agreed upon deductions, but from time to time, we have agreed to pay developers
fixed per unit product royalties after royalty advances are fully recouped. To the extent that sales prices of products on which we have agreed to pay a fixed per unit royalty are marked down, it
could negatively impact our business.
We engage in strategic transactions and may encounter difficulties in integrating acquired businesses or
otherwise realizing the anticipated benefits of the transactions.
As part of our business strategy, from time to time, we acquire, make investments in, or enter into strategic alliances and joint ventures with,
complementary businesses. These transactions may involve significant risks and uncertainties, including: (1) in the case of an acquisition, (i) the potential for the acquired business to
underperform relative to our expectations and the acquisition price, (ii) the potential for the acquired business to cause our financial results to differ from expectations in any given period,
or over the longer-term, (iii) unexpected tax consequences from the acquisition, or the tax treatment of the acquired business's operations going forward, giving rise to incremental tax
liabilities that are difficult to predict, (iv) difficulty in integrating the acquired business, its operations and its employees in an efficient and effective manner, (v) any unknown
liabilities or internal control deficiencies assumed as part of the acquisition, and (vi) the potential loss of key
employees of the acquired businesses, and, (2) in the case of an investment, alliance or joint venture, (i) our ability to cooperate with our partner, (ii) our partner having
economic, business or legal interests or goals that are inconsistent with ours, and (iii) the potential that our partner may be unable to meet its economic or other obligations, which may
require us to fulfill those obligations alone. Further, any such transaction may involve the risk that our senior management's attention will be excessively diverted from our other operations, the
risk that our industry does not evolve as anticipated and that any intellectual property or personnel skills acquired do not prove to be those needed for our future
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success,
and the risk that our strategic objectives, cost savings or other anticipated benefits are otherwise not achieved.
Our debt could adversely affect our business.
As of December 31, 2017, the Company had approximately $4.4 billion of long-term debt outstanding. Our debt burden could have
important consequences, including: increasing our vulnerability to general adverse economic and industry conditions; limiting our flexibility in planning for, or reacting to, changes in our business
and our industry; requiring the dedication of a substantial portion of any cash flow from operations for the payment of principal and interest on our indebtedness, thereby reducing the availability of
cash flow to fund our operations, growth strategy, working capital, capital expenditures, future business opportunities, and other general corporate purposes; exposing us to the risk of increased
interest rates with respect to any borrowings that are at floating rates of interest; restricting us from making strategic acquisitions or causing us to make non-strategic divestitures; limiting our
ability to obtain additional financing for working capital, capital expenditures, research and development, acquisitions and general corporate or other purposes; limiting our ability to adjust to
changing market conditions; and placing us at a competitive disadvantage relative to competitors who are less highly leveraged.
Agreements
governing our indebtedness, including our credit agreement and the indentures governing our notes, impose operating and financial restrictions on our activities. These
restrictions require us to comply with or maintain certain financial tests and ratios. In addition, under certain circumstances, our credit agreement and indentures may limit or prohibit other
activities. In addition, we are required to maintain a maximum total net debt ratio calculated pursuant to a financial maintenance covenant under our credit agreement. Further, various risks,
uncertainties and events beyond our control could affect our ability to comply with these covenants. Failure to comply with any of the covenants in our financing agreements could result in a default
under those agreements and under other agreements containing cross-default provisions. Such a default would permit lenders to accelerate the maturity of the debt under these agreements. Under these
circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations, including our obligations under our credit agreement or
the indentures governing our notes. In addition, the limitations imposed by financing agreements on our ability to incur additional debt and to take other actions might significantly impair our
ability to obtain other financing. There can be no assurances that we will be granted waivers or amendments to these agreements if for any reason we are unable to comply with these agreements or that
we will be able to refinance our debt on terms acceptable to us, or at all.
We may not be able to borrow funds under our revolving credit facility if we are not able to meet the
conditions to borrowing under that facility.
We view our revolving credit facility as a source of available liquidity. This facility contains various conditions, covenants and
representations with which we must be in compliance in order to borrow funds. We have not borrowed under the revolving credit facility to date, but if we wish to do so, there can be no assurance that
we will be in compliance with these conditions, covenants and representations at such time.
We may be involved in legal proceedings that have a negative impact on our business.
From time to time, we are involved in claims, suits, government investigations, audits and proceedings arising in the ordinary course of our
business, including actions with respect to intellectual property, competition and antitrust matters, privacy matters, tax matters, labor and employment matters, unclaimed property matters, compliance
and commercial claims. In addition, negative consumer sentiment about our business practices may result in inquiries or investigations from
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regulatory
agencies and consumer groups, as well as litigation, which, regardless of their outcome, may be damaging to our reputation.
Claims,
suits, government investigations, audits and proceedings are inherently difficult to predict and their results are subject to significant uncertainties, many of which are outside
of our control. Regardless of the outcome, such legal proceedings can have a materially adverse impact on us due to legal costs, diversion of management resources and other factors. In addition, it is
possible that a resolution of one or more such proceedings could result in reputational harm, substantial settlements, judgments, fines or penalties, criminal sanctions, consent decrees or orders
preventing us from offering
certain features, functionalities, products or services, requiring us to change our development process or other business practices.
There
is also inherent uncertainty in determining reserves for these matters. There is significant judgment required in the analysis of these matters, including assessing the probability
of potential outcomes and determining whether a potential exposure can be reasonably estimated. In making these determinations, we, in consultation with outside counsel, examine the relevant facts and
circumstances on a quarterly basis assuming, as applicable, a combination of settlement and litigated outcomes and strategies. Further, it may take time to develop factors on which reasonable
judgments and estimates can be based. If we fail to establish appropriate reserves, our business could be negatively impacted.
Issues with the toys, accessories or hardware peripherals utilized in certain of our games may lead to
product liability, personal injury or property damage claims, recalls, replacements of products, or regulatory actions by governmental authorities.
We may experience issues with toys, accessories or peripherals that may lead to product liability, personal injury or property damage claims,
recalls, replacements of products, or regulatory actions by governmental authorities. Any of these activities could result in increased governmental scrutiny, harm to our reputation, reduced demand by
consumers for our products, decreased willingness by our customers to purchase, or by our partners to provide marketing support for, those products, denial or increased cost for insurance coverage, or
additional safety and testing requirements, any of which could negatively impact our business.
Lawsuits have been filed, and may continue to be filed, against publishers of interactive entertainment
software products.
In prior years, lawsuits have been filed against numerous interactive entertainment companies, including against us, by the families of victims
of violence, alleging that interactive entertainment products influence the behavior of the perpetrators of such violence. These lawsuits have been dismissed, but similar additional lawsuits could be
filed in the future. Although our general liability insurance carrier has agreed to defend lawsuits of this nature with respect to the prior lawsuits, it is uncertain whether insurance carriers would
do so in the future, or if such insurance carriers would cover all or any amounts for which we might be liable if such future lawsuits are not decided in our favor. Further, any such lawsuit could
result in increased governmental scrutiny, harm to our reputation, reduced demand by consumers for our products, or decreased willingness by our customers to purchase, or by our partners to provide
marketing support for, those products. Such results could divert development and management resources, increase legal fees and other costs and have other negative impacts on our business.
We are exposed to seasonality in the sale of our products.
The interactive entertainment industry is somewhat seasonal, with the highest levels of consumer demand occurring during the year-end holiday
buying season in the fourth quarter of the calendar year. As a result, our sales have historically been highest during the second half of the year, particularly for
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our
Activision segment. Receivables and credit risk are likewise higher during the second half of the year, as retailers increase their purchases of our products in anticipation of the holiday season.
Delays in development, approvals or manufacturing could affect the timing of the release of products, causing us to miss key selling periods such as the year-end holiday buying season, which could
negatively impact our business.
Our business may be harmed if our distributors, retailers, development and licensing partners, or other third
parties with whom we do business act in ways that put our brand at risk.
In many cases, our business partners are given access to sensitive and proprietary information or control over our intellectual property in
order to provide services and support to our team. These third parties may misappropriate our information or intellectual property and engage in unauthorized use of it or otherwise act in a way that
places our brand at risk. The failure of these third parties to provide adequate services and technologies, the failure of third parties to adequately maintain or update their services and
technologies or the misappropriation or misuse of this information or intellectual property could result in a disruption to our business operations or an adverse effect on our reputation, and may
negatively impact our business.
We use open source software in connection with certain of our games and services, which may pose particular
risks to our proprietary software, products, and services in a manner that could have a negative impact on our business.
We use open source software in connection with certain of our games and the services we offer. Some open source software licenses require users
who distribute open source software as part of their software to publicly disclose all or part of the source code to such software or make available any derivative works of the open source code on
unfavorable terms or at no cost. The terms of various open source licenses have not been interpreted by courts, and there is a risk that such licenses could be construed in a manner that imposes
unanticipated conditions or restrictions on our use of the open source software. Were it determined that our use was not in compliance with a particular license, we may be required to release our
proprietary source code, pay damages for breach of contract, re-engineer our games or products, discontinue distribution in the event re-engineering cannot be accomplished on a timely basis, or take
other remedial action that may divert resources away from our game development efforts, any of which could negatively impact our business.
We may be subject to intellectual property claims.
As the number of interactive entertainment software products increases and the features and content of these products continue to overlap,
software developers have increasingly become subject to infringement claims. Further, many of our products are highly realistic and feature materials that are based on real-world things or people,
which may also be the subject of claims of infringement of the intellectual property of others, including right of publicity, trademark, and unfair competition claims. In addition, our products often
utilize complex, cutting-edge technology that may become subject to emerging intellectual property claims of others. Although we take steps to avoid knowingly violating the intellectual property
rights of others, third parties may still claim infringement, particularly since there are many companies that focus exclusively on enforcing patent rights.
From
time to time, we receive communications from third parties regarding such claims. Existing or future infringement claims against us, whether meritorious or not, may be time
consuming, distracting to management and expensive to defend. Further, intellectual property litigation or claims could force us to do one or more of the
following:
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cease selling, incorporating, supporting or using products or services that incorporate the challenged intellectual property;
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obtain a license from the holder of the infringed intellectual property, which, if available at all, may not be available on commercially
favorable terms;
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redesign the affected interactive entertainment software products, which could result in additional costs, delay introduction and possibly
reduce commercial appeal of the affected products; or
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pay damages to the holder of the infringed intellectual property for past infringements.
Our products are subject to the threat of piracy and unauthorized copying, and inadequate intellectual
property laws and other protections could prevent us from enforcing or defending our proprietary technologies. We may also face legal risks arising out of user-generated content. Further, the use of
unauthorized "cheat" programs or the use of other unauthorized software modifications by users could impact multiplayer gameplay or lead to reductions in microtransactions in our games.
We regard our software as proprietary and rely on a variety of methods, including a combination of copyright, patent, trademark and trade secret
laws and employee and third-party nondisclosure agreements, to protect our proprietary rights. We own or license various copyrights, patents, trademarks and trade secrets. The process of registering
and protecting these rights in various jurisdictions is expensive and time-consuming. Further, we are aware that some unauthorized copying occurs, and if a significantly greater amount of unauthorized
copying of our software products were to occur, it could negatively impact our business.
Piracy
is a persistent problem for us, and policing the unauthorized sale, distribution and use of our products is difficult, expensive, and time-consuming. Further, the laws of some
countries in which our products are, or may be, distributed either do not protect our products and intellectual property rights to the same extent as the laws of the United States, or are poorly
enforced. In addition, though we take steps to make the unauthorized sale, distribution and use of our products more difficult and to enforce and police our rights, as do the manufacturers of consoles
and the operators of other platforms on which many of our games are played, our efforts and the efforts of the console manufacturers and platform operators may not be successful in controlling the
piracy of our products in all instances. Technology designed to circumvent the protection measures used by console manufacturers and platform operators or by us in our products, the increasing
availability of broadband access to the Internet, the refusal of Internet service providers to remove infringing content in certain instances and the ability to download pirated copies of games from
various Internet sites and peer-to-peer networks could result in an expansion in piracy.
In
addition, "cheating" programs or other unauthorized software tools and modifications that enable consumers to cheat in games could negatively impact the volume of microtransactions or
purchases of downloadable content. In addition, vulnerabilities in the design of our applications and of the platforms upon which they run could be discovered after their release, which may result in
lost revenue opportunities. This may lead to lost revenues from paying consumers or increased cost of developing technological measures to respond to these, either of which could negatively impact our
business.
We
also cannot be certain that existing intellectual property laws will provide adequate protection for our products in connection with emerging technologies.
Due to our reliance on third-party platforms, platform providers are frequently able to influence our
products and costs.
Generally, when we develop interactive entertainment software products for hardware platforms offered by Sony, Microsoft, or Nintendo, the
physical products are replicated exclusively by that hardware manufacturer or their approved replicator. The agreements with these manufacturers include
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certain
provisions, such as approval rights over all software products and related promotional materials and the ability to change the fee they charge for the manufacturing of products, which allow
the hardware manufacturers substantial influence over the cost and the release schedule of such interactive entertainment software products. In addition, because each of the manufacturers is also a
publisher of games for its own hardware platforms and manufactures products for all of its other licensees, a manufacturer may give priority to its own products or those of our competitors.
Accordingly, Sony, Microsoft, or Nintendo could cause unanticipated delays in the release of our products, as well as increases to projected development, manufacturing, marketing or distribution
costs, any of which could negatively impact our business.
The
platform providers also control the networks over which consumers purchase digital products and services for their platforms and through which we provide online game capabilities for
our console platform products. The control that the platform providers have over the fee structures and/or retail pricing for products and services for their platforms and online networks could impact
the volume of purchases of our products made over their networks and our profitability. With respect to certain downloadable content and microtransactions, the networks provided by these platform
providers are the exclusive means of selling and distributing this content. Further, increased competition for limited premium "digital shelf space" has placed the platform providers in an
increasingly better position to negotiate favorable terms of sale. If the platform provider establishes terms that restrict our offerings on its platform, or significantly impact the financial terms
on which these products or services are offered to our customers, or does not renew our license or approve the inclusion of online capabilities in our console products, our business could be
negatively impacted.
We
also derive significant revenues from the distribution of free-to-play games on third-party mobile and web platforms such as the Apple App Store, the Google Play Store, and Facebook,
and most of the virtual currency we sell is purchased using the payment processing systems of these platform providers. These platforms also serve as significant online distribution platforms for our
games. If these platforms modify their current discovery mechanisms, communication channels available to developers, operating systems, terms of service or other policies (including fees), or they
develop their own competitive offerings, our business could be negatively impacted. Further, if these platform providers
are required to change how they label free-to-play games or take payment for in-app purchases or change how the personal information of consumers is made available to developers, our business could be
negatively impacted.
Our business is highly dependent on the success and availability of video game platforms manufactured by
third parties, as well as our ability to develop commercially successful products for these platforms.
We derive a substantial portion of our revenues from the sale of products for play on video game platforms manufactured by third parties, such
as Sony's PS4, Microsoft's Xbox One, and Nintendo's Wii U and Switch. For example, sales of products for consoles accounted for 34% of our consolidated net revenues in 2017. The success of our console
business is driven in large part by our ability to accurately predict which platforms will be successful in the marketplace and our ability to develop commercially successful products for these
platforms. We also rely on the availability of an adequate supply of these video game consoles and the continued support for these consoles by their manufacturers. We must make product development
decisions and commit significant resources well in advance of the anticipated introduction of a new platform, and development costs for new console platforms may be greater than those costs for the
then-current console platforms. If increased costs are not offset by higher revenues and other cost efficiencies, our business could be negatively impacted. If the platforms for which we develop new
software products or modify existing products do not attain significant market acceptance, we may not be able to recover our development costs, which could be significant.
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The importance of retail sales to our business exposes us to the risks of that business model.
In the United States and Canada, our "boxed" products are often sold on a direct basis to mass-market retailers, consumer electronics stores,
discount warehouses and game specialty stores. Our "boxed" products are sold internationally on a direct-to-retail basis, through third-party distribution and licensing arrangements, and through our
wholly-owned European distribution subsidiaries. Our sales are made primarily on a purchase order basis without long-term agreements or other forms of commitments, and our retail customers and
distributors have generally been reducing the levels of inventory they are willing to carry. The loss of, or significant reduction in sales to, any of Activision's principal retail customers or
distributors could have adverse consequences. In addition, having such a large portion of our retail total net revenues concentrated in a few customers reduces our negotiating leverage with these
customers.
Further,
the concentration of sales in a small number of large customers also makes us more vulnerable to collection risk if one or more of these large customers becomes unable to pay
for our products or seeks protection under the bankruptcy laws. Retailers and distributors in the interactive entertainment industry have from time to time experienced significant fluctuations in
their businesses and a number of them have failed. Challenging economic conditions may impair the ability of our customers to pay for products they have purchased and, as a result, our reserves for
doubtful accounts and write-off of accounts receivable could increase and, even if increased, may turn out to be insufficient. Moreover, even in cases where we have insurance to protect against a
customer's bankruptcy, insolvency or liquidation, this insurance typically contains a significant deductible and co-payment obligation, and does not cover all instances of non-payment. Further, the
insolvency or business failure of other types of business partners could result in disruptions to the manufacturing or distribution of our products or the cancellation of contractual arrangements that
we consider to be favorable. A payment default by, or the insolvency or business failure of, a significant business partner could negatively impact our business.
Moreover,
the importance of retail sales to our business exposes us to the risk of product returns and price protection with respect to our distributors and retailers. In some cases,
return policies allow distributors and retailers to return defective, shelf-worn, damaged and certain other products in accordance with terms granted. Price protection, when granted and applicable,
allows these distributors and retailers a credit against amounts owed with respect to merchandise unsold by them. We may permit product returns from, or grant price protection to, distributors and
retail customers who meet certain conditions. These conditions may include compliance with applicable payment terms, delivery of weekly inventory and sales information and consistent participation in
the launches of premium title releases. We may also consider other factors, including the facilitation of slow-moving inventory and other industry factors. Activision also offers a 90-day limited
warranty to end users that Activision products will be free from manufacturing defects. Although we maintain a reserve for returns and price protection, and although we may place limits on product
returns and price protection, we could be forced to accept substantial product returns and provide substantial price protection to maintain our relationships with retailers and our access to
distribution channels. We face similar issues and risks, including exposure to risk of chargebacks, with respect to end users to whom we sell products directly, whether through our proprietary online
gaming service or otherwise.
Further,
retailers typically have a limited amount of shelf space and promotional resources, and there is intense competition for high-quality retail shelf space and promotional support
from retailers. Competition for shelf space may intensify and may require us to increase our marketing expenditures. Retailers with limited shelf space typically devote the most and highest quality
shelf space to those products expected to be best sellers. We cannot be certain that our new products will consistently achieve such "best seller" status. Due to increased competition for limited
shelf space, retailers and distributors are in an increasingly better position to negotiate favorable terms of sale, including price discounts, price protection, marketing and display fees and product
return policies. Our products
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constitute
a relatively small percentage of most retailers' sales volume. We cannot be certain that retailers will continue to purchase our products or provide those products with adequate levels of
shelf space and promotional support on acceptable terms.
Additionally,
we make provisions for retail inventory price protection based upon certain assumed lowest prices and if competitive pressures force us to lower our prices below those
levels, it could similarly have a negative impact on our business. Further, because we pay a licensing fee to the console hardware manufacturer for each physical copy of a product manufactured for
that manufacturer's game platform regardless of whether that product is actually sold, if we overestimate demand and make too many physical "boxed" copies of any title, we will incur unrecoverable
manufacturing costs for unsold units.
We are a global company and are subject to the risks and uncertainties of conducting business outside the
U.S.
We conduct business throughout the world, and we derive a substantial amount of our revenues and profits from international trade, particularly
from Europe, Asia and Australia. Moving forward, we expect that international sales will continue to account for a significant portion of our total revenues and profits and, moreover, that sales in
emerging markets in Asia and elsewhere will be an increasingly important part of our international sales. As such, we are, and may be increasingly, subject to risks inherent in foreign trade
generally, as well as risks inherent in doing business in emerging markets, including increased tariffs and duties, compliance with economic sanctions, fluctuations in currency exchange rates,
shipping delays, increases in transportation costs, international political, regulatory and economic developments, unexpected changes to laws, regulatory requirements and enforcement on us and our
platform partners and differing local business practices, all of which may impact profit margins or make it more difficult, if not impossible, for us to conduct business in foreign markets.
A
deterioration in relations between either us or the United States and any country in which we have significant operations or sales, or the implementation of government regulations in
such a country, could result in the adoption or expansion of trade restrictions, including economic sanctions, that could have a negative impact on our business. For instance, to operate in China, all
games must have regulatory approval. A decision by the Chinese government to revoke its approval for any of our games or to decline to approve any products we desire to sell in China in the future
could have a negative impact on our business. Additionally, in the past, legislation has been implemented in China that has required modifications to our software. The future implementation of similar
laws or regulations in China or any other country in which we have operations or sales may restrict or prohibit the sale of our products or may require engineering modifications to our products that
are not cost-effective, if even feasible at all, or could degrade the consumer experience to the point where consumers cease to purchase such products. Further, the enforcement of regulation of mobile
and other games with an
online element in China remains uncertain, and further changes, either in the regulations or their enforcement, could have a negative impact on our business in China.
We
are also subject to risks that our operations outside the United States could be conducted by our employees, contractors, third-party partners, representatives or agents in ways that
violate the Foreign Corrupt Practices Act, the U.K. Anti-Bribery Act or other similar anti-bribery laws, as well as the 2017 U.K. Criminal Finances Act or other similar financial crime laws. While we
have policies and procedures, as well as training for our employees, intended to secure compliance with these laws, our employees, contractors, third-party partners, representatives or agents may take
actions that violate our policies. Moreover, it may be more difficult to oversee the conduct of any such persons who are not our employees, potentially exposing us to greater risk from their actions.
Additionally,
in June 2016, voters in the United Kingdom approved an advisory referendum to withdraw from the European Union (the "E.U."), commonly referred to as "Brexit." The United
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Kingdom
commenced withdrawal proceedings with the E.U. in March 2017. These proceedings have created political and economic uncertainty, particularly in the United Kingdom and the E.U., and this
uncertainty may persist for years. The uncertainty surrounding the terms of the United Kingdom's withdrawal and its consequences could adversely impact consumer and investor confidence and the level
of sales of discretionary items, including our products. Any of these effects could negatively impact our business.
In
addition, cultural differences may affect consumer preferences and limit the international popularity of games that are popular in the U.S, or require us to modify the content of the
games or the method by which we charge our customers for the games to be successful. If we do not correctly assess consumer preferences in the countries in which we sell our products, or if the other
risks discussed herein come to fruition, it could negatively impact our business.
Changes in tax rates or exposure to additional tax liabilities could negatively impact our business.
We are subject to income taxes in the United States and other jurisdictions. In the ordinary course of business there are many transactions and
calculations where the ultimate income tax determination is uncertain. Significant judgment is required in determining our worldwide income tax provision. Although we believe our income tax estimates
are reasonable, the ultimate outcomes may
have a material adverse effect on the Company's consolidated financial position, liquidity, or results of operations.
Our
income tax liability and effective tax rate could be adversely affected by a variety of factors, including changes in our business, the mix of earnings in countries with differing
statutory tax rates, changes in tax laws or tax rulings, changes in interpretations of existing laws, or developments in tax examinations or investigations. Any of these factors could have a material
adverse effect on the Company's consolidated financial position, liquidity, or results of operations or require us to change the manner in which we operate our business. The tax regimes we are subject
to or operate under are unsettled and may be subject to significant change. The E.U. and its member states, and a number of other countries are actively pursuing fundamental changes to the tax laws
applicable to multinational companies like us. Furthermore, tax authorities may choose to examine or investigate our tax reporting or tax liability, including under transfer pricing or permanent
establishment theories. These proceedings may lead to adjustments or proposed adjustments to our income taxes or provisions for uncertain tax positions.
On
December 22, 2017, tax reform legislation known as the Tax Cuts and Jobs Act (the "U.S. Tax Reform Act") was enacted in the United States. The U.S. Tax Reform Act introduces
significant changes to U.S. income tax law that will have a meaningful impact on our financial position and effective tax rate. Accounting for the income tax effects of the U.S. Tax Reform Act
requires complex new calculations to be performed and significant judgments in interpreting the legislation. Additional guidance may be issued on how the provisions of the U.S. Tax Reform Act will be
applied or otherwise administered that is different from our interpretation. Due to the timing of enactment and the complexity in determining the income tax effects of the U.S. Tax Reform Act, we made
reasonable estimates of the effects and recorded provisional amounts in our financial statements for the year ended December 31, 2017. We may make adjustments to the provisional amounts as we
collect and prepare the data necessary to finalize our calculations, interpret the U.S. Tax Reform Act and any additional guidance issued, and consider the effects of any additional actions we may
take as a result of the U.S. Tax Reform Act. These adjustments could materially affect our financial position and results of operations as well as our effective tax rate in the period in which these
adjustments are made.
In
late 2017, we received a Notice of Reassessment from the French Tax Authority ("FTA") related to transfer pricing concerning intercompany transactions involving one of our French
subsidiaries for the 2011 through 2013 tax years. We disagree with the proposed assessment and intend to vigorously
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contest
it. We plan to pursue all remedies available to us to successfully resolve this matter, including administrative remedies with the FTA, and judicial remedies, if necessary. While we believe
our tax provisions at December 31, 2017 are appropriate, until such time as this matter is ultimately resolved we could be subject to significant additional tax liabilities. In addition to the
risk of additional tax for years 2011 through 2013, if litigation regarding this matter were adversely determined and/or if the FTA were
to seek adjustments of a similar nature for subsequent years, we could be subject to significant additional tax liabilities.
We
are also required to pay taxes other than income taxes, such as payroll, sales, use, value-added, net worth, property, and goods and services taxes, in both the United States and
various other jurisdictions. Tax authorities regularly examine these non-income taxes. The outcomes from these examinations, changes in the business, changes in applicable tax rules or other tax
matters may have a negative impact on our business.
Fluctuations in currency exchange rates could negatively impact our business.
We transact business in various currencies other than the U.S. dollar and have significant international sales and expenses denominated in
currencies other than the U.S. dollar, subjecting us to currency exchange rate risks. A substantial portion of our international sales and expenses are denominated in local currencies, including
euros, British pounds, Australian dollars, South Korean won, Chinese yuan, and Swedish krona, which could fluctuate against the U.S. dollar. Since we have significant international sales, but incur
the majority of our costs in the United States, the impact of foreign currency fluctuations, particularly the strengthening of the U.S. dollar, may have an asymmetric and disproportional impact on our
business. We have, in the past, utilized currency derivative contracts to hedge certain foreign exchange exposures and managed these exposures with natural offsets. However, there can be no assurance
that we will continue our hedging programs, or that we will be successful in managing exposure to currency exchange rate risks whether or not we do so.
Our games are subject to scrutiny regarding the appropriateness of their content. If we fail to receive our
target ratings for certain titles, or if our retailers refuse to sell such titles due to what they perceive to be objectionable content, it could have a negative impact on our business.
Our console and PC games are subject to ratings by the Entertainment Software Rating Board (the "ESRB"), a self-regulatory body based in the
U.S. that provides U.S. and Canadian consumers of interactive entertainment software with ratings information, including information on the content in such software, such as violence, nudity or sexual
content, along with an assessment of the suitability of the content for certain age groups. Certain other countries have also established content rating systems as prerequisites for product sales in
those countries. In addition, certain stores use other ratings systems, such as Apple's use of its proprietary "App Rating System" and Google Play's use of the International Age Rating Coalition
(IARC) rating system. If we are unable to obtain the ratings we have targeted for our products, it could have a negative impact on our business. In some instances, we may be required to modify our
products to comply with the requirements of the rating systems, which could delay or disrupt the release of any given product, or may prevent its sale altogether in certain territories. Further, if
one of our games is "re-rated" for any reason, a ratings organization could
require corrective actions, which could include a recall, retailers could refuse to sell it and demand that we accept the return of any unsold or returned copies or consumers could demand a refund for
copies previously purchased.
Additionally,
retailers may decline to sell interactive entertainment software containing what they judge to be graphic violence or sexually explicit material or other content that they
deem inappropriate for their businesses, whether because a product received a certain rating by the ESRB or other content rating system, or otherwise. If retailers decline to sell our products based
upon their opinion that they contain objectionable themes, graphic violence or sexually explicit material or other generally
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objectionable
content, we might be required to modify particular titles or forfeit the revenue opportunity of selling such titles with that retailer.
Further,
throughout the history of the interactive entertainment industry, many interactive software products have included hidden content and/or hidden gameplay features, some of which
have been accessible through the use of in-game codes or other technological means, that are intended to enhance the gameplay experience. In some cases, such undisclosed content or features have been
considered to be objectionable. While publishers are required to disclose pertinent hidden content during the ESRB ratings process, in a few cases, publishers have failed to disclose hidden content,
and the ESRB has required the recall of the game, changed the rating or associated content descriptors originally assigned to the product, required the publisher to change the game or game packaging
and/or imposed fines on the publisher. Retailers have on occasion reacted to the discovery of such undisclosed content by removing these games from their shelves, refusing to sell them and demanding
that their publishers accept them as product returns. Likewise, some interactive entertainment software consumers have reacted to the revelation of undisclosed content by refusing to purchase such
games, demanding refunds for games they have already purchased, refraining from buying other games published by the company whose game contained the objectionable material, and, on at least one
occasion, filing a lawsuit against the publisher of the product containing such content.
We
have implemented preventive measures designed to reduce the possibility of objectionable undisclosed content from appearing in the interactive software products we publish.
Nonetheless, these preventive measures are subject to human error, circumvention, overriding and reasonable resource constraints. If an interactive software product we publish is found to contain
undisclosed content, we could be subject to any of these consequences.
Our business, products, and distribution are subject to increasing regulation in key territories. If we do
not successfully respond to these regulations, our business could be negatively impacted.
Legislation is continually being introduced, and litigation and regulatory enforcement actions are taking place, that may affect the way in
which we, and other industry participants, may offer content and features, and distribute and advertise our products. The video game industry continues to evolve, and new and innovative business
opportunities are often subject to new attempts at regulation. Many foreign countries, such as China and Germany, have laws that permit governmental entities to restrict or prohibit marketing or
distribution of interactive entertainment software products because of the content therein (and similar legislation has been introduced at one time or another at the federal and state levels in the
United States). Further, the growth and development of electronic commerce and virtual items and currency may prompt calls for more stringent consumer protection laws that may impose additional
burdens or limitations on operations of companies such as ours conducting business through the Internet and mobile devices. We are subject to laws and regulations related to protection of minors,
consumer privacy, accessibility, advertising, taxation, payments, intellectual property, distribution, and antitrust, among others. Also, existing laws or new laws regarding the marketing of in-app
purchases, regulation of currency, banking institutions, virtual currencies, unclaimed property, and money laundering may be interpreted to cover virtual currency or goods. Furthermore, the growth and
development of electronic commerce and virtual items and currency may prompt calls for more stringent consumer protection laws that may impose additional burdens or limitations on operations of
companies such as ours conducting business through the Internet and mobile devices. The adoption and enforcement of legislation that restricts the marketing, content, business model, or sales of our
products in countries in which we do business may harm the sales of our products, as the products we are able to offer to our customers and the size of the potential market for our products may be
limited. We may be required to modify certain product development processes or products or alter our marketing strategies to comply with regulations, which could be costly or delay the release of our
products. The laws and regulations affecting our products vary by territory and may be inconsistent with one another,
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imposing
conflicting or uncertain restrictions. Failure to comply with any applicable legislation may also result in government-imposed fines or other penalties, as well as harm to our reputation.
Moreover, the public dialogue concerning interactive entertainment may have an adverse impact on our reputation and consumers' willingness to purchase our products. Because the King Acquisition has
significantly increased our user population, it may subject us to laws and regulations in additional jurisdictions and exacerbate the potential adverse impact on our business.
Although
we have structured and operate our skill tournaments with applicable laws in mind, including any applicable laws relating to gambling, and believe that playing these games does
not constitute gambling, our skill tournaments could in the future become subject to gambling-related rules and regulations and expose us to civil and criminal penalties. We also sometimes offer
consumers of our
online and casual games various types of contests and promotional opportunities. We are subject to laws in a number of jurisdictions concerning the operation and offering of such activities and games,
many of which are still evolving and could be interpreted in ways that could harm our business. Further, some of our online games and other services include random digital item mechanics, which may
become subject to regulations in various jurisdictions. If these were to occur, we might be required to seek licenses, authorizations, or approvals from relevant regulators, the granting of which may
be dependent on us meeting certain capital and other requirements, and we may be subject to additional regulation and oversight, such as reporting to regulators, all of which could significantly
increase our operating costs. Changes in current laws or regulations or the imposition of new laws and regulations in the United States, Europe, or elsewhere regarding these activities may lessen the
growth of casual game services and impair our business.
Change in government regulations relating to the Internet could negatively impact our business.
We rely on our consumers' access to significant levels of Internet bandwidth for the sale and digital delivery of our content and the
functionality of our games with online features. Changes in laws or regulations that adversely affect the growth, popularity or use of the Internet, including laws impacting "net neutrality," could
decrease the demand for our products and services or increase our cost of doing business. Although certain jurisdictions have implemented laws and regulations intended to prevent Internet service
providers from discriminating against particular types of legal traffic on their networks, other jurisdictions may lack such laws and regulations or repeal existing laws or regulations. For example,
on December 14, 2017, the Federal Communications Commission voted to repeal net neutrality regulations in the U.S. Given uncertainty around these rules, including changing interpretations,
amendments, or repeal, coupled with the potentially significant political and economic power of local Internet service providers and the relatively significant level of Internet bandwidth access our
products and services require, we could experience discriminatory or anti-competitive practices that could impede our growth, cause us to incur additional expenses, or otherwise negatively impact our
business.
The laws and regulations concerning data privacy are continually evolving. Failure to comply with these laws
and regulations could harm our business.
Consumers play certain of our games online using third-party platforms and networks, through online social platforms, and on mobile devices. We
collect and store information about our consumers of these gamesboth personally identifying and non-personally identifying information. We are subject to laws from a variety of
jurisdictions regarding privacy and the protection of this information. For example, the E.U. has traditionally taken a broader view than the United States and certain other jurisdictions as to what
is considered personal information and has imposed greater obligations under data privacy regulations. The U.S. Children's Online Privacy Protection Act ("COPPA") also regulates the collection, use,
and disclosure of personal information from children under 13 years of age. Failure
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to
comply with COPPA may increase our costs, subject us to expensive and distracting government investigations, and result in substantial fines.
Data
privacy protection laws are rapidly changing and likely will continue to do so for the foreseeable future, which could impact our approach to operating and marketing our games. For
example, the E.U.'s General Data Protection Regulation (the "GDPR"), which will come into effect in May 2018, imposes a range of new compliance obligations for us and other companies with European
users, and increases financial penalties for noncompliance significantly. Regulators have not yet issued clear guidance for many of these new compliance obligations. The U.S. government, including the
Federal Trade Commission and the Department of Commerce, is continuing to review the need for greater regulation over the collection of personal information and information about consumer behavior on
the Internet and on mobile devices, and the E.U. has proposed reforms to its existing data protection legal framework, including the GDPR. Various government and consumer agencies worldwide have also
called for new regulation and changes in industry practices. In addition, in some cases, we are dependent upon our platform providers to solicit, collect and provide us with information regarding our
consumers that is necessary for compliance with these various types of regulations.
Player
interaction with our games is subject to our privacy policies, end user license agreements ("EULAs"), and terms of service. If we fail to comply with our posted privacy policies,
EULAs, or terms of service, or if we fail to comply with existing privacy-related or data protection laws and regulations, it could result in proceedings or litigation against us by governmental
authorities or others, which could result in fines or judgments against us, damage our reputation, impact our financial condition and harm our business. If regulators, the media, or consumers raise
any concerns about our privacy and data protection or consumer protection practices, even if unfounded, this could also result in fines or judgments against us, damage our reputation, negatively
impact our financial condition, and damage our business.
We depend on servers to operate our games with online features and our proprietary online gaming service. If
we were to lose server functionality for any reason, our business may be negatively impacted.
Our business relies on the continuous operation of servers, some of which are owned and operated by third parties. Although we strive to
maintain more than sufficient server capacity, and provide for active redundancy in the event of limited hardware failure, any broad-based catastrophic server malfunction, a significant
service-disrupting attack or intrusion by hackers that circumvents security measures, a failure of disaster recovery service or the failure of a company on which we are relying for server capacity to
provide that capacity for whatever reason would likely degrade or interrupt the functionality of our games with online features, and could prevent the
operation of such games altogether, any of which could result in the loss of sales for, or in, such games. This risk is particularly pronounced with respect to the mobile games published by King,
which rely on a small number of third-party owned data centers located in one city, or with respect to the functioning of our proprietary online gaming service, Blizzard Battle.net, the disruption of
which could prevent Blizzard from delivering content digitally or render all of Blizzard's games, as well as
Destiny 2
PC content, unavailable.
We
also rely on networks operated by third parties, such as the PlayStation Network, Xbox Live and Steam, for the sale and digital delivery of downloadable console and PC game content
and the functionality of our games with online features. Similarly, we rely on the continued operation of the Apple App Store, the Google Play Store, and Facebook for the sale of virtual currency for
our free-to-play games. An extended interruption to any of these services could adversely affect our ability to sell and distribute our digital products and operate our games with online features,
negatively impacting our business.
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Further,
insufficient server capacity could also negatively impact our business. Conversely, if we overestimate the amount of server capacity required by our business, we may incur
additional operating costs.
We rely on complex information technology systems and networks to operate our business. Any significant data
breach or system or network disruption could negatively impact our business.
In the course of our day-to-day business, we and third parties operating on our behalf create, store, and/or use commercially sensitive
information, such as the source code and game assets for our interactive entertainment software products and confidential information with respect to our customers, consumers, and employees. A
malicious intrusion by hackers or other breach of the systems on which such source code and assets, account information (including personally identifiable information) and other sensitive data
(including credit card information maintained in a proprietary database) is stored could lead to piracy of our software, fraudulent activity, disclosure or misappropriation of, or access to, our
customers', consumers' or employees' personally identifiable information or our own sensitive business data. We have implemented programs intended to secure our data and systems and prevent
unauthorized access to, or loss of, sensitive data. However, because these attacks may remain undetected for prolonged periods of time and the techniques used by criminal hackers and other third
parties to breach systems change frequently, we may be unable to anticipate these techniques or implement adequate preventative measures. A data intrusion into a server for a game with online features
or for our proprietary online gaming service could also disrupt the operation of such game or platform. If we are subject to data security breaches, or a security-related incident that
materially disrupts the availability of our products and services, we may have a loss in sales or subscriptions or be forced to pay damages or incur other costs, including from the implementation of
additional security measures, or suffer reputational damage. Additionally, while we maintain insurance policies, they may be insufficient to reimburse us for all losses or all types of claims that may
be caused by data breaches or system or network disruptions. Moreover, if there were a public perception that our data protection measures are inadequate, whether or not the case, it could result in
reputational damage and potential harm to our business relationships or the public perception of our business model. In addition, such data security breaches may subject us to legal claims or
proceedings, including regulatory investigations and actions, especially if there is loss, disclosure, or misappropriation of, or access to, our customers' credit card or other sensitive or personally
identifiable information.
Our reported financial results could be significantly impacted by changes in financial accounting standards
or by the application of existing or future accounting standards to our business as it evolves.
Our reported financial results are impacted by the accounting policies promulgated by the SEC and national accounting standards bodies and the
methods, estimates and judgments that we use in applying our accounting policies. Policies affecting revenue recognition have affected, and could further significantly affect, the way we report
revenues related to our products and services. We recognize a majority of the revenues from bundled sales (
i.e.
, video games that include an online
service component) on a deferred basis over an estimated service period for such games. In addition, we defer the cost of revenues of those products. Further, as we increase our downloadable content
and add new features to our online services, our estimate of the service period may change and we could be required to recognize revenues, and defer related costs, over a shorter or longer period of
time. As we enhance, expand and diversify our business and product offerings, the application of existing or future financial accounting standards, particularly those relating to the way we account
for revenues and taxes, could have a significant impact on our reported net revenues, net income and earnings per share under accounting principles generally accepted in the United States in any given
period.
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Provisions in our corporate documents and Delaware state law could delay or prevent a change of control.
Our Amended and Restated Bylaws contain a provision regulating the ability of shareholders to bring matters for action before annual and special
meetings. The regulations on shareholder action could make it more difficult for any person seeking to acquire control of the Company to obtain shareholder approval of actions that would support this
effort. In addition, our
Third Amended and Restated Certificate of Incorporation authorizes the issuance of so-called "blank check" preferred stock. This ability of our Board of Directors to issue and fix the rights and
preferences of preferred stock could effectively dilute the interests of any person seeking control or otherwise make it more difficult to obtain control.
Historically, our stock price has been highly volatile.
The trading price of our common stock has been, and could continue to be, subject to wide fluctuations in response to many factors, including
for example, but without limitation:
-
-
quarter-to-quarter variations in the results of our operations;
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the announcement of new products;
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the announcement of lower prices on competing products;
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product development or release schedules;
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general conditions in the computer, software, entertainment, media or electronics industries, or in the worldwide economy;
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announcements of developments in the overall worldwide market for interactive entertainment, including announcements of industry sales data;
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the timing of the introduction of new platforms and delays in the actual release of new platforms;
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hardware manufacturers' announcements of price changes for hardware platforms;
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consumer acceptance of hardware platforms;
-
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consumer spending trends;
-
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the outcome of lawsuits or regulatory investigations in which we are, or may become, involved;
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changes in earnings estimates or buy/sell recommendations by analysts;
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sales or acquisitions of common stock by our directors or executive management; and
-
-
investor perceptions and expectations regarding our products, plans and strategic position, and those of our competitors and customers.
Catastrophic events may disrupt our business.
Our corporate headquarters and our primary corporate disaster center are located in the Los Angeles, California area and our primary corporate
disaster recovery data center is in Las Vegas, Nevada, each of which is near a major earthquake fault. A major earthquake or other catastrophic event that results in the destruction or disruption of
any of our critical business or information technology systems, or otherwise prevents us from conducting our normal business operations, could require significant expenditures to resume operations and
negatively impact our business. While we maintain insurance coverage for some of these events, the potential liabilities associated with such events could exceed the insurance coverage we maintain.
Further, our system redundancy may be ineffective or inadequate and our disaster recovery planning may not be sufficient for all eventualities.
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Any
such event could also limit the ability of retailers, distributors or our other customers to sell or distribute our products.
If general economic conditions decline, demand for our products could decline.
Purchases of our products and services involve discretionary spending on the part of consumers. Consumers are generally more willing to make
discretionary purchases, including purchases of products and services like ours, during periods in which favorable economic conditions prevail. As a result, our products are sensitive to general
economic conditions and economic cycles. A reduction or shift in domestic or international consumer spending could result in an increase in our selling and promotional expenses, in an effort to offset
that reduction, and could negatively impact our business.
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