Can you explain to me what exactly that means? It was mentioned in the EA report thread as well but I'm not sure I completely follow. Is revenue generated from online content not reported as it is earned? So lets say the latest Call of Duty DLC is downloaded ___ million times for ___ million in revenue within a span of one quarter. Instead of reporting that revenue in that quarter's report Activision has to spread it for as long as they think the game will be active online?
Not quite. Let me get the text and then explain.
EA said:
Change in Deferred Net Revenue (Packaged Goods and Digital Content). Electronic Arts is not able to objectively determine the fair value of the online service included in certain of its packaged goods and digital content. As a result, the Company recognizes the revenue from the sale of these games and content over the estimated online service period. In other transactions, at the date we sell the software product we have an obligation to provide incremental unspecified digital content in the future without an additional fee. In these cases, we account for the sale of the software product as a multiple element arrangement and recognize the revenue on a straight-line basis over the estimated period of game play. Internally, Electronic Arts' management excludes the impact of the change in deferred net revenue related to packaged goods games and digital content in its non-GAAP financial measures when evaluating the Company's operating performance, when planning, forecasting and analyzing future periods, and when assessing the performance of its management team. The Company believes that excluding the impact of the change in deferred net revenue from its operating results is important to (1) facilitate comparisons to prior periods during which the Company was able to objectively determine the fair value of the online service and not delay the recognition of significant amounts of net revenue related to online-enabled packaged goods and (2) understanding our operations because all related costs are expensed as incurred instead of deferred and recognized ratably.
So, basically, the following situation arrives.
Let's say that EA decides that, after analyzing accounting rules, that Battlefield 3's online component should be considered to have an expected lifetime of three years, because after that a minimal number of players will play the game for more than three years after purchase, even if the servers are left online. This means that the revenue gotten from Battlefield 3 must be divided by 12 (three years with four quarters each), and only 1/12th of the revenue the game makes can be counted in the quarter it releases. The reason this happens is because when EA sells you a game with multiplayer, they are technically providing you with a service, and can't count all of the revenue until that service is delivered in full.
However, costs will be counted immediately because costs aren't deferred, since no continuing service is being provided from EA spending marketing dollars or printing discs.
This gives us the following math if EA sells 15 million full priced copies of Battlefield 3 in a single quarter:
Revenue: $48/game (we subtract the retailer markup) * 15,000,000 copies / 12 quarters = $60 million per quarter for the next three years. This is despite the fact that in reality they made $720 million in revenue this quarter.
Cost: $12 per disc (console licensing fee plus physical cost) * 15,000,000 copies + $100,000,000 in marketing = -$280,000,000
So, while in reality EA made ($720 M - $280 M) = $440,000,000 of profit in this scenario, by GAAP rules, they had ($60 M - $280 M) = $220,000,000 in losses for the quarter.
Now, if we hit the April-June 2012 where EA released nothing, if we just take costs related to Battlefield 3, they made $60 million in profit on the game with zero costs by GAAP, even if they sold zero copies.
This is why companies with online games make money in the quarters where they release nothing, but lose money in the quarters where they release their biggest games.
