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Cost of Product Revenue
Cost of product revenue consists of (1) product costs, (2) certain royalty expenses for celebrities, professional
sports and other organizations, and independent software developers, (3) manufacturing royalties, net of volume
discounts and other vendor reimbursements, (4) expenses for defective products, (5) write-offs of post launch
prepaid royalty costs, (6) amortization of certain intangible assets, (7) personnel-related costs, and
(8) warehousing and distribution costs. We generally recognize volume discounts when they are earned from the
manufacturer (typically in connection with the achievement of unit-based milestones); whereas other vendor
reimbursements are generally recognized as the related revenue is recognized.
Cost of product revenue decreased by $289 million, or 21.0 percent in fiscal year 2013, as compared to fiscal
year 2012. The decrease was primarily due to a decrease in the number of titles released, which led to a
19 percent decrease in publishing and other revenue and a 54 percent decrease in distribution revenue, during
fiscal year 2013, as compared to fiscal year 2012.
Cost of Service and Other Revenue
Cost of service and other revenue consists primarily of (1) data center and bandwidth costs associated with
hosting our online games and websites, (2) associated royalty costs, (3) credit card fees associated with our
service revenue, (4) server costs related to our website advertising business, and (5) platform processing fees
from operating our website-based games on third party platforms.
Cost of service and other revenue increased by $79 million, or 35.3 percent in fiscal year 2013, as compared to
fiscal year 2012. The increase was primarily due to increased server and support costs due to the release of more
online-connected and subscription-based titles and related content during fiscal year 2013, as compared to fiscal
year 2012.
Total Cost of Revenue as a Percentage of Total Net Revenue
During fiscal year 2013, total cost of revenue as a percentage of total net revenue decreased by 2.0 percent as
compared to fiscal year 2012. This decrease as a percentage of net revenue is primarily due to (1) a 54 percent
decrease in distribution revenue which has higher costs and (2) a greater percentage of net revenue from our
digital products and services that have a lower cost than our publishing and other products.
Research and Development
Research and development expenses consist of expenses incurred by our production studios for personnel-related
costs, related overhead costs, contracted services, depreciation and any impairment of prepaid royalties for pre-
launch products. Research and development expenses for our online products include expenses incurred by our
studios consisting of direct development and related overhead costs in connection with the development and
production of our online games. Research and development expenses also include expenses associated with the
development of website content, software licenses and maintenance, network infrastructure and management
overhead.
Research and development expenses for fiscal years 2013 and 2012 were as follows (in millions):
March 31,
2013
% of Net
Revenue
March 31,
2012
% of Net
Revenue
$ Change
% Change
$1,153
30%
$1,180
28%
$(27)
(2%)
Research and development expenses decreased by $27 million, or 2 percent, in fiscal year 2013, as compared to
fiscal year 2012. This decrease was primarily due to (1) a $17 million decrease in incentive-based compensation
expense, (2) a $14 million decrease in contracted services, and (3) a $9 million decrease in stock-based
compensation expense. These decreases were partially offset by a $17 increase million in personnel-related costs.
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