A N NUA L
R EPORT
2012

Outstanding
RESULTSNON-GAAP Revenues (1)Increased 11% YEAR ON YEAR

RecordNON-GAAP Operating Margin(1)5.0B 34$

For a full reconciliation, see tables at the end of the annual report.

(1)%

/ 2012 ANNUAL REPORT / 1

1.18 1.3B$$

RECORD NON-GAAP EPS (1)INCREASED 27% YEAR ON YEAROPERATING CASH FLOWINCREASED 41% YEAR ON YEAR

LONG-TERMSTRATEGY:

FOCUS
INNOVATIONTALENT
COMMITMENT
activision blizzard, inc.

/ 2012 ANNUAL REPORT / 2

Premium interactive
entertainment

GAAP Revenues

NON-GAAP Revenues

(1)

5.0B

$
$

$

4.9B

2%

4.8B

INCREASE
YEAR ON YEAR

11%

INCREASE
YEAR ON YEAR

$

2011

2012

4.5B

2011

2012

For a full reconciliation, see tablesat the end of the annual report.

(1)

drivesrevenues
activision blizzard, inc.

/ 2012 ANNUAL REPORT / 4

delivers best-in-classoperating margins

GAAP operating margin

NON-GAAP operating margin

34

%
370

200

27.9%

2011

BASIS POINT
INCREASE
YEAR ON YEAR

30.3%

29.9%

BASIS POINT
INCREASE
YEAR ON YEAR

2012

2011

2012

For a full reconciliation, see tablesat the end of the annual report.

(1)

long-term
focus
activision blizzard, inc.

(1)

/ 2012 ANNUAL REPORT / 6

quality andinnovation

GAAP EPSNON-GAAP EPS

(1)

1.18

$

27 %

$1.01

10 %

$0.92

2011

INCREASE
YEAR ON YEAR

$0.93

INCREASE
YEAR ON YEAR

2012

2011

2012

For a full reconciliation, see tablesat the end of the annual report.

(1)

DRIVES EPSGROWTH
activision blizzard, inc.

/ 2012 ANNUAL REPORT / 8

Free Cash Flow (1)2009–2012

Capital Returnedto Shareholders(2)81% payout ratio(3)2009–2012

Cash & Investments (4)as of December 31, 2012

4.5B
$
3.7B
$
4.4B
$

Free Cash Flow is a non-GAAP metric defined as Operating Cash Flow less Capital
Expenditures. For a full reconciliation, see tables at the end of the annual report.
(2)
Dividends and share repurchases.
(3)
Defined as dividends and share repurchases as a percentage of free cash flow.
(4)
Includes short- and long-term investments.
(1)

INCREASING
VALUE
activision blizzard, inc.

POSITIONEDFOR GROWTHESTABLISHED FRANCHISESNEW INTELLECTUAL PROPERTIESNEW MODELS AND NEW MARKETS

/ 2012 ANNUAL REPORT / 12

DEAR
Shareholders:2012 was an excellent year for Activision Blizzard. In fact, by
most of the metrics we use to measure our performance, it
was the best year in our history, although it will be difficult
to repeat in 2013.
Since present management assumed responsibility for thecompany twenty-two years ago, we have made good progressin building it from insolvency into the world’s leading thirdparty interactive entertainment publisher.
Since 1991, when we took control, our book value per share hasgrown from less than $0.01, on a split-adjusted basis, to $10.18,
representing an increase of more than 30% compoundedannually and outperforming the S&P 500 by a wide margin.
During that time, our earnings per share have increased at acompounded annual growth rate of over 20% per year; ourrevenues have increased at a compounded annual growth rateof over 30% per year; and our compounded annual total
shareholder returns, comprised of share price appreciation
and reinvested dividends, increased at a compounded annual
growth rate of over 12%, exceeding the total returns of the
S&P 500 by over 300 basis points.
While we had a great year, it is important to put that in thecontext of a better year for the S&P 500. During 2012, ourbook value per share increased 12% including dividends, ascompared to a 16% increase in book value per share by the
S&P 500 including dividends.
In 2012, we delivered GAAP and non-GAAP operating
margins of 30% and 34%, respectively. Our GAAP net
revenues were $4.86 billion, as compared with $4.76 billion
for 2011, and our non-GAAP net revenues were $4.99 billion,
as compared to $4.49 billion. Our earnings per share also
increased significantly year-over-year, from $0.92 to $1.01
per share on a GAAP basis and from $0.93 to $1.18 per shareon a non-GAAP basis, an increase of 27%.

activision blizzard, inc.

With over $1.3 billion in operating cash flow, we ended thecalendar year with approximately $4.4 billion in cash andinvestments and no debt.
We have always believed that prioritizing opportunities basedon our abilities to make the very best games with the very
best financial returns for our shareholders is the key to longterm, sustained success. While this sounds obvious, it can
only be accomplished with extraordinarily talented people,
clear metrics to evaluate and reward performance, and an
unwavering commitment to excellence.

Near-Term Challenges
Our talented team delivered another record year of results in2012. While we celebrate our successes, we are also alert tothe near term challenges faced by the company, a few ofwhich we would like to share.
We do not expect 2013 results at Activision Blizzard toresemble 2012. There are two reasons for this, one related toour company’s product plans, and one tied to general industry
conditions. In 2012, many of our key franchises included amajor release of all-new content. In particular, the recordshattering success of Diablo III®, the first new Diablo game inover a decade, exceeded even our optimistic expectations. In
2012, World of Warcraft® experienced the release of a fantastic
expansion pack, Mists of Pandaria®. In the past we have seen
major World of Warcraft expansion packs improve bothsubscriber retention and acquisition.
We will not have a major World of Warcraft expansion pack in
2013. This year, we also do not have an all-new Diablo gameplanned. Year-over-year comparisons for Blizzard, therefore,
will likely be unfavorable. To use our hero Warren Buffett’s
thoughts: “We won’t ‘smooth’ quarterly or annual results: If
earnings figures are lumpy when they reach headquarters,

/ 2012 ANNUAL REPORT / 13

they will be lumpy when they reach you.” Our results in 2013
will be “lumpy” by comparison to 2012.
Our 2013 performance will also likely be affected by the factthat it is a transitional year for the interactive entertainment
industry.
Nintendo launched the Wii U in 2012 to a slower-thanexpected start, and Sony announced the PlayStation 4 in early2013 with a plan to ship by the end of 2013.
The launch of the next-generation console systems presents
opportunities, but will also create challenging market
conditions. The last transition was disruptive and volatile; it
introduced new competitors and business models that
required time for our company to understand and sort
through the attendant risks and opportunities.
In 2012, we benefitted from a very large current-generation
installed base. In 2013, there will likely be a relatively small
number of new next-generation console video game systems
sold. In addition to the challenges of straddling this transition,
we face challenges related to the continued success of mobile
devices, including tablets. The business models for interactive
entertainment on these devices are much less certain than theproven ways we generate returns from our online subscription
services, downloadable content for consoles and PCs, andretail console and PC games.
So far, most companies making small screen games havegenerally experienced “big screen”-sized losses. Very few mobile
and tablet games have generated the types of shareholder
returns we have become accustomed to even though theoverall market growth for mobile games has been very strong.
While we are working on initiatives for these promising newopportunities, there is nothing likely to contribute meaningfully
to our financial results in 2013.

We are optimistic that our leadership position, along with
our resources, scale, infrastructure, and creative talent, should
allow us to take advantage of the positive long-term businessfundamentals that we expect this new era will ultimately
bring. Past console transitions ultimately have expanded ourbusiness opportunities over the long term. They have done
this both by expanding the addressable consumer base (eachconsole cycle has achieved a bigger installed base than the last),
and by enabling us to make more fun, ambitious, innovative,
and compelling games. That said, there is always a higher
degree of uncertainty during periods of console transition,and our ability to deliver our customary shareholder returns
on devices, like tablets and smartphones, that now competewith consoles is unproven.

Lessons Learned
Though 2012 was an outstanding year, we did make somemistakes. One mistake had a large impact on our financial
results. All mistakes were largely the result of not sticking to theprinciples that have worked so well for us for over twenty years.

» Our most significant mistake was the launch of our

subscription service, Call of Duty Elite® in late 2011. The
service attracted a large number of subscribers. As we notedin our letter last year, it was the third most subscribed
Western interactive entertainment service after Xbox Liveand World of Warcraft. However, our execution fractured our
player community and had a negative impact on our proven,successful downloadable content (DLC) business model forCall of Duty®. As a result, we decided we would better
serve our audience by making all elements of the Call of Duty
Elite service free to our entire Call of Duty player community
and move to a season pass/à la carte model for DLC. We
launched our first DLC for Call of Duty: Black Ops II in late
January of this year. Early results suggest we have satisfied
audiences with our content and this new service model.

activision blizzard, inc.

/ 2012 ANNUAL REPORT / 14

» Our licensed title business performed below our

expectations in 2012. Though a relatively small part of ourbusiness in recent years, the trend away from third-party
licensed content in the industry towards original intellectual
property appears to continue. We did not adhere to theprinciple of “owning or controlling” the underlying intellectual
property in which we invest. We made greater investmentsin third-party intellectual property and software development
than was prudent. We have such a large library of franchises
and potential franchises dating back to 1979 when thecompany was founded that we are far better off making
games based on our own titles than on the intellectual
property of third parties, with very few exceptions.

» World of Warcraft remains the most successful massively

multiplayer online role playing game (MMORPG) in theworld, and it ended the year with 9.6 million subscribers,
far more than any other subscription-based MMORPG.
Despite this success, it is notable that we ended 2012 with alower number of subscribers than we began the year,
notwithstanding the release of Mists of Pandaria. As wenoted on our earnings call, most of the decline occurred in
the East, where revenue per user is lower than in the West.
World of Warcraft is more than eight years old, and it
remains a powerhouse. That said, the nature of the online
game market has changed dramatically over the last eight
years. While we have had great success in keeping the game
fresh through four major expansion packs and numerous
patched-in content updates, the expectation of the gaming
community about the pace of updates and alterations haschanged. As we continue to develop and build the gameplay
experience, we are working to tighten the update timeframes to keep our fans engaged with the thrill of newcontent, while also working to bring back fans who may
have taken a break but have not lost their love for the game.

A Record Year
Though we made some missteps and faced some challenges,
2012 was a year of many highlights. We will always work to
refine our business processes, but we believe that our
performance in the past year was a validation of our basic
approach to making games. Our strategy of deep investment

activision blizzard, inc.

in our core franchises, smart development of new intellectual
property, rigorous efforts to ensure that each of our releases
reaches new heights of quality and innovation, and relentless
optimization of costs and operational efficiencies, paid off thisyear, as it has consistently in the past.
We continue to invest our capital prudently and to use it tobuild world-class entertainment brands, broaden our leadership
position, and expand our global footprint. We also find otherways to return value to our shareholders. We are the only
Western third-party interactive entertainment publisher to
pay a cash dividend, which we have increased every year since2010, and in February 2013, we increased the dividend to$0.19 per share.
The bulk of our business is built around our core franchises,
which we think of as distinct brands in their own right. This
is not a static list—it evolves as we develop new intellectual
property, such as Skylanders® in 2011, or Destiny™. Let’s walkthrough the major drivers of our success in 2012 across
Activision Publishing and Blizzard Entertainment.
In 2012, the Call of Duty franchise achieved cumulative lifeto-date revenues of approximately $8 billion. We launched
Call of Duty: Black Ops II at retail in November and crossed$1 billion in worldwide retail sales in just 15 days, eclipsing
our previous record. In aggregate across all platforms, Call of
Duty: Black Ops II was the #1 best-selling title in the U.S.
and Europe. Additionally, according to Microsoft®, Call of
Duty: Black Ops II was the most played game on Xbox LIVE®,
and Call of Duty: Modern Warfare 3 and the original Call of
Duty: Black Ops each remained top-five games played on theservice, in spite of having been released in 2011 and 2010
respectively.
The company is well into development on two new Call of
Duty games—a console game that will be released in 2013,
and Call of Duty Online, which is being developed for the large
and fast-growing Chinese online game market. Ourdevelopment studio in Shanghai has been working, inpartnership with Tencent, a leading operator of free-to-playaction games in China, to create an online Call of Duty
experience built specifically for Chinese players. While notwithout challenges, we are very excited about this opportunity.

/ 2012 ANNUAL REPORT / 15

Our first Skylanders game was introduced in October 2011
with the release of Skylanders Spyro’s Adventure®. In just 15
months, Skylanders achieved life-to-date worldwide sales,
including toys and accessories, in excess of $1 billion—fasterthan any other franchise in the company’s history.
In 2012, Activision Publishing’s Skylanders Giants™, the second
game in our Skylanders franchise, was the #1 best-sellingkids’ video game of the year. In addition, during the year, we
extended the Skylanders franchise appeal with more than 130
licensing partners, and continued to gain operating
efficiencies in our manufacturing and supply chain operations.
During 2012, in North America and Europe combined,
including toys and accessories, Skylanders Giants was the #5
best-selling game in dollars, and Skylanders Spyro’s Adventure,
was the #4 best-selling game. Additionally, through January
2013, we have sold more than 100 million Skylanders toys
worldwide and in 2012 we outsold the largest action-figureline in North America and Europe.
In 2013, the company plans to release Skylanders SWAP Force™,
which expands upon the franchise’s signature toys-to-life
gameplay by letting kids not only bring physical toys to life
inside the game, but also swap the top and bottom halves of
the toys and create their own unique characters. As an added
value to our current players, seasoned fans of the franchisecan play Skylanders SWAP Force with their entire collection ofcharacters from Skylanders Spyro’s Adventures and Skylanders
Giants. We are excited about the continued innovation our
teams are bringing to this exciting new genre of gameplay.

In September 2012, Blizzard Entertainment released World of
Warcraft: Mists of Pandaria, the fourth expansion for World of
Warcraft. The Mists of Pandaria launch was a global event,including countries in North America, South America,
Europe, and Asia. For the first time ever, our substantial baseof players in China was able to enjoy the expansion packcontent within the same one-week global launch period asplayers elsewhere. Despite the decline in subscribership noted
above, World of Warcraft remains one of the world’s great
entertainment franchises and by far the most popular
subscription-based MMORPG in the world.
Additionally, during the year, Blizzard renewed its license with
our partner NetEase for the distribution of World of Warcraftin China.
In 2012, Blizzard also achieved unprecedented success with
Diablo III, which was the #1 best-selling PC game at retail.
Including digital sales, it sold more than 12 million copies
worldwide through the end of the year and generated morethan $500 million in revenues. The development team at
Blizzard has been updating the game since its May launch,adding new content, game systems, features, and otherimprovements. Additionally, we recently announced that
Blizzard is developing Diablo III for the PlayStation 3 and
PlayStation 4, bringing the beloved Diablo franchise toconsoles for the first time in almost 15 years.

Though not scheduled for release in 2013, a significant newopportunity we are investing in is Destiny, a large-scalecollaboration between Activision and world-class developer
Bungie, the creators of Halo®.*

StarCraft® is the only Blizzard core franchise that did not see
a significant new release in 2012. However, on March 12,2013, Blizzard launched StarCraft II: Heart of the Swarm™, thefirst expansion to its award-winning real-time strategy game
StarCraft II: Wings of Liberty®. The game features a new
campaign continuing the epic story established in Wings ofLiberty and introduces new multiplayer features that enhance
the game’s online experience.

Destiny combines Bungie’s trademark grand scope, sci-fistorytelling and adventures with visceral first-person action
gaming that takes place in an unfolding, cinematic universe.
Destiny will deliver a unique social gaming experience toconsoles by offering players a connected, living world thatthey can explore, as well as vibrant social spaces where they
can congregate, celebrate in-game achievements, and shareadventures grouped with friends or solo.

Blizzard also continues to invest in its proprietary online
platform, Battle.net®, which lets players communicate andcollaborate across games while giving the company a way tointeract with and support its players through direct digitalsales, free trials and value-added services. During 2012, over
42.9 million people used Battle.net to play a Blizzard game.
The deep integration of Battle.net within Blizzard games enables
the development of unique and enriching services and features.

*Halo is a registered trademark of Microsoft Corporation.

activision blizzard, inc.

/ 2012 ANNUAL REPORT / 16

Through Battle.net and other sales of digital content, we
continued to achieve significant success in deriving revenue
from digital channels, reporting record digital revenues forthe calendar year. We were the #1 third-party interactive
entertainment Western digital publisher. GAAP net revenues
from digital channels exceeded $1.5 billion and represented
32% of the company’s total net revenues. Non-GAAP net
revenues from digital channels were a record $1.6 billion andrepresented 32% of the company’s total net revenues. (This
non-GAAP percentage was down very slightly from 2012
due to the growth of non-digital sales.)Looking Ahead
Much has changed in our industry over the last two decades,
but we still operate the company with the same four basic
principles that we brought with us to a nearly insolvent
company named Mediagenic in 1991.

» Deliver innovative and compelling interactive entertainment
experiences» Focus on the largest and most promising opportunities» Recruit, reward, and retain great talent and build teams
that share common values» Remain disciplined in the application of our commitment
to deliver shareholder value

we can consistently execute with unparalleled depth andscale. We extend into new business models and high-margin
emerging markets only when highly promising or proven,sometimes by others, to avoid failure or distraction.
We recognize that the only formula for success in a creative
industry is to attract and retain the best talent. We recognizethat the success of our franchises is built upon the shared
dedication from great teams of people whose sense of mutual
respect and teamwork drives our performance to new levels.
Lastly, we are committed to managing our finances to growour business and deliver and return long-term value to ourshareholders. We have an unwavering culture of financial
discipline, and we institutionalize our business processes toensure that we learn from and replicate past success. Most
importantly, we are a rigorously performance-based company—in terms of how we compensate, promote, and measure ourown success.
We believe that our dedication and determination to live by
our four key strategic principles have built a framework thatwill continue to guide our success. As we head into thistransitional period, we have never been more excited orconfident about our ability to deliver the great games ouraudiences expect and wonderful new experiences ouraudiences cannot yet imagine.
With appreciation,

These principles are simple to state, but they are challenging
to execute.
Our business depends entirely upon our ability to make games
that people want to play. We strive to make the most fun,thrilling, social, and delightful entertainment experiences, andto make sure that these experiences deliver significant value
to our players versus the many other entertainment choices
they have in today’s world. By creating products that deeply
engage and satisfy our audiences, we build a loyal fan baseand establish recurring profit streams.
We aim to allocate our capital efficiently to enable us to focus
on our most promising opportunities globally. We develop
new intellectual properties selectively, identifying those withmass market appeal and building them into franchises that

activision blizzard, inc.

Bobby Kotick
President and Chief Executive Officer,
Activision Blizzard

Brian Kelly
Co-Chairman of the Board,
Activision Blizzard

SELECTED FINANCIAL DATA
For accounting purposes, the Business Combination (as defined below) was treated as a “reverse acquisition,” with Vivendi Games (asdefined below) deemed to be the acquirer. The historical financial statements of Activision Blizzard, Inc. prior to July 9, 2008 are those ofVivendi Games (see Note 1 of the Notes to Consolidated Financial Statements included in this Annual Report). Therefore, 2012, 2011, 2010,2009 and 2008 financial data is not comparable with prior periods.
The terms “Activision Blizzard,” the “Company,” “we,” “us,” and “our” are used to refer collectively to Activision Blizzard, Inc. andits subsidiaries.
The following table summarizes certain selected consolidated financial data, which should be read in conjunction with our
Consolidated Financial Statements and Notes thereto and with Management’s Discussion and Analysis of Financial Condition and Results ofOperations included elsewhere in this Annual Report. The selected consolidated financial data presented below at and for each of the years in thefive-year period ended December 31, 2012 is derived from our Consolidated Financial Statements. All amounts set forth in the following tables
are in millions, except per share data.
For the Years Ended December 31,
2012

Statement of Operations Data:
Net Revenues......................................................................................................................... $4,856
Net income (loss) ..................................................................................................................
1,149
Basic net income (loss) per share(3) .......................................................................................
1.01
Diluted net income (loss) per share(3) ...................................................................................
1.01
Cash dividends declared per share(4) .....................................................................................
0.18
Balance Sheet Data:
Total assets ............................................................................................................................ $14,200

2011

2010

2009

2008

$4,755
1,085
0.93
0.92
0.165

$4,447418(1)
0.34
0.33
0.15

$4,279113(2)
0.09
0.09—$3,026(107)(0.11)(0.11)—$13,277$13,447$13,742$14,465(1)

In the fourth quarter of 2010, we recorded $326 million of impairment charges within our Activision segment. These charges
consisted of impairments of $67 million, $9 million and $250 million to license agreements, game engines and internally developed
franchises intangible assets, respectively.

(2)

In the fourth quarter of 2009, we recorded $409 million of impairment charges within our Activision segment. These charges
consisted of impairments of $24 million, $12 million and $373 million to license agreements, game engines and internally developed
franchise intangible assets, respectively.

(3)

Stock Split—In July 2008, the Board of Directors declared a two-for-one split of our outstanding shares of common stock effected in
the form of a stock dividend. The stock dividend was issued on September 5, 2008 to shareholders of record at the close of business on
August 25, 2008.

(4)

Cash Dividends—On February 9, 2012, our Board of Directors declared a cash dividend of $0.18 per share payable on May 16, 2012
to shareholders of record at the close of business on March 21, 2012. On February 9, 2011, our Board of Directors declared a cash
dividend of $0.165 per share to be paid on May 11, 2011 to shareholders of record at the close of business on March 16, 2011. On
February 10, 2010, our Board of Directors declared a cash dividend of $0.15 per common share payable on April 2, 2010 toshareholders of record at the close of business on February 22, 2010. Future dividends will depend upon our earnings, financial
condition, cash requirements, future prospects and other factors deemed relevant by our Board of Directors. There can be noassurances that dividends will be declared in the future. Prior to the cash dividend declared in February 2010, the Company had neverpaid a cash dividend.

1

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSBusiness Overview
The Company’s Formation and Business Combination
Activision, Inc. was originally incorporated in California in 1979 and was reincorporated in Delaware in December 1992. On July 9,2008, a business combination (the “Business Combination”) by and among Activision, Inc., Sego Merger Corporation, a wholly-owned
subsidiary of Activision, Inc., Vivendi S.A. (“Vivendi”), VGAC LLC, a wholly-owned subsidiary of Vivendi , and Vivendi Games, Inc.
(“Vivendi Games”), a wholly-owned subsidiary of VGAC LLC, was consummated. As a result of the consummation of the Business
Combination, Activision, Inc. was renamed Activision Blizzard, Inc. Activision Blizzard is a public company traded on the NASDAQ under the
ticker symbol “ATVI.”
Activision Blizzard, Inc. is a worldwide online, personal computer (“PC”), video game console, tablet, handheld, and mobile game
publisher. The terms “Activision Blizzard,” the “Company,” “we,” “us,” and “our” are used to refer collectively to Activision Blizzard, Inc. andits subsidiaries. Based upon our organizational structure, we conduct our business through three operating segments as follows:
Activision Publishing, Inc.
Activision Publishing, Inc. (“Activision”) is a leading international developer and publisher of interactive software products andcontent. Activision develops games based on both internally-developed and licensed intellectual property. Activision markets and sells games wedevelop and, through our affiliate label program, games developed by certain third-party publishers. We sell games both through retail channels
and by digital download. Activision currently offers games that operate on the Sony Computer Entertainment, Inc. (“Sony”) PlayStation 3(“PS3”), Nintendo Co. Ltd. (“Nintendo”) Wii (“Wii”) and Nintendo Wii U (“Wii U”), and Microsoft Corporation (“Microsoft”) Xbox 360(“Xbox 360”) console systems; the Nintendo Dual Screen (“DS”) and Nintendo 3DS (“3DS”) handheld game systems; the PC; and otherhandheld and mobile devices.
Blizzard Entertainment, Inc.
Blizzard Entertainment, Inc. (“Blizzard”) is a leader in the subscription- based massively multi-player online role-playing game(“MMORPG”) category in terms of both subscriber base and revenues generated through its World of Warcraft® franchise, which it develops,
hosts and supports. Blizzard also develops, markets, and sells role-playing action and strategy PC-based computer games, including games in themultiple- award winning Diablo® and StarCraft® franchises. In addition, Blizzard maintains a proprietary online-game related service, Battle.net®.
Blizzard distributes its products and generates revenues worldwide through various means, including: subscriptions (which consist of fees fromindividuals playing World of Warcraft®, sales of prepaid subscription cards, and revenue from value-added services such as realm transfers,
faction changes and other character customizations within the World of Warcraft gameplay); retail sales of physical “boxed” products; online
download sales of PC products; and licensing of software to third-party or related party companies that distribute World of Warcraft, Diablo® III
and StarCraft® II products.
Activision Blizzard Distribution
Activision Blizzard Distribution (“Distribution”) consists of operations in Europe that provide warehousing, logistical and sales
distribution services to third-party publishers of interactive entertainment software, our own publishing operations, and manufacturers ofinteractive entertainment hardware.
Business Results and Highlights
In 2012, Activision Blizzard’s consolidated net revenues were $4.9 billion and consolidated net income was $1.1 billion, resulting in
diluted earnings per common share of $1.01. The Company grew net revenues, operating income, and earnings per share as compared to 2011.
We also generated $1.3 billion in cash from operating activities in 2012.
Also, according to The NPD Group with respect to North America, GfK Chart- Track with respect to Europe, and Activision Blizzard
internal estimates, during 2012:

2

•In North America and Europe combined, including toys and accessories, Activision Publishing was the #1 console and handheld
publisher for the calendar year with the #1 and #3 best-selling franchises—Call of Duty® and Skylanders.

•

Activision Blizzard reported record digital revenues for the calendar year and was the #1 third-party interactive entertainment
Western digital publisher.

•

For the calendar year, in aggregate across all platforms in the U.S. and Europe, Activision Publishing’s Call of Duty: Black Ops
II was the #1 best-selling title in dollars and Call of Duty: Modern Warfare® 3 was the #9 best-selling title in dollars.

•

In both North America and Europe, including toys and accessories, Skylanders Giants™ was the #1 best-selling kids’ title indollars for the fourth quarter. Additionally, for the calendar year, in North America and Europe combined, including toys andaccessories, Skylanders Giants was the #5 best-selling game in dollars, and Skylanders Spyro’s Adventure® was the #4 bestselling game in dollars.

•

For the calendar year, Blizzard Entertainment had two top-10 PC games in North America and Europe. Diablo III was the #1
best-selling PC game at retail, breaking PC-game sales records with more than 12 million copies sold worldwide throughDecember 31, 2012, and World of Warcraft: Mists of Pandaria® was the #3 best-selling PC game at retail.

Product Release Highlights
The following games and content packs, among other titles, were released during the year ended December 31, 2012:
•
•
•
•
•
•
•
•
•
•
•

007™ Legends
Angry Birds™ Trilogy
Battleship®
Cabela’s® Dangerous Hunts 2013
Cabela’s Hunting Expeditions
Call of Duty: Black Ops II
Call of Duty Modern Warfare 3 Content Collection #1
Call of Duty: Modern Warfare 3 Content Collection #2
Call of Duty: Modern Warfare 3 Content Collection #3
Call of Duty: Modern Warfare 3 Content Collection #4
Diablo III

•
•
•
•
•
•
•
•
•
•

Family Guy: Back to the Multiverse
Ice Age™ Continental Drift Arctic GamesMen In Black: Alien Crisis™
Prototype® 2
Skylanders Giants
The Amazing Spider-Man™
Transformers™: Fall of Cybertron™
Transformers Prime™
Wipeout 3
World of Warcraft: Mists of Pandaria

On January 29, 2013, Activision released Revolution, the first downloadable map pack for Call of Duty: Black Ops II, (“Revolution”)
on the Xbox 360. Revolution is expected to be available on other platforms during the first quarter of 2013.
StarCraft II: Heart of the Swarm™, the first expansion to Blizzard’s real-time strategy game StarCraft II: Wings of Liberty®, is
expected to be available in stores and online beginning March 12, 2013.
International Operations
International sales are a fundamental part of our business. Net revenues from international sales accounted for approximately 50%,
50%, and 46% of our total consolidated net revenues for the years ended December 31, 2012, 2011 and 2010, respectively. We maintainsignificant operations in the United States (“U.S.”), Canada, the United Kingdom (“U.K.”), France, Germany, Ireland, Italy, Sweden, Spain, theNetherlands, Australia, South Korea and China. An important element of our international strategy is to develop content that is specificallydirected toward local cultures and customs. Our international business is subject to risks typical of an international business, including, but notlimited to, foreign currency exchange rate volatility and changes in local economies. Accordingly, our future results could be materially andadversely affected by changes in foreign currency exchange rates and changes in local economies.

3

Management’s Overview of Business Trends
Online Content and Digital Downloads
We provide our products through both retail channels and digital online delivery methods. Many of our video games that are available
through retailers as physical “boxed” software products, such as DVDs, are also available by direct digital download over the Internet (both fromwebsites that we own and from others owned by third parties). In addition, we offer players downloadable content as add-ons to our products(e.g., new multi-player content packs), generally for a one-time fee. We also offer subscription- based services for World of Warcraft, which are
digitally delivered and hosted by Blizzard’s proprietary online-game related service, Battle.net. In 2011, Activision launched Call of Duty Elite, adigital service that provides both free and paid subscription-based content and features for Call of Duty: Modern Warfare 3. In conjunction withthe release of Call of Duty: Black Ops II, all of the Call of Duty Elite service features for that game were made available for free. This free service
does not include downloadable map packs, which are sold separately, either a la carte as individual map packs or as part of a discounted season
pass bundle. Existing Call of Duty Elite premium members will continue to enjoy the Call of Duty Elite premium membership features for Call of
Duty: Modern Warfare 3 through the end of their subscription period. Digital revenues remain an important part of our business, and we continue
to focus on and develop products that can be delivered via digital online channels. The amount of our digital revenues in any period may fluctuate
depending, in part, on the timing and nature of our specific product releases.
We currently define digital online channel-related sales as revenues from subscriptions and memberships, licensing royalties,
value-added services, downloadable content, and digitally distributed products. This definition may differ from that used by our competitors orother companies.
For the year ended December 31, 2012, our sales through the digital online channels decreased by approximately $100 million, as
compared to 2011, and our net revenues from digital online channels represented 32% of our total consolidated net revenues in 2012 as compared
to 34% in 2011. These decreases were mainly attributable to the deferral of revenues due to the timing of the releases of Diablo III and World of
Warcraft: Mists of Pandaria. On a non-GAAP basis, our sales through the digital online channels increased by $40 million, as compared to 2011,
and our net revenues from digital online channels represented 32% of our total consolidated net revenues in 2012 as compared to 35% in 2011.
This increase in sales from the digital online channels was primarily due to the releases of Diablo III and World of Warcraft: Mists of Pandaria.
Please refer to the reconciliation between GAAP and non-GAAP financial measures later in this document for further discussions ofretail and digital online channels.
Current Generation of Game Consoles
The current generation of game consoles began with Microsoft’s launch of the Xbox 360 in November 2005, and continued in 2006
when Sony and Nintendo launched the PS3 and the Wii, respectively. The installed base of current generation hardware (i.e. Xbox 360, PS3 andWii) in the U.S. and Europe was approximately 183 million units as of December 31, 2012, as compared to 166 million units at December 31,
2011, according to The NPD Group, with respect to North America, and GfK Chart-Track, with respect to Europe, representing an increase of
11% in units year-over-year. The installed base of PS3 and Xbox 360 hardware units increased 15% year-over-year, while the installed base of
Wii hardware units increased 5% year-over-year. During the 2012 year-end holiday season, Nintendo released a new “next-generation” highdefinition version console, the Wii U. On February 20, 2013, Sony announced that it intends to launch PlayStation 4, its next-generation
computer entertainment system, by the 2013 year-end holiday buying season.
We continually monitor console hardware sales, as well as the development of “next-generation” consoles. We manage our productdelivery on each current and future platform in a manner we believe to be most effective to maximize our revenue opportunities and achieve thedesired return on our investments in product development.
Conditions in the Retail Distribution Channels
Conditions in the retail channels of the interactive entertainment industry remained challenging through 2012. In North America andEurope, retail sales within the industry experienced a combined overall decrease of approximately 21% in 2012, as compared to 2011, according
to The NPD Group and GfK Chart-Track. The declines in the North America and European retail channels were impacted by fewer releases andcatalog sales in 2012 as compared to 2011, as well as price declines over the prior year. In addition, the decline in sales to the retail channels
continue to be more pronounced for casual titles on the Nintendo Wii and handheld platforms (down over 35% year-over-year), than titles onhigh-definition platforms (i.e., Xbox 360 and PS3).

4

Despite the 21% decrease in retail sales for the overall industry, according to The NPD Group, GfK Chart-Track and the Company’s
internal estimates, the sales of the industry’s top five titles (including accessory packs and figures) grew 1% in 2012, as compared to 2011. This
has resulted in the further concentration of revenues in the top titles, particularly for high-definition platforms, which experienced year-over-year
growth, while non-premier titles experienced declines. The Company’s results have been less impacted by the general declining trends in retailcompared to our competitors because of our greater focus on premier top titles and a more focused overall slate of titles.
Concentration of Top Titles
The concentration of retail revenues among key core titles has continued as a trend in the overall interactive software industry.
According to The NPD Group, the top 10 titles accounted for 30% of the sales in the U.S. video game industry in 2012 as compared to 26% in
2011. Similarly, a significant portion of our revenues has historically been derived from video games based on a few popular franchises and thesevideo games are responsible for a disproportionately high percentage of our profits. For example, our four largest franchises in 2012—Call ofDuty, Diablo, Skylanders and World of Warcraft—accounted for approximately 83% of our net revenues, and a significantly higher percentage of
our operating income, for the year.
We expect that a limited number of popular franchises will continue to produce a disproportionately high percentage of the industry
and our revenues and profits.
Seasonality
The interactive entertainment industry is highly seasonal. We have historically experienced our highest sales volume in the year-end
holiday buying season, which occurs in the fourth quarter. We defer the recognition of a significant amount of net revenue related to our software
titles containing online functionality that constitutes a more-than-inconsequential separate service deliverable over an extended period of time(i.e., typically five months to less than a year). As a result, the quarter in which we generate the highest sales volume may be different than thequarter in which we recognize the highest amount of net revenue. Our results can also vary based on a number of factors including, but notlimited to, title release date, consumer demand, market conditions and shipment schedule.
Outlook
Looking forward, the above discussed factors, such as the ongoing console transition, increasing concentration of top titles in theinteractive entertainment industry, and a continuingly challenged global economy, might negatively impact our short-term results. In addition,2013 compared to 2012 will be a difficult year-over-year comparison due to the highly successful launch of Diablo III in May 2012. We willcontinue to invest in our established franchises, as well as new titles we think have the potential to drive our growth over the long-term.

5Consolidated Statements of Operations Data
The following table sets forth consolidated statements of operations data for the periods indicated in dollars and as a percentage of
total net revenues (amounts in millions):
For the Years Ended December 31,
2012

Net revenues:
Product sales ...................................................................................................................
Subscription, licensing, and other revenues ...................................................................
Total net revenues .....................................................................................................
Costs and expenses:
Cost of sales—product costs ..........................................................................................
Cost of sales—online subscriptions ...............................................................................
Cost of sales—software royalties and amortization ......................................................
Cost of sales—intellectual property licenses .................................................................
Product development ......................................................................................................
Sales and marketing .......................................................................................................
General and administrative ............................................................................................
Impairment of intangible assets .....................................................................................
Restructuring ..................................................................................................................
Total costs and expenses ...........................................................................................
Operating income ................................................................................................................
Investment and other income (expense), net .......................................................................
Income before income tax expense .....................................................................................
Income tax expense .............................................................................................................
Net income...........................................................................................................................

6

2011

2010

$3,620
1,236
4,856

75%
25
100

$3,257
1,498
4,755

68%
32
100

$3,087
1,360
4,447

69%
31
100

1,116
263
194
89
604
578
561
—
—
3,405
1,451
7
1,458
309
$1,149

23
5
4
2
12
12
12
—
—
70
30
—
30
6
24%

1,134
255
218
165
629
545
456
—
25
3,427
1,328
3
1,331
246
$1,085

24
5
5
3
14
11
10
—
—
72
28
—
28
5
23%

1,350
250
338
197
626
516
375
326
—
3,978
469
23
492
74
$418

31
5
8
4
14
12
8
7
—
89
11
1
12
2
10%

Operating Segment Results
Our operating segments are consistent with our internal organizational structure, the manner in which our operations are reviewed andmanaged by our Chief Executive Officer, who is our Chief Operating Decision Maker (“CODM”), the manner in which we assess operating
performance and allocate resources, and the availability of separate financial information. We do not aggregate operating segments.
The CODM reviews segment performance exclusive of the impact of the change in deferred net revenues and related cost of sales withrespect to certain of our online-enabled games, stock-based compensation expense, restructuring expense, amortization of intangible assets, andimpairment of intangible assets and goodwill. The CODM does not review any information regarding total assets on an operating segment basis,
and accordingly, no disclosure is made with respect thereto. Information on the operating segments and reconciliations of total segment net
revenues and total segment operating income to consolidated net revenues and income before income tax expense from external customers andconsolidated income before income tax expense for the years ended December 31, 2012, 2011, and 2010 are presented in the table below(amounts in millions):

Segment net revenues:
Activision ..........................................................................................................
Blizzard .............................................................................................................
Distribution ........................................................................................................
Operating segment net revenue total ............................................................
Reconciliation to consolidated net revenues:
Net effect from changes in the deferral of net revenues ...................................
Consolidated net revenues............................................................................
Segment income from operations:
Activision ..........................................................................................................
Blizzard .............................................................................................................
Distribution ........................................................................................................
Operating segment income from operations total ........................................
Reconciliation to consolidated operating income and consolidated income
before income tax expense:
Net effect from changes in the deferral of net revenues and related costof sales ..........................................................................................................
Stock-based compensation expense ..................................................................
Restructuring .....................................................................................................
Amortization of intangible assets ......................................................................
Impairment of goodwill/intangible assets .........................................................
Consolidated operating income ..............................................................................
Investment and other income (expense), net.....................................................
Consolidated income before income tax expense ..................................................

2012

For the Years Ended December 31,
Increase/(decrease)
2011
2010
2012 v 2011

$3,072
1,609
306
4,987

$2,828
1,243
418
4,489

$2,769
1,656
378
4,803

$244
366
(112)
498

$59
(413)
40
(314)

(131)
$4,856266$4,755(356)$4,447

(397)
$101

622
$308

$970
717
11
1,698

$851
496
11
1,358

$511
850
10
1,371

$119
221
—
340

$340
(354)
1
(13)

(91)
(126)
—
(30)
—
1,451
7
$1,458

183
(103)
(26)
(72)
(12)
1,328
3
$1,331

(319)
(131)
(3)
(123)
(326)
469
23
$492

(274)
(23)
26
42
12
123
4
$127

502
28
(23)
51
314
859
(20)
$839

Increase/(decrease)2011 v 2010

For better understanding of the differences in presentation between our segment results and the consolidated results, the following
explains the nature of each reconciling item.
Net Effect from Deferral of Net Revenues and Related Cost of Sales
We have determined that some of our game’s online functionality represents an essential component of gameplay and as a result amore-than-inconsequential separate deliverable. As such, we are required to recognize the revenues of these game titles over the estimated service
periods, which may range from a minimum of five months to a maximum of less than a year. The related cost of sales is deferred and recognized
as the related revenues are recognized. In the table on the previous page, we present the amount of net revenues and related cost of sales
separately for each period as a result of this accounting treatment.

7

Stock-Based Compensation Expense
We expense our stock-based awards using the grant date fair value over the vesting periods of the stock awards. In the case of liability
awards, the liability is subject to revaluation based on the stock price at the end of the relevant period. Included within stock-based compensation
are the net effects of capitalization, deferral, and amortization.
Restructuring
On February 3, 2011, the Company’s Board of Directors authorized a restructuring plan (the “2011 Restructuring”) involving a focus
on the development and publication of a reduced slate of titles on a going-forward basis. The 2011 Restructuring included the discontinuation of
the development of music-based games, the closure of the related business unit and the cancellation of other titles then in production, along with arelated reduction in studio headcount and corporate overhead. The costs related to the 2011 Restructuring activities included severance costs,
facility exit costs, and exit costs from the cancellation of projects. The 2011 Restructuring charges for the year ended December 31, 2011 were
$25 million, which is reflected in a separate caption “Restructuring expenses” on our consolidated statement of operations. The 2011
Restructuring was completed as of December 31, 2011 and we do not expect to incur significant additional restructuring expenses relating
thereto.
In 2008, we implemented an organizational restructuring plan as a result of the Business Combination. This organizational
restructuring was to integrate different operations and to streamline the combined Activision Blizzard organization. The costs related to therestructuring activities included severance costs, facility exit costs, write-offs of assets and liabilities and exit costs from the cancellation ofprojects. For the year ended December 31, 2011, expense related to the organizational restructuring was $1 million and has been reflected in the“General and administrative expense” in the consolidated statement of operations. The organizational restructuring activities as a result of theBusiness Combination were completed as of December 31, 2011 and we do not expect to incur additional restructuring expenses relating thereto.
Amortization of Intangible Assets
All of our intangible assets are the result of the Business Combination and other acquisitions. We amortize the intangible assets overtheir estimated useful lives based on the pattern of consumption of the underlying economic benefits. The amount presented in the table
represents the effect of the amortization of intangible assets as well as other purchase price accounting adjustments, where applicable, in ourconsolidated statements of operations.
Impairment of Goodwill/Intangible Assets
We recorded a non-cash charge of $12 million related to the impairment of goodwill of our Distribution reporting unit for the year
ended December 31, 2011, reflecting a continuing shift in the distribution of interactive entertainment software from retail distribution channels
to digital distribution channels. Furthermore, we recorded a non-cash impairment charge on definite-lived intangible assets of $326 million forthe year ended December 31, 2010, reflecting a continuing weaker environment for the casual game and music genres.
Segment Net Revenues
Activision
Activision’s net revenues increased for 2012 as compared to 2011, primarily due to revenues from the Skylanders franchise (both fromthe launch of Skylanders Giants in the fourth quarter of 2012 and the full-year revenues from Skylanders Spyro’s Adventure, which was launchedin the fourth quarter of 2011). The increase was partially offset by lower revenues from the Call of Duty franchise primarily from lower catalog
sales and lower revenues from downloadable content packs for Call of Duty: Modern Warfare 3, though these decreases were partially mitigatedby the strong performance from Call of Duty: Black Ops II which launched in the fourth quarter of 2012.
For 2011, net revenues from the Activision segment increased as compared to 2010 primarily due to: the strong performance of Call of
Duty: Modern Warfare 3 and the strong digital revenue performance from the franchise; revenues from Skylanders Spyro’s Adventure which
successfully launched as a new intellectual property in the fourth quarter of 2011; the release of Lego Star Wars III, which we published onbehalf of Lucas Arts in Europe and certain countries in Asia Pacific; and benefits from foreign exchange as compared to the prior year. The
increase was partially offset by a more focused release schedule in 2011 than in 2010, and lower catalog sales of games in the music and casual
games genre.

8

Blizzard
Blizzard’s net revenues increased for 2012 as compared to 2011, primarily due to the release of Diablo III in May 2012 and World of
Warcraft: Mists of Pandaria in September 2012. The increase in net revenues was partially offset by lower subscription revenues from World of
Warcraft due to a lower subscriber base.
At December 31, 2012, the worldwide subscriber* base for World of Warcraft was approximately 9.6 million, down from a base of
more than 10 million subscribers at September 30, 2012, and approximately 10.2 million subscribers at December 31, 2011, with the majority ofthe decline from the East (where the “East” includes China, Taiwan, and Korea, and the “West” includes North America, Europe and Latin
America). With the launch of World of Warcraft: Cataclysm®, in the fourth quarter of 2010, the subscriber base reached a new peak at more than
12 million subscribers at December 31, 2010. Since that time, the subscriber base has trended downward. Looking forward, Blizzard
Entertainment expects to continue to deliver new game content in all regions that is intended to further appeal to the gaming community.

*

World of Warcraft subscribers include individuals who have paid a subscription fee or have an active prepaid card to play World of
Warcraft, as well as those who have purchased the game and are within their free month of access. Internet Game Room players who
have accessed the game over the last thirty days are also counted as subscribers. The above definition excludes all players under freepromotional subscriptions, expired or cancelled subscriptions, and expired prepaid cards. Subscribers in licensees’ territories aredefined along the same rules.

Blizzard’s net revenues decreased for 2011 as compared to 2010 primarily as a result of no new titles released in 2011 as compared to2010, when StarCraft II: Wings of Liberty was released in the third quarter and World of Warcraft: Cataclysm was released in the fourth quarter;
and as a result of a decline in World of Warcraft’s subscriber base during 2011. These decreases were partially offset by benefits from foreignexchange as compared to the prior year.
Distribution
Distribution’s net revenues decreased in 2012 as compared to 2011, primarily due to a weaker U.K. market.
Distribution’s net revenues increased in 2011 as compared to 2010, primarily due to additional customer sales opportunities in the
U.K. and benefits from foreign exchange as compared to prior year.
Segment Income from Operations
Activision
Activision’s operating income increased in 2012 as compared to 2011, primarily due to higher net revenues as described above, andlower sales and marketing costs. The increase was partially offset by higher cost of sales as a result of higher net revenues, higher productdevelopment costs, and higher general and administrative costs, primarily resulting from legal-related expenses (including legal-related accruals,
settlements and fees) and additional accrued bonuses reflecting our strong 2012 financial performance.
Activision’s operating income increased in 2011 as compared to 2010, primarily due to a more focused release of products thatdelivered higher operating margins; increased digital sales of Call of Duty’s digital content, resulting in high operating margins; and reduction ofoperating expenses resulting from the 2011 Restructuring. These positive impacts on operating income were partially offset by an increase insales and marketing expenses to support the launch of Skylanders Spyro’s Adventure, Call of Duty: Modern Warfare 3 and Call of Duty Elite andadditional litigation activities and settlement of lawsuits.
Blizzard
Blizzard’s operating income increased in 2012 as compared to 2011, primarily due to higher revenues as described above. The
increase was partially offset by higher cost of sales as a result of higher net revenues, higher sales and marketing costs to support the launch of
Diablo III and World of Warcraft: Mists of Pandaria, and higher general and administrative costs from additional accrued bonuses reflecting ourstrong 2012 financial performance.

9

Blizzard’s operating income decreased in 2011 as compared to 2010, primarily due to lower revenues as discussed above. These
negative impacts on operating income were partially offset by a decrease in sales and marketing expenses, as higher sales and marketing expenses
were incurred in 2010 to support the release of StarCraft II: Wings of Liberty in the third quarter and World of Warcraft: Cataclysm in the fourth
quarter; and lower customer support costs incurred.
Non-GAAP Financial Measures
The analysis of revenues by distribution channel is presented both on a GAAP (including the impact from change in deferred
revenues) and non-GAAP (excluding the impact from change in deferred revenues) basis. We use this non-GAAP measure internally whenevaluating our operating performance, when planning, forecasting and analyzing future periods, and when assessing the performance of ourmanagement team. We believe this is appropriate because this non-GAAP measure enables an analysis of performance based on the timing ofactual transactions with our customers, which is consistent with the way the Company is measured by investment analysts and industry data
sources, and facilitates comparison of operating performance between periods. In addition, excluding the impact from change in deferred net
revenue provides a much more timely indication of trends in our sales and other operating results. While we believe that this non-GAAP measureis useful in evaluating our business, this information should be considered as supplemental in nature and is not meant to be considered in isolation
from, as a substitute for, or as more important than, the related financial information prepared in accordance with GAAP. In addition, this nonGAAP financial measure may not be the same as any non-GAAP measure presented by another company. This non-GAAP financial measure has
limitations in that it does not reflect all of the items associated with our GAAP revenues. We compensate for the limitations resulting from theexclusion of the change in deferred revenues by considering the impact of that item separately and by considering our GAAP, as well as nonGAAP, revenues.
Results of Operations—Years Ended December 31, 2012, 2011, and 2010
Non-GAAP Financial Measures
The following table provides reconciliation between GAAP and non-GAAP net revenues by distribution channel for the years ended
December 31, 2012, 2011, and 2010 (amounts in millions):
For the Years Ended December 31,
Increase/
Increase/(decrease)(decrease)2012 v 2011
2011 v 2010

% Change
2012 v 2011

% Change
2011 v 2010

2012

2011

2010

$3,013
1,537
4,550
306
4,856

$2,697
1,640
4,337
418
4,755

$2,629
1,440
4,069
378
4,447

$316
(103)
213
(112)
101

$68
200
268
40
308

12%
(6)
5
(27)
2

3%
14
7
11
7

69
62
131

(185)
(81)
(266)

251
105
356

254
143
397

(436)
(186)
(622)

(137)
(177)
(149)

(174)
(177)
(175)

3,082
1,599
4,681
306
$4,987

2,512
1,559
4,071
418
$4,489

2,880
1,545
4,425
378
$4,803

570
40
610
(112)
$498

(368)
14
(354)
40
$(314)

23
3
15
(27)
11%

(13)
1
(8)
11
(7)%

GAAP net revenues by distribution channel
Retail channels .......................................
Digital online channels(1) ........................
Total Activision and Blizzard ................
Distribution .............................................
Total consolidated GAAP net revenues .
Change in deferred net revenues(2)Retail channels .......................................
Digital online channels(1) ........................
Total changes in deferred net revenues ..
Non-GAAP net revenues by distribution channel
Retail channels .......................................
Digital online channels(1) ........................
Total Activision and Blizzard ................
Distribution .............................................
Total non-GAAP net revenues(3) ............

(1)

We currently define revenues from digital online channels as revenues from subscriptions and memberships, licensing royalties,
value-added services, downloadable content, and digitally distributed products.

(2)

We have determined that some of our game’s online functionality represents an essential component of gameplay and as a result amore-than-inconsequential separate deliverable. As such, we are required to recognize the revenues of these game titles over theestimated service periods, which may range from a minimum of five months to a maximum of less than a year. In the table above, we
present the amount of net revenues for each period as a result of this accounting treatment.

10

(3)

Total non-GAAP net revenues presented also represents our total operating segment net revenues.

The increase in GAAP net revenues from retail channels for 2012 as compared to 2011 was the result of sales from the Skylanders
franchise (both from the launch of Skylanders Giants in the fourth quarter of 2012 and the full-year revenues from Skylanders Spyro’s Adventure,
which was launched in the fourth quarter of 2011) and revenues from Diablo III and World of Warcraft: Mists of Pandaria. The increase waspartially offset by lower catalog sales of Call of Duty and other titles, and lower catalog revenues generated from World of Warcraft: Cataclysm
and Starcraft II: Wings of Liberty, which were released in 2010.
The increase in GAAP net revenues from retail channels for 2011 as compared to 2010 was the result of the strong performance of theCall of Duty franchise, recognition of deferred revenues from the 2010 launches of StarCraft II: Wings of Liberty and World of Warcraft:
Cataclysm, and revenues generated from the launch of Skylanders Spyro’s Adventure, partially offset by the release of fewer key titles.
The decrease in GAAP net revenues from digital online channels for 2012 as compared to 2011 was primarily due to lower revenues
from World of Warcraft subscriptions and lower net revenues from Call of Duty downloadable content packs released in 2012 for Call of Duty:
Modern Warfare 3, in comparison to downloadable content packs released in 2011 for Call of Duty®: Black Ops. The decrease was partially
offset by the full game download sales of Diablo III and World of Warcraft: Mists of Pandaria, and revenues from Call of Duty Elite
memberships.
The increase in GAAP net revenues from digital online channels for 2011 as compared to 2010 was primarily due to the stronger
performance and greater number of downloadable content packs for Call of Duty: Black Ops, which was released in 2011, as compared to thedownloadable content packs for Call of Duty: Modern Warfare® 2 released in the prior year, and a higher number of full game downloads fromthe Call of Duty catalog titles. In addition, revenues generated from the World of Warcraft franchise, particularly from the digital release ofWorld of Warcraft: Cataclysm in December 2010, as well as the digital release of StarCraft II: Wings of Liberty in July 2010, resulted in moredeferred revenues recognized in 2011 as compared to 2010.
The increase in non-GAAP net revenues from retail channels for 2012 as compared to 2011 was the result of sales from theSkylanders franchise (both from the launch of Skylanders Giants in the fourth quarter of 2012 and the full-year revenues from Skylanders Spyro’s
Adventure, which was launched in the fourth quarter of 2011), Diablo III and World of Warcraft: Mists of Pandaria. The increase was partially
offset by lower catalog sales of Call of Duty titles as well as other titles, and lower catalog revenues generated from World of Warcraft:
Cataclysm and Starcraft II: Wings of Liberty, which were released in 2010.
The decrease in non-GAAP net revenues from retail channels for 2011 as compared to 2010 was the result of our more focused slate,with the release of fewer key titles, and lower revenues generated from the casual “value” titles. The decrease was partially offset by the strong
performance of the Call of Duty franchise and revenues generated from Skylanders Spyro’s Adventure.
The increase in non-GAAP net revenues from digital online channels for 2012 as compared to 2011 was attributable to sales of fullgame digital downloads from the launches of World of Warcraft: Mists of Pandaria and Diablo III (which were launched in 2012) andmemberships revenues from Call of Duty Elite (which was launched in late November 2011). The increase was partially offset by lower revenues
from World of Warcraft subscriptions and lower net revenues from Call of Duty downloadable content packs.
The increase in non-GAAP net revenues from digital online channels for 2011 as compared to 2010 was attributable to the stronger
performance and greater number of downloadable content packs released in 2011 for Call of Duty: Black Ops, versus downloadable map packs
released in the prior year for Call of Duty: Modern Warfare 2, and a higher number of full game downloads from the Call of Duty catalog titles.
This increase was partially offset by the unfavorable impact of the decrease in World of Warcraft’s subscriber base, the decrease of full gamedownloads of World of Warcraft: Cataclysm, which was released in December 2010, and StarCraft II: Wings of Liberty, which was released inJuly 2010.

11

Consolidated Results
Net Revenues by Geographic Region
The following table details our consolidated net revenues by geographic region for the years ended December 31, 2012, 2011, and2010 (amounts in millions):

2012

2011

2010

$2,436
1,968
452$4,856$2,405
1,990
360$4,755$2,4091,743
295$4,447For the Years ended December 31,
Increase/
Increase/(decrease)(decrease)2012 v 2011
2011 v 2010

% Change
2012 v 2011

% Change
2011 v 2010

Geographic region net revenues:
North America ...............................................
Europe............................................................
Asia Pacific....................................................
Consolidated net revenues..................................

$31
(22)
92
$101

$(4)
247
65
$308

1%
(1)
26
2%

—%
14
22
7%

The increase/(decrease) in deferred revenues recognized by geographic region for the years ended December 31, 2012, 2011, and 2010
was as follows (amounts in millions):

2012

For the Years Ended December 31,
Increase/(Decrease)
2011
2010
2012 v 2011

$(78)
(28)
(25)
$(131)

$154
104
8
$266

Increase/(Decrease)2011 v 2010

Deferred revenues recognized by geographic region:
North America .................................................................................................
Europe..............................................................................................................
Asia Pacific......................................................................................................
Total impact on consolidated net revenues ..........................................................

$(166)(159)(31)$(356)$(232)(132)(33)$(397)

$320
263
39
$622

Consolidated net revenues from North America and Asia Pacific increased in 2012 as compared to 2011, primarily due to sales fromthe Skylanders franchise (both from the launch of Skylanders Giants in the fourth quarter of 2012, and the full-year revenues from Skylanders
Spyro’s Adventure, which was launched in the fourth quarter of 2011), Diablo III and World of Warcraft: Mists of Pandaria. Sales of Diablo III
accounted for the majority of the year-over-year increase in net revenues for the Asia Pacific region. The increase in consolidated net revenues
from North America and Asia Pacific was partially offset by lower subscriptions revenues from World of Warcraft, lower catalog sales of Call of
Duty titles as well as other titles, and lower catalog revenues generated from World of Warcraft: Cataclysm and Starcraft II: Wings of Liberty,
which were released in 2010.
Consolidated net revenues from Europe decreased slightly in 2012 as compared to 2011, primarily due to lower subscriptions revenues
from World of Warcraft, lower catalog sales of Call of Duty titles as well as other titles, and lower catalog revenues generated from World of
Warcraft: Cataclysm and from Starcraft II: Wings of Liberty, which were released in 2010, and lower revenues from our Distribution segment.
The decrease was partially offset by sales from the Skylanders franchise (both from the launch of Skylanders Giants in the fourth quarter of 2012
and the full-year revenues from Skylanders Spyro’s Adventure, which was launched in the fourth quarter of 2011), Diablo III and World of
Warcraft: Mists of Pandaria.
Further, in Europe and certain countries in Asia Pacific, net revenues were also negatively impacted due to the fact that we publishedtitles for Lucas Arts in 2011, such as Lego Star Wars III, while no comparable title was published in 2012.
The decrease in deferred revenues recognized in all regions for the year ended December 31, 2012 as compared to 2011 was primarily
attributable to lower World of Warcraft subscription revenues, lower sales of Call of Duty digital downloadable content packs and catalogs titles,
and lower catalog sales of World of Warcraft: Cataclysm and Starcraft II: Wings of Liberty, as well as an increase in revenues deferred due to thelaunch of both Diablo III and World of Warcraft: Mists of Pandaria. The decrease was partially offset by the recognition of the deferred revenues
from Call of Duty: Modern Warfare 3.
Consolidated net revenues from Europe and Asia Pacific increased in 2011 as compared to 2010, primarily due to the success of Callof Duty catalog titles, stronger performance of downloadable content packs for Call of Duty: Black Ops and the release of World of Warcraft:
Cataclysm and StarCraft II: Wings of Liberty in 2010, all of which resulted in increased revenues recognized in 2011 as compared to 2010.

12

Further, the launch of Skylanders Spyro’s Adventure and the increase in Distribution segment revenues in Europe contributed to the increase inconsolidated net revenues. These increases were partially offset by the additional deferral of revenues as a result of greater sales from the launchof Call of Duty: Modern Warfare 3 in November 2011.
Consolidated net revenues from North America decreased slightly in 2011 as compared to 2010, primarily due to the decrease in net
revenues from music and casual titles and the greater sales from the launch of Call of Duty: Modern Warfare 3 which resulted in additional
deferral of revenues. These decreases were almost entirely offset by the success of Call of Duty catalog titles, stronger performance ofdownloadable content packs for Call of Duty: Black Ops, the releases of World of Warcraft: Cataclysm and StarCraft II: Wings of Liberty in2010, and the launch of Skylanders Spyro’s Adventure, all of which resulted in increased revenues recognized in 2011 as compared to 2010.
The releases of Call of Duty: Black Ops, World of Warcraft: Cataclysm and StarCraft II: Wings of Liberty in 2010 were the primaryreason why more deferred revenues were recognized during 2011 as compared to 2010 across all regions. This increase in the recognition ofdeferred revenues was partially offset by greater revenues deferred in 2011 as a result of the higher sales from the initial launch of Call of Duty:
Modern Warfare 3 as compared to Call of Duty: Black Ops.
Foreign Exchange Impact
Changes in foreign exchange rates had a negative impact of approximately $114 million and a positive impact of approximately$100 million on Activision Blizzard’s net revenues in 2012 and 2011, respectively. The change is primarily due to the year-over-year movementsof the British pound, Euro and Australian dollar average rates relative to the U.S. dollar.
Net Revenues by Platform
The following table details our net revenues by platform and as a percentage of total consolidated net revenues for the years ended
December 31, 2012, 2011, and 2010 (amounts in millions):
Year Ended
December 31,
2012

Platform net revenues:
Online subscriptions(1) ...............................
PC and other(2) ...........................................
ConsoleSony PlayStation 3 ...............................
Microsoft Xbox 360 .............................
Nintendo Wii and Wii U ......................
Total console .............................................
Handheld ...................................................
Total platform net revenues ...........................
Distribution ................................................
Total consolidated net revenues .....................

% of
total
consolidated
net revs.

Year
Ended
December 31,
2011

% of
total
consolidated
net revs.

Year
Ended
December 31,
2010

% of
total
consolidated
net revs.

Increase/(decrease)2012 v 2011

Increase/(decrease)2011 v
2010

$986
1,214

20%
25

$1,357374

29%
8$1,230325

28%
7$(371)
840

$127
49

876
1,019
291
2,186
164
4,550
306
$4,856

18
21
6
45
4
94
6
100%

948
1,140
351
2,439
167
4,337
418
$4,755

20
24
7
51
3
91
9
100%

889
1,033
408
2,330
184
4,069
378
$4,447

20
23
9
52
4
91
9
100%

(72)
(121)
(60)
(253)
(3)
213
(112)
$101

59
107
(57)
109
(17)
268
40
$308

13

The increase/(decrease) in deferred revenues recognized by platform for the years ended December 31, 2012, 2011, and 2010 was asfollows (amounts in millions):

Increase/(decrease) in deferred revenues recognized by platform:
Online subscriptions(1) .....................................................................................
PC and other(2) .................................................................................................
ConsoleSony PlayStation 3 .....................................................................................
Microsoft Xbox 360 ...................................................................................
Nintendo Wii and Wii U ............................................................................
Total console ...................................................................................................
Nintendo 3DS and DS ................................................................................
Total impact on consolidated net revenues ..........................................................

Years Ended December 31,
Increase/(Decrease)20102012 v 2011

Increase/(Decrease)2011 v 2010

2012

2011

$(85)
(36)

$202
75

$(191)(81)$(287)
(111)

$393
156

(30)
3
12
(15)
5
$(131)

(36)
(43)
66
(13)
2
$266

(77)
(15)
16
(76)
(8)
$(356)

6
46
(54)
(2)
3
$(397)

41
(28)
50
63
10
$622

(1)

Revenues from online subscriptions consists of revenue from all World of Warcraft products, including subscriptions, boxed products,
expansion packs, licensing royalties, value-added services, and revenues from Call of Duty Elite memberships.

(2)

Revenues from PC and other consists of net revenues from the sale of PC boxed products, Skylanders franchise standalone toys
products, mobile sales and other physical merchandise and accessories.

Net revenues from online subscriptions decreased in 2012 as compared to 2011, primarily as a result of lower World of Warcraft
subscription revenues, and lower Blizzard catalog sales from World of Warcraft: Cataclysm, which was released in December 2010. The decrease
was partially offset by revenues from Call of Duty Elite memberships and World of Warcraft: Mists of Pandaria. Net revenues from online
subscriptions increased in 2011 as compared to 2010, primarily driven by the recognition of deferred revenues from the release of World of
Warcraft: Cataclysm in December 2010 and from the sales of World of Warcraft’s value-added services, partially offset by the unfavorable
impact of World of Warcraft’s declining subscriber base.
Net revenues from PC and other significantly increased in 2012 as compared to 2011, primarily as a result of the sale of standalone
toys and accessories from the Skylanders franchise (both from the launch of Skylanders Giants in the fourth quarter of 2012 and Skylanders
Spyro’s Adventure, which was launched in the fourth quarter of 2011), and from sales of Diablo III. The increase was partially offset by thedecrease in revenues from Starcraft II: Wings of Liberty, which was released in July 2010. Net revenues from PC and other increased in 2011 ascompared to 2010, primarily due to the sale of standalone toys and accessories for Skylanders Spyro’s Adventure, and the success of the Call of
Duty franchise titles. The increase was partially offset by lower revenues from music and causal titles and no major release for PC and other in2011 as compared to 2010, when StarCraft II: Wings of Liberty was released.
Net revenues from PS3 and Xbox 360 decreased in 2012 as compared to 2011, primarily due to lower revenues from Call of Duty
downloadable content packs and catalog sales, partially offset by sales from the Skylanders franchise. Net revenues from PS3 and Xbox 360
increased in 2011 as compared to 2010, primarily due to the launch of Skylanders Spyro’s Adventure, the success of the Call of Duty franchise,and downloadable content packs for Call of Duty: Black Ops as compared to the downloadable content packs for Call of Duty: Modern Warfare
2. The increase was partially offset by the strong consumer demand at launch in November 2011 for Call of Duty: Modern Warfare 3, which
resulted in additional deferral of revenues.
Net revenues from Nintendo Wii and Wii U decreased in 2012 as compared to 2011, primarily due to overall weaker catalog sales andfewer comparable releases, partially offset by additional revenues from titles associated with the launch of the Wii U. Net revenues from theNintendo Wii and handheld systems decreased in 2011 as compared to 2010 due to the release of fewer key titles than in 2010, and lower catalog
sales of games in the music and casual games genres.
The deferred revenues recognized for online subscriptions decreased in 2012 as compared to 2011, primarily due to revenues deferredfrom World of Warcraft: Mists of Pandaria, which launched on September 25, 2012, and lower revenues recognized from World of Warcraft:
Cataclysm, which was released in December 2010, and was partially offset by additional revenues recognized from Call of Duty Elite
memberships in 2012. The deferred revenues recognized for online subscriptions increased in 2011 as compared to 2010, primarily driven by the14

recognition of deferred revenues from the release of World of Warcraft: Cataclysm in December 2010 and from the sales of World of Warcraft’s
value-added services, partially offset by the unfavorable impact of World of Warcraft’s declining subscriber base.
The decrease in deferred revenues recognized for PC and other in 2012 as compared to 2011 was primarily related to revenues
deferred from the successful launch of Diablo III on May 15, 2012 and a decrease in revenues recognized from catalog sales of StarCraft II:
Wings of Liberty, which was released in July 2010. The deferred revenues recognized for PC and other increased in 2011 as compared to 2010,
primarily related to the recognition of revenues of StarCraft II: Wings of Liberty, which was released in July 2010.
The increase in deferred revenue recognized for Xbox 360 in 2012 as compared to 2011 was primarily due to less revenue deferredfrom Call of Duty: Black Ops II. The decrease in deferred revenue recognized for Xbox 360 in 2011 as compared to 2010, was primarily due tothe revenues deferral from Call of Duty: Modern Warfare 3. The decreases in deferred revenues recognized for Nintendo Wii in 2012 ascompared to 2011, primarily relate to overall weaker catalog sales and fewer comparable releases, and were partially offset by additional Wii U
deferred revenues recognized. The increases in deferred revenues recognized for Nintendo Wii in 2011 as compared to 2010, primarily relate torecognition of revenues of our catalog sales of games in the music and casual games genres.
Costs and Expenses
Cost of Sales (amounts in millions)
The following table details the components of cost of sales in dollars and as a percentage of total consolidated net revenues for theyears ended December 31, 2012, 2011, and 2010 (amounts in millions):
Year
Ended
December 31,
2012

Product costs.................................
Online subscriptions .....................
Software royalties andamortization .............................
Intellectual property licenses ........

Year
Ended
December 31,
2011

% of
consolidated
net revs.

Year
Ended
December 31,
2010

% of
consolidated
net revs.

Increase(Decrease)2012 v
2011% ofconsolidated
net revs.

Increase(Decrease)2011 v
2010$1,116263

23%
5$1,134255

24%
5$1,350
250

31%
5

$(18)
8

$(216)
5

194
89

4
2

218
165

5
3

338
197

8
4

(24)
(76)

(120)
(32)

Total cost of sales decreased in 2012 as compared to 2011, primarily due to a decrease in amortization of capitalized softwaredevelopment and intellectual property license costs as we had fewer titles released during 2012; a decrease in amortization of intangible assets
due to decreasing intangible assets balances year-over-year; and lower product costs from our Distribution segment due to lower revenues. These
decreases in cost of sales were partially offset by higher product costs from our Publishing and Blizzard segments due to higher revenues.
Total cost of sales decreased in 2011 as compared to 2010, primarily due to the continued change in mix for products with fewer
hardware peripherals, and accordingly lower product costs; an increasing number of products distributed through digital online channels; adecrease in inventory obsolescence charges, as the prior year included higher inventory obsolescence charges relating to peripherals; a decrease inamortization of capitalized software development and intellectual property license costs as we had fewer titles released during 2011; and adecrease in amortization of intangible assets. These decreases in cost of sales were partially offset by more deferred costs recognized, consistent
with more deferred revenues recognized, during 2011 as compared to 2010; and higher product costs from our Distribution segment revenues
associated with higher revenues.
Product Development (amounts in millions)Year Ended
December 31,
2012

Product development ...................

$604

% of
consolidated
net revs.

12%

Year Ended
December 31,
2011

$629

% of
consolidated
net revs.

14%

Year Ended
December 31,
2010

$626

% of
consolidated
net revs.

14%

Increase(Decrease)2012 v
2011$(25)

Increase(Decrease)2011 v
2010$3

For 2012, product development costs decreased as compared to 2011, principally due to higher capitalization in 2012 of our overall
product development costs related to future titles and the timing at which these titles reached technical feasibility and lower stock option
expenses. Additionally, product development costs in 2011 included larger amounts written off, due to the cancellation of games underdevelopment, than in 2012. The decrease was partially offset by higher studio-related bonuses reflecting our strong 2012 financial performance.

15

For 2011, product development costs increased slightly as compared to 2010, principally due to lower capitalization of our overall
product development costs related to future titles and higher accrued studio-related bonuses. This increase in product development expense waspartially offset by the benefits realized from our 2011 Restructuring, which involved a focus on reducing the number of titles in development andpublication, including the discontinuation of the development of music-based games. Additionally, product development costs in 2011 included
amounts written off due to the cancellation of a future game under development; however, the write-off of capitalized software development wasslightly less than in 2010.
Sales and Marketing (amounts in millions)Year Ended
December 31,
2012

Sales and marketing ...........

% ofconsolidated
net revs.

$578

12%

Year Ended
December 31,
2011

% of
consolidated
net revs.

$545

11%

Year Ended
December 31,
2010

% of
consolidated net
revs.

$516

12%

Increase(Decrease)2012 v
2011

Increase(Decrease)2011 v
2010

$33

$29

Sales and marketing expenses increased in 2012 as compared to 2011, primarily due to increased spending on sales and marketing
activities to support the launches of Diablo III and World of Warcraft: Mists of Pandaria, as well as continued investments in our Skylanders
franchise.
Sales and marketing expenses increased in 2011 as compared to 2010, primarily due to increased spending on sales and marketing
activities to support the launch of Skylanders Spyro’s Adventure, Call of Duty: Modern Warfare 3 and Call of Duty Elite in the fourth quarter of2011.
General and Administrative (amounts in millions)Year Ended
December 31,
2012

General andadministrative ................

$561

% of
consolidated
net revs.

12%

Year Ended
December 31,
2011

% of
consolidated
net revs.

$456

10%

Year Ended
December 31,
2010

$375

% of
consolidated
net revs.

8%

Increase(Decrease)2012 v
2011$105

Increase(Decrease)2011 v
2010$81

General and administrative expenses increased in 2012 as compared to 2011, primarily due to higher legal-related expenses (including
legal-related accruals, settlements and fees), stock-based compensation expenses and additional accrued bonuses reflecting our strong 2012financial performance.
General and administrative expenses increased in 2011 as compared to 2010, primarily due to higher legal expenses incurred fromadditional litigation activities and settlement of lawsuits, the impairment of our Distribution segment’s goodwill and higher depreciation expenseand facilities costs.
Impairment of Intangible Assets (amounts in millions)Year Ended
December 31,
2012

Impairment of intangible
assets ..............................

$—

% of
consolidated
net revs.

—%

Year Ended
December 31,
2011

% of
consolidated
net revs.

$——%

Year Ended
December 31,
2010

$326

% of
consolidated
net revs.

7%

Increase(Decrease)2012 v
2011$—

Increase(Decrease)2011 v
2010$(326)

There was no impairment of intangible assets for the years ended December 31, 2012 and 2011.
In the fourth quarter of 2010, as a result of the franchise and industry results of the holiday season, we significantly revised ouroutlook for the retail sales of software. Further, with the impact of the continued economic downturn on our industry in 2010 and the change inthe buying habits of casual consumers, we reassessed our overall expectations with respect to our future sales of certain games titles. We
considered these economic changes during our planning process for 2011 that we conducted during the months of November and December,
2010, which resulted in a strategy change to, among other things, focus on fewer title releases in the casual and music genres. As a result, weupdated our future projected revenue streams for our franchises in the casual and music genres. We performed recoverability and, whereapplicable, impairment tests on the related intangible assets in accordance with ASC Subtopic 360-10. Based on the analysis performed, werecorded impairment charges of $67 million, $9 million and $250 million to license agreements, game engines and internally developed
franchises intangible assets, respectively, for 2010 within our Activision segment. See Note 11 of the Notes to Consolidated Financial Statements

16

included in this Annual Report for additional information regarding the determination of the impairment charges recorded for the year ended
December 31, 2010.
Restructuring (amounts in millions)Year Ended
December 31,
2012

Restructuring ......................

% ofconsolidated
net revs.

$—

Year Ended
December 31,
2011

—%

% of
consolidated
net revs.

$25

Year Ended
December 31,
2010

—%

% of
consolidated
net revs.

$—

Increase(Decrease)2012 v
2011

—%

$(25)

Increase(Decrease)2011 v
2010$25

There were no material restructuring expenses for the year ended December 31, 2012.
On February 3, 2011, the Company’s Board of Directors authorized the 2011 Restructuring. The 2011 Restructuring focused on thedevelopment and publication of a reduced slate of titles on a going-forward basis, including the discontinuation of the development ofmusic-based games, the closure of the related business unit and the cancellation of other titles then in production, along with a related reduction
in studio headcount and corporate overhead. The costs related to the 2011 Restructuring activities included severance costs, facility exit costs, andexit costs from the cancellation of projects. The 2011 Restructuring was completed as of December 31, 2011 and we do not expect to incur
additional restructuring expenses relating thereto. See Note 7 of the Notes to Consolidated Financial Statements included in this Annual Reportfor more detail and a roll forward of the restructuring liability that includes the beginning and ending liability, costs incurred, cash payments andnon-cash write downs.
In 2008, we implemented an organizational restructuring plan as a result of the Business Combination. This organizational
restructuring was to integrate different operations and to streamline the combined Activision Blizzard organization. The restructuring activities
included severance costs, facility exit costs, write offs of assets and liabilities and exit costs from the cancellation of projects. At December 31,
2010, we had completed our organizational restructuring activities as a result of the Business Combination. Restructuring expenses during year
ended December 31, 2011 and 2010 associated to this plan were immaterial and were recorded within the “General and administrative expense”
in our consolidated statements of operations.
Investment and Other Income (Expense), Net (amounts in millions)Year Ended
December 31,
2012

Investment and otherincome (expense), net ....

% ofconsolidated
net revs.

$7—%

Year Ended
December 31,
2011

% of
consolidated
net revs.

$3—%

Year Ended
December 31,
2010

% of
consolidated
net revs.

$23

Increase(Decrease)2012 v
2011

1%

$4

Increase(Decrease)2011 v
2010$(20)

Investment and other income (expense), net, increased in 2012 as compared to 2011. The increase is primarily due to the net realized
gain on our foreign exchange contracts of $2 million in 2012 as compared to a $7 million loss in 2011. However, during 2012, we experienced
lower yields on our investments, which partially offset the increase.
Investment and other income (expense), net, decreased in 2011 as compared to 2010. During 2011, we recorded higher yields
generated from our cash and investment balances, which was partially offset by a higher realized loss from foreign exchange contracts, ascompared to 2010. Further, the majority of Investment and other income (expense), net, in 2010 related to the reduction in fair value of a financial
liability relating to a contingent earn-out liability from a previous acquisition and there was no such item during 2011.
Income Tax Expense (Benefit) (amounts in millions)Year Ended
December 31,
2012

Income tax expense ....................

$309

% of
Pretaxincome21.2%

Year Ended
December 31,
2011

$246

% of
Pretaxincome18.5%

Year Ended
December 31,
2010

$74

% of
Pretaxincome15.0%

Increase(Decrease)2012 v
2011$63

Increase(Decrease)2011 v
2010$172

For 2012, the Company’s income before income tax expense was $1.46 billion. Our income tax expense of $309 million resulted in an
effective tax rate of 21.2%. The difference between our effective tax rate and the U.S. statutory tax rate of 35% is due to earnings taxed atrelatively lower rates in foreign jurisdictions, recognition of California research and development credits, the federal domestic production
deduction, and a tax benefit resulting from a federal income tax audit settlement allocated to us by a subsidiary of Vivendi S.A. (“Vivendi”), as
further discussed below.

17

For 2011, the Company’s income before income tax expense was $1.3 billion. Our income tax expense of $246 million resulted in an
effective tax rate of 18.5%. The difference between our effective tax rate and the U.S. statutory tax rate of 35% is due to earnings taxed atrelatively lower rates in foreign jurisdictions, recognition of federal and California research and development credits, the federal domestic
production deduction and a favorable impact from discrete items recognized in connection with the filing of our 2010 tax returns.
In 2012 and 2011, our U.S. income before income tax expense was $668 million and $623 million, respectively, and comprised 46%
and 47%, respectively, of our consolidated income before income tax expense. In 2012 and 2011, the foreign income before income tax expense
was $790 million and $708 million, respectively, and comprised 54% and 53%, respectively, of our consolidated income before income tax
expense. In 2012 and 2011, the impact of earnings taxed at lower rates in foreign jurisdictions versus our U.S. federal statutory tax rate was 17%
and 15%, respectively.
As previously disclosed, on July 9, 2008, the Business Combination occurred among Vivendi, the Company and certain of theirrespective subsidiaries pursuant to which Vivendi Games, then a member of the consolidated U.S. tax group of Vivendi’s subsidiary, Vivendi
Holdings I Corp. (“VHI”), became a subsidiary of the Company. As a result of the business combination, the favorable tax attributes of VivendiGames carried forward to the Company. In late August 2012, VHI settled a federal income tax audit with the Internal Revenue Service (“IRS”)
for the tax years ended December 31, 2002, 2003, and 2004. In connection with the settlement agreement, VHI’s consolidated federal net
operating loss carryovers were adjusted and allocated to various companies that were part of its consolidated group during the relevant periods.
This allocation resulted in a $132 million federal net operating loss allocation to Vivendi Games. In September 2012, the Company filed anamended tax return for its December 31, 2008 tax year to utilize these additional federal net operating losses allocated as a result of theaforementioned settlement, resulting in the recording of a one-time tax benefit of $46 million. Prior to the settlement, and given the uncertainty of
the VHI audit, the Company had insufficient information to allow it to record or disclose any information related to the audit until the quarter
ended September 30, 2012, as disclosed in the Company’s Form 10-Q for that period.
Vivendi Games results for the period January 1, 2008 through July 2009 are included in the consolidated federal and certain foreignstate and local income tax returns files by Vivendi or its affiliates while Vivendi Games results for the period July 10, 2008 throughDecember 31, 2008 are included in the consolidated federal and certain foreign, state and local income tax returns filed by Activision Blizzard.
Vivendi Games tax years 2005 through 2008 remain open to examination by the major taxing authorities. The IRS is currently examining VivendiGames tax returns for the 2005 through 2008 tax years.
Activision Blizzard’s tax years 2008 through 2011 remain open to examination by the major taxing jurisdictions to which we aresubject. The IRS is currently examining the Company’s federal tax returns for the 2008 and 2009 tax years. The Company also has several stateand non-U.S. audits pending.
Although the final resolution of the Company’s global tax disputes is uncertain, based on current information, in the opinion of ourmanagement, the ultimate resolution of these matters will not have a material adverse effect on the Company’s consolidated financial position,liquidity or results of operations. However, an unfavorable resolution of the Company’s global tax disputes could have a material adverse effecton our business and results of operations in the period in which the matters are ultimately resolved.
On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law by the President of the United States. Under theprovisions of the American Taxpayer Relief Act of 2012, the research and development (“R&D”) tax credit that had expired December 31, 2011,
was reinstated retroactively to January 1, 2012, and is now scheduled to expire on December 31, 2013. The Company will record the impact of
the extension of the R&D tax credit related to the tax year ended December 31, 2012, as a discrete item the first quarter of 2013. The impact of
the extension of the R&D tax credit is expected to result in a tax benefit of approximately $11 million related to the tax year ended December 31,
2012.
The overall effective income tax rate in future periods will depend on a variety of factors, such as changes in the mix of income by tax
jurisdiction, applicable accounting rules, applicable tax laws and regulations, and rulings and interpretations thereof, developments in tax audits
and other matters, and variations in the estimated and actual level of annual pretax income or loss. Further, the effective tax rate could fluctuatesignificantly on a quarterly basis and could be adversely affected by the extent that income (loss) before income tax expenses (benefit) is lower
than anticipated in foreign regions where taxes are levied at relatively lower statutory rates and/or higher than anticipated in the United States
where taxes are levied at relatively higher statutory rates.
A more detailed analysis of the differences between the U.S. federal statutory rate and the consolidated effective tax rate, as well asother information about our income taxes, is provided in Note 15 of the Notes to Consolidated Financial Statements included in this Annual
Report.

18

Foreign Exchange Impact
Changes in foreign exchange rates had a negative impact of $67 million and a positive impact of $49 million on Activision Blizzard’s
consolidated operating income in 2012 and 2011, respectively. The change is primarily due to the strengthening of the British pound, Euro andAustralian dollar average rates relative to the U.S. dollar.
Liquidity and Capital Resources
Sources of Liquidity (amounts in millions)
For the Years Ended December 31,
Increase(Decrease)
2012
2011
2012 v 2011

Cash and cash equivalents ......................................................................................................................................
$3,959
Short-term investments .......................................................................................................................................... 416$4,375$3,165360$3,525Percentage of total assets........................................................................................................................................ 31%

27%

2012

Cash flows provided by operating activities ........................................................$1,345
Cash flows provided by (used in) investing activities ......................................... (124)Cash flows used in financing activities ................................................................ (497)
Effect of foreign exchange rate changes .............................................................. 70
Net increase in cash and cash equivalents ........................................................... $794

2011

For the Years Ended December 31,
Increase(Decrease)20102012 v 2011

$952
266
(808)
(57)
$353

$1,376(312)(1,053)
33
$44

$393
(390)
311
127
$441

$794
56
$850

Increase(Decrease)2011 v 2010$(424)
578
245
(90)
$309

Cash Flows Provided by Operating Activities
The primary drivers of cash flows provided by operating activities included the collection of customer receivables generated by thesale of our products and digital and subscription revenues, partially offset by payments to vendors for the manufacturing, distribution andmarketing of our products, payments to third-party developers and intellectual property holders, tax liabilities, and payments to our workforce. A
significant operating use of our cash relates to our continued focus on customer service for our subscribers and investment in softwaredevelopment and intellectual property licenses.
Cash flows provided by operating activities were higher for 2012 as compared to 2011, and were lower for 2011 as compared to 2010.
Our source of cash inflow varies with our release schedule. For example, Blizzard’s major releases of StarCraft II and World of Warcraft:
Cataclysm during 2010, and Blizzard’s major releases of Diablo III and World of Warcraft: Mist of Pandaria during 2012 contributed to thehigher cash inflows for 2010 and 2012 as compared to 2011, when there were no major releases from Blizzard. Additionally, the strong
performance of Activision’s Skylanders franchise and Call of Duty: Black Ops II contributed to strong operating cash flows in 2012.
Cash Flows Provided by (Used in) Investing Activities
The primary drivers of cash flows used in investing activities have typically included capital expenditures, acquisitions and the net
effect of purchases and sales/maturities of short-term investments.
Cash flows provided by investing activities were lower for 2012 as compared to 2011, primarily due to decreased proceeds from thematurity of investments, partially offset by higher purchases of short-term investments. In 2012, proceeds from the maturity of investments were$444 million, the majority of which consisted of U.S. treasury and other government agency securities, while the purchase of short-term
investments totaled $503 million. Further, capital expenditures, primarily related to property and equipment, were $73 million.
Cash flows provided by investing activities were higher for 2011 as compared to 2010, primarily due to increased proceeds from thematurity of investments, decreased purchases of short-term investments and lower capital expenditures. Proceeds from the maturity of19

investments were $740 million, the majority of which consisted of U.S. treasury and other government agency securities, while the purchase of
short-term investments totaled $417 million and capital expenditures, primarily related to property and equipment, were $72 million.
Cash Flows Used in Financing Activities
The primary drivers of cash flows used in financing activities have historically related to transactions involving our common stock,
including the issuance of shares of common stock to employees, payment of dividends and the repurchase of our common stock. We have nothistorically utilized debt financing as a source of cash flows although we may do so in the future.
Cash flows used in financing activities were lower for 2012 as compared to 2011, primarily due to decreased share repurchaseactivities. Cash flows used in financing activities for the year ended December 31, 2012 primarily reflected an aggregate cash payment of$204 million to holders of our common stock and restricted stock units in connection with our annual dividend. In addition, cash flows used infinancing activities for the year ended December 31, 2012 reflect the repurchase of $315 million of our common stock and the payment of$16 million in taxes relating to the vesting of employees’ restricted stock rights. The repurchases and dividend payments were partially offset by$33 million of proceeds from the issuance of shares of our common stock to employees in connection with stock option exercises.
Cash flows used in financing activities were lower for 2011 as compared to 2010, primarily due to decreased share repurchaseactivities. Cash flows used in financing activities for the year ended December 31, 2011 primarily reflected an aggregate cash payment of$194 million to holders of our common stock and restricted stock units in connection with our annual dividend. In addition, cash flows used infinancing activities for the year ended December 31, 2011 reflect the repurchase of $692 million of our common stock, as compared to therepurchase of $959 million for the year ended December 31, 2010.
Other Liquidity and Capital Resources
Our primary sources of liquidity are cash and cash equivalents and investments and cash flows provided by operating activities. With
our cash and cash equivalents and investments of $4.4 billion and expected cash flows provided by operating activities, we believe that we havesufficient liquidity to meet daily operations for the foreseeable future. We also believe that we have sufficient working capital ($3.6 billion at
December 31, 2012) to finance our operational requirements for at least the next twelve months, including purchases of inventory and equipment,
the development, production, marketing and sale of new products, the provision of customer service for our subscribers, the acquisition of
intellectual property rights for future products from third parties, and to fund our stock repurchase program and dividends.
As of December 31, 2012, the amount of cash and cash equivalents held outside of the U.S. by our foreign subsidiaries was$2.6 billion, compared with $1.6 billion as of December 31, 2011. If these funds are needed in the future for our operations in the U.S., we would
accrue and pay the required U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S.
and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.
We are considering, or may consider during 2013, substantial stock repurchases, dividends, acquisitions, licensing or other nonordinary course transactions, and significant debt financings relating thereto.
Capital Expenditures
We made capital expenditures of $73 million in 2012, as compared to $72 million in 2011. In 2013, we anticipate total capital
expenditures of approximately $85 million. Capital expenditures are expected to be primarily for computer hardware and software purchases.
Commitments
In the normal course of business, we enter into contractual arrangements with third-parties for non-cancelable operating leaseagreements for our offices, for the development of products, and for the rights to intellectual property. Under these agreements, we commit toprovide specified payments to a lessor, developer or intellectual property holder, as the case may be, based upon contractual arrangements. The
payments to third-party developers are generally conditioned upon the achievement by the developers of contractually specified development
milestones. Further, these payments to third-party developers and intellectual property holders typically are deemed to be advances and arerecoupable against future royalties earned by the developer or intellectual property holder based on the sale of the related game. Additionally, inconnection with certain intellectual property rights acquisitions and development agreements, we commit to spend specified amounts formarketing support for the related game(s) which is to be developed or in which the intellectual property will be utilized. Assuming all contractual

20

provisions are met, the total future minimum commitments for these and other contractual arrangements in place at December 31, 2012 arescheduled to be paid as follows (amounts in millions):
Contractual Obligations(1)Facility andDeveloper
equipment leases
and IP
Marketing

For the year ending December 31,
2013 ......................................................................................................................................
2014 ......................................................................................................................................
2015 ......................................................................................................................................
2016 ......................................................................................................................................
2017 ......................................................................................................................................
Thereafter .............................................................................................................................
Total .................................................................................................................................

(1)

33
31
22
18
17
52
173

119
5
1
—
—
3
128

58
51
—
6
6
—
121

Total

210
87
23
24
23
55
422

We have omitted uncertain income tax liabilities from this table due to the inherent uncertainty regarding the timing of potential issue
resolution. Specifically, either the underlying positions have not been fully developed enough under audit to quantify at this time or
the years relating to the issues for certain jurisdictions are not currently under audit. At December 31, 2012, we had $207 million of
unrecognized tax benefits, of which $197 million was included in “Other Liabilities” and $10 million was included in “Accrued
Expenses and Other Liabilities” in the consolidated balance sheets.

Off-balance Sheet Arrangements
At December 31, 2012 and 2011, Activision Blizzard had no significant relationships with unconsolidated entities or financial parties,
often referred to as “structured finance” or “special purpose” entities, which would have been established for the purpose of facilitating offbalance sheet arrangements or other contractually narrow or limited purposes, that have or are reasonably likely to have a material future effect on
our financial condition, changes in financial condition, revenues or expenses, results of operation, liquidity, capital expenditures, or capital
resources.
Financial Disclosure
We maintain internal control over financial reporting, which generally includes those controls relating to the preparation of our
financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). We also arefocused on our “disclosure controls and procedures,” which as defined by the Securities and Exchange Commission (the “SEC”), are generally
those controls and procedures designed to ensure that financial and non-financial information required to be disclosed in our reports filed with the
SEC is reported within the time periods specified in the SEC’s rules and forms, and that such information is communicated to management,
including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.
Our Disclosure Committee, which operates under the Board-approved Disclosure Committee Charter and Disclosure Controls &Procedures Policy, includes senior management representatives and assists executive management in its oversight of the accuracy and timelinessof our disclosures, as well as in implementing and evaluating our overall disclosure process. As part of our disclosure process, senior finance andoperational representatives from all of our corporate divisions and business units prepare quarterly reports regarding their current quarter
operational performance, future trends, subsequent events, internal controls, changes in internal controls and other accounting and disclosure
relevant information. These quarterly reports are reviewed by certain key corporate finance executives. These corporate finance representatives
also conduct quarterly interviews on a rotating basis with the preparers of selected quarterly reports. The results of the quarterly reports andrelated interviews are reviewed by the Disclosure Committee. Finance representatives also conduct reviews with our senior management team,
our legal counsel and other appropriate personnel involved in the disclosure process, as appropriate. Additionally, senior finance and operational
representatives provide internal certifications regarding the accuracy of information they provide that is utilized in the preparation of our periodic
public reports filed with the SEC. Financial results and other financial information also are reviewed with the Audit Committee of the Board of
Directors on a quarterly basis. As required by applicable regulatory requirements, the principal executive and financial officers review and makevarious certifications regarding the accuracy of our periodic public reports filed with the SEC, our disclosure controls and procedures, and ourinternal control over financial reporting. With the assistance of the Disclosure Committee, we will continue to assess and monitor, and makerefinements to, our disclosure controls and procedures, and our internal control over financial reporting.

21

Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates and assumptions. The impact and any associated risks related to thesepolicies on our business operations are discussed throughout Management’s Discussion and Analysis of Financial Condition and Results ofOperations where such policies affect our reported and expected financial results. The estimates and assumptions discussed below are consideredby management to be critical because they are both important to the portrayal of our financial condition and results of operations and because
their application places the most significant demands on management’s judgment, with financial reporting results relying on estimates andassumptions about the effect of matters that are inherently uncertain. Specific risks for these critical accounting estimates and assumptions aredescribed in the following paragraphs.
Revenue Recognition including Revenue Arrangements with Multiple Deliverables
On January 1, 2011, we adopted amendments to an accounting standard related to revenue recognition for arrangements with multipledeliverables (which standard, as amended, is referred to herein as the “new accounting principles”). The new accounting principles establish aselling price hierarchy for determining the selling price of a deliverable and require the application of the relative selling price method to allocate
the consideration received for an arrangement to each deliverable in a multiple deliverables revenue arrangement. Certain of our revenue
arrangements have multiple deliverables and, as such, are accounted for under the new accounting principles. These revenue arrangements
include product sales consisting of both software and hardware deliverables (such as peripherals or other ancillary collectors’ items sold together
with physical “boxed” software) and our sales of World of Warcraft boxed products, expansion packs and value-added services, each of which isconsidered with the related subscription services for these purposes. Our assessment of deliverables and units of accounting does not change
under the new accounting principles.
Pursuant to the guidance of ASU 2009-13, when a revenue arrangement contains multiple elements, such as hardware and software
products, licenses and/or services, we allocate revenue to each element based on a selling price hierarchy. The selling price for a deliverable isbased on its vendor-specific-objective-evidence (“VSOE”) if it is available, third-party evidence (“TPE”) if VSOE is not available, or best
estimated selling price (“BESP”) if neither VSOE nor TPE is available. In multiple element arrangements where more-than-incidental softwaredeliverables are included, revenue is allocated to each separate unit of accounting for each of the non-software deliverables and to the softwaredeliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling pricehierarchy. If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables asa group is then allocated to each software deliverable using the guidance for recognizing software revenue.
As noted above, when neither VSOE nor TPE is available for a deliverable, we use BESP. We do not have significant revenue
arrangements that require BESP for the years ended December 31, 2012 and 2011. The inputs we use to determine the selling price of oursignificant deliverables include the actual price charged by the Company for a deliverable that the Company sells separately, which represents the
VSOE, and the wholesale prices of the same or similar products, which represents TPE. The pattern and timing of revenue recognition fordeliverables and allocation of the arrangement consideration did not change upon the adoption of the new accounting principles. Also, theadoption of the new accounting standard has not had a material impact on our financial statements.
Overall, we recognize revenue from the sale of our products upon the transfer of title and risk of loss to our customers and once any
performance obligations have been completed. Certain products are sold to customers with a “street date” (i.e., the earliest date these products
may be sold by retailers). For these products we recognize revenue on the later of the street date or the date the product is sold to our customer.
Revenue from product sales is recognized after deducting the estimated allowance for returns and price protection.
For our software products with online functionality, we evaluate whether those features or functionality are more than aninconsequential separate deliverable in addition to the software product. This evaluation is performed for each software product and any onlinetransaction, such as a digital download of a title with product add-ons, when it is released.
When we determine that a software title contains online functionality that constitutes a more-than-inconsequential separate service
deliverable in addition to the product, which, when we do, is principally because of its importance to gameplay, we consider our performanceobligations for this title to extend beyond the sale of the game. VSOE of fair value does not exist for the online functionality of some products, as
we do not separately charge for this component of every title. As a result, we recognize all of the software-related revenue from the sale of any
such title ratably over the estimated service period of such title. In addition, we initially defer the costs of sales for the title (excluding intangible
asset amortization), and recognize the costs of sales as the related revenues are recognized. Cost of sales includes manufacturing costs, software
royalties and amortization, and intellectual property licenses.

22

Determining whether the online functionality for a particular game constitutes more than an inconsequential deliverable, as well as theestimated service periods and product life over which to recognize the revenue and related costs of sales, is subjective and require management’s
judgment.
We recognize revenues from World of Warcraft boxed product, expansion packs and value-added services, in each case with therelated subscription service revenue, ratably over the estimated service period beginning upon activation of the software and delivery of therelated services. Revenues attributed to the sale of World of Warcraft boxed software and related expansion packs are classified as “Productsales,” whereas revenues attributable to subscriptions and other value-added services are classified as “Subscription, licensing, and otherrevenues.”
Revenue for software products with more than inconsequential separate service deliverables and World of Warcraft products arerecognized over the estimated service periods, which range from a minimum of five months to a maximum of less than a year.
For our software products with features we consider to be incidental to the overall product offering and an inconsequential deliverable,
such as products which provide limited online features at no additional cost to the consumer, we recognize the related revenue from them upon
the transfer of title and risk of loss of the product to our customer.
Allowances for Returns, Price Protection, Doubtful Accounts and Inventory Obsolescence
We closely monitor and analyze the historical performance of our various titles, the performance of products released by otherpublishers, market conditions, and the anticipated timing of other releases to assess future demand of current and upcoming titles. Initial volumes
shipped upon title launch and subsequent reorders are evaluated with the goal of ensuring that quantities are sufficient to meet the demand fromthe retail markets, but at the same time are controlled to prevent excess inventory in the channel. We benchmark units to be shipped to ourcustomers using historical and industry data.
We may permit product returns from, or grant price protection to, our customers under certain conditions. In general, price protectionrefers to the circumstances in which we elect to decrease, on a short or longer term basis, the wholesale price of a product by a certain amountand, when granted and applicable, allow customers a credit against amounts owed by such customers to us with respect to open and/or future
invoices. The conditions our customers must meet to be granted the right to return products or price protection include, among other things,
compliance with applicable trading and payment terms, and consistent return of inventory and delivery of sell-through reports to us. We may also
consider other factors, including the facilitation of slow-moving inventory and other market factors.
Significant management judgments and estimates must be made and used in connection with establishing the allowance for returns
and price protection in any accounting period based on estimates of potential future product returns and price protection related to current period
product revenue. We estimate the amount of future returns and price protection for current period product revenue utilizing historical experienceand information regarding inventory levels and the demand and acceptance of our products by the end consumer. The following factors are used
to estimate the amount of future returns and price protection for a particular title: historical performance of titles in similar genres; historicalperformance of the hardware platform; historical performance of the franchise; console hardware life cycle; sales force and retail customer
feedback; industry pricing; future pricing assumptions; weeks of on-hand retail channel inventory; absolute quantity of on-hand retail channel
inventory; our warehouse on-hand inventory levels; the title’s recent sell-through history (if available); marketing trade programs; andperformance of competing titles. The relative importance of these factors varies among titles depending upon, among other items, genre,
platform, seasonality, and sales strategy.
Based upon historical experience, we believe that our estimates are reasonable. However, actual returns and price protection could
vary materially from our allowance estimates due to a number of reasons including, among others, a lack of consumer acceptance of a title, therelease in the same period of a similarly themed title by a competitor, or technological obsolescence due to the emergence of new hardware
platforms. Material differences may result in the amount and timing of our revenue for any period if factors or market conditions change or if
management makes different judgments or utilizes different estimates in determining the allowances for returns and price protection. For
example, a 1% change in our December 31, 2012 allowance for sales returns, price protection and other allowances would have impacted net
revenues by approximately $3 million.
Similarly, management must make estimates as to the collectability of our accounts receivable. In estimating the allowance for
doubtful accounts, we analyze the age of current outstanding account balances, historical bad debts, customer concentrations, customer
creditworthiness, current economic trends, and changes in our customers’ payment terms and their economic condition, as well as whether we canobtain sufficient credit insurance. Any significant changes in any of these criteria would affect management’s estimates in establishing ourallowance for doubtful accounts.

23

We regularly review inventory quantities on-hand and in the retail channels. We write down inventory based on excess or obsolete
inventories determined primarily by future anticipated demand for our products. Inventory write-downs are measured as the difference between
the cost of the inventory and net realizable value, based upon assumptions about future demand, which are inherently difficult to assess anddependent on market conditions. At the point of loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes
in facts and circumstances do not result in the restoration or increase in that newly established basis.
Software Development Costs and Intellectual Property Licenses
Software development costs include payments made to independent software developers under development agreements, as well as
direct costs incurred for internally developed products.
We account for software development costs in accordance with the Financial Accounting Standards Board (“FASB”) guidance for thecosts of computer software to be sold, leased, or otherwise marketed (“Accounting Standards Codification (“ASC”) Subtopic 985-20”). Softwaredevelopment costs are capitalized once technological feasibility of a product is established and such costs are determined to be recoverable.
Technological feasibility of a product encompasses both technical design documentation and game design documentation, or the completed andtested product design and working model. Significant management judgments and estimates are utilized in the assessment of when technologicalfeasibility is established. For products where proven technology exists, this may occur early in the development cycle. Technological feasibility isevaluated on a product-by-product basis. Prior to a product’s release, we expense, as part of “Cost of sales—software royalties and amortization,”
capitalized costs if and when we believe such amounts are not recoverable. Capitalized costs for those products that are cancelled or expected to
be abandoned are charged to “Product development expense” in the period of cancellation. Amounts related to software development which are
not capitalized are charged immediately to “Product development expense.”
Commencing upon product release, capitalized software development costs are amortized to “Cost of sales—software royalties andamortization” based on the ratio of current revenues to total projected revenues for the specific product, generally resulting in an amortization
period of six months or less.
Intellectual property license costs represent license fees paid to intellectual property rights holders for use of their trademarks,
copyrights, software, technology, music or other intellectual property or proprietary rights in the development of our products. Depending upon
the agreement with the rights holder, we may obtain the right to use the intellectual property in multiple products over a number of years, oralternatively, for a single product. Prior to the related product’s release, we expense, as part of “Cost of sales—intellectual property licenses,”
capitalized intellectual property costs when we believe such amounts are not recoverable. Capitalized intellectual property costs for those
products that are cancelled or expected to be abandoned are charged to “Product development expense” in the period of cancellation.
Commencing upon the related product’s release, capitalized intellectual property license costs are amortized to “Cost of sales—
intellectual property licenses” based on the ratio of current revenues for the specific product to total projected revenues for all products in which
the licensed property will be utilized. As intellectual property license contracts may extend for multiple years, the amortization of capitalized
intellectual property license costs relating to such contracts may extend beyond one year.
We evaluate the future recoverability of capitalized software development costs and intellectual property licenses on a quarterly basis.
For products that have been released in prior periods, the primary evaluation criterion is actual title performance. For products that are scheduled
to be released in future periods, recoverability is evaluated based on the expected performance of the specific products to which the costs relate orin which the licensed trademark or copyright is to be used. Criteria used to evaluate expected product performance include: historicalperformance of comparable products developed with comparable technology; market performance of comparable titles; orders for the productprior to its release; general market conditions; and, for any sequel product, estimated performance based on the performance of the product onwhich the sequel is based. Further, as many of our capitalized intellectual property licenses extend for multiple products over multiple years, we
also assess the recoverability of capitalized intellectual property license costs based on certain qualitative factors, such as the success of otherproducts and/or entertainment vehicles utilizing the intellectual property, whether there are any future planned theatrical releases or televisionseries based on the intellectual property, and the rights holder’s continued promotion and exploitation of the intellectual property.
Significant management judgments and estimates are utilized in assessing the recoverability of capitalized costs. In evaluating therecoverability of capitalized costs, the assessment of expected product performance utilizes forecasted sales amounts and estimates of additionalcosts to be incurred. If revised forecasted or actual product sales are less than the originally forecasted amounts utilized in the initialrecoverability analysis, the net realizable value may be lower than originally estimated in any given quarter, which could result in an impairment
charge. Material differences may result in the amount and timing of expense for any period if management makes different judgments or utilizes
different estimates in evaluating these qualitative factors.

24Income Taxes
We record a tax provision for the anticipated tax consequences of the reported results of operations. In accordance with FASB income
tax guidance (“ASC Topic 740”), the provision for income taxes is computed using the asset and liability method, under which deferred tax assets
and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and operating losses and tax credit carryforwards. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income in the
period that includes the enactment date. We evaluate deferred tax assets each period for recoverability. For those assets that do not meet thethreshold of “more likely than not” that they will be realized in the future, a valuation allowance is recorded.
Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain
tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining deferred tax
assets. In the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation
allowance would be charged to tax expenses in the period such determination is made. The calculation of tax liabilities involves significant
judgment in estimating the impact of uncertainties in the application of ASC Topic 740 and other complex tax laws. Resolution of these
uncertainties in a manner inconsistent with management’s expectations could have a material impact on our business and results of operations in
an interim period in which the uncertainties are ultimately resolved.
Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Although
we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that whichis reflected in our historical income tax provisions and accruals. We adjust these reserves in light of changing facts and circumstances, such as theclosing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts
recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision forincome taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest
and penalties.
Our provision for income taxes is subject to volatility and could be adversely impacted by earnings being lower than anticipated inforeign regions where taxes are levied at relatively lower statutory rates and/or higher than anticipated in the United States where taxes are levied
at relatively higher statutory rates; by changes in the valuation of our deferred tax assets and liabilities; by expiration of or lapses in the R&D tax
credit laws; by tax effects of nondeductible compensation; by tax costs related to intercompany realignments; by differences between amounts
included in our tax filings and the estimate of such amounts included in our tax expenses; by changes in accounting principles; or by changes intax laws and regulations including possible U.S. changes to the taxation of earnings of our foreign subsidiaries, the deductibility of expenses
attributable to foreign income, or the foreign tax credit rules. Significant judgment is required to determine the recognition and measurement
attributes prescribed in the accounting guidance for uncertainty in income taxes. The accounting guidance for uncertainty in income taxes applies
to all income tax positions, including the potential recovery of previously paid taxes, which if settled unfavorably could adversely impact ourprovision for income taxes or additional paid-in capital. In addition, we are subject to the continuous examination of our income tax returns by
the Internal Revenue Service (“IRS”) and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these
examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous
examinations will not have an adverse impact on our operating results and financial condition.
Fair Value Estimates
The preparation of financial statements in conformity with U.S. GAAP often requires us to determine the fair value of a particular
item to fairly present our Consolidated Financial Statements. Without an independent market or another representative transaction, determining
the fair value of a particular item requires us to make several assumptions that are inherently difficult to predict and can have a material impact on
the conclusion of the appropriate accounting.
There are various valuation techniques used to estimate fair value. These include (1) the market approach where market transactions
for identical or comparable assets or liabilities are used to determine the fair value, (2) the income approach, which uses valuation techniques toconvert future amounts (for example, future cash flows or future earnings) to a single present amount, and (3) the cost approach, which is basedon the amount that would be required to replace an asset. For many of our fair value estimates, including our estimates of the fair value ofacquired intangible assets, we use the income approach. Using the income approach requires the use of financial models, which require us tomake various estimates including, but not limited to (1) the potential future cash flows for the asset, liability or equity instrument being measured,(2) the timing of receipt or payment of those future cash flows, (3) the time value of money associated with the delayed receipt or payment ofsuch cash flows, and (4) the inherent risk associated with the cash flows (that is, the risk premium). Determining these cash flow estimates is25inherently difficult and subjective, and, if any of the estimates used to determine the fair value using the income approach turns out to beinaccurate, our financial results may be negatively impacted. Furthermore, relatively small changes in many of these estimates can have asignificant impact on the estimated fair value resulting from the financial models or the related accounting conclusion reached. For example, a
relatively small change in the estimated fair value of an asset may change a conclusion as to whether an asset is impaired. While we are required
to make certain fair value assessments associated with the accounting for several types of transactions, the following areas are the most sensitive
to the assessments:
Business Combinations. We must estimate the fair value of assets acquired and liabilities assumed in a business combination. Ourassessment of the estimated fair value of each of these can have a material effect on our reported results as intangible assets are amortized overvarious lives. Furthermore, a change in the estimated fair value of an asset or liability often has a direct impact on the amount to recognize as
goodwill, which is an asset that is not amortized. Often determining the fair value of these assets and liabilities assumed requires an assessment of
expected use of the asset, the expected cost to extinguish the liability or our expectations related to the timing and the successful completion ofdevelopment of an acquired in-process technology. Such estimates are inherently difficult and subjective and can have a material impact on our
financial statements.
Assessment of Impairment of Assets. Management evaluates the recoverability of our identifiable intangible assets and other longlived assets in accordance with FASB literature related to accounting for the impairment or disposal of long-lived assets within ASC
Subtopic 360-10, which generally requires the assessment of these assets for recoverability when events or circumstances indicate a potential
impairment exists. We considered certain events and circumstances in determining whether the carrying value of identifiable intangible assets andother long-lived assets, other than indefinite-lived intangible assets, may not be recoverable including, but not limited to: significant changes in
performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; asignificant decline in our stock price for a sustained period of time; and changes in our business strategy. In determining whether an impairment
exists, we estimate the undiscounted cash flows to be generated from the use and ultimate disposition of these assets. If an impairment isindicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment loss is measured as the amountby which the carrying amount of the assets exceeds the fair value of the assets.
During 2010, we recorded an impairment charge of $326 million to our definite-lived intangible assets. See Note 11 of the Notes toConsolidated Financial Statements included in this Annual Report for additional information regarding the determination of the impairment
charges recorded for the year ended December 31, 2010. We did not record an impairment charge to our definite-lived intangible assets as ofDecember 31, 2012 and 2011.
FASB literature related to the accounting for goodwill and other intangibles within ASC Topic 350 provides companies an option to
first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying
value before performing a two-step approach to testing goodwill for impairment for each reporting unit. Our reporting units are determined by thecomponents of our operating segments that constitute a business for which both (1) discrete financial information is available and (2) segment
management regularly reviews the operating results of that component. ASC Topic 350 requires that the impairment test be performed at least
annually by applying a fair-value-based test. The qualitative assessment is optional. The first step measures for impairment by applying fairvalue-based tests at the reporting unit level. The second step (if necessary) measures the amount of impairment by applying fair-value-based tests
to the individual assets and liabilities within each reporting unit.
To determine the fair values of the reporting units used in the first step, we use a discounted cash flow approach. Each step requires us
to make judgments and involves the use of significant estimates and assumptions. These estimates and assumptions include long-term growth
rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates based on our weighted average cost ofcapital, and future economic and market conditions. These estimates and assumptions have to be made for each reporting unit evaluated for
impairment. Our estimates for market growth, our market share and costs are based on historical data, various internal estimates and certain
external sources, and are based on assumptions that are consistent with the plans and estimates we are using to manage the underlying business. If
future forecasts are revised, they may indicate or require future impairment charges. We base our fair value estimates on assumptions we believe
to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.
Fair value of our reporting units is determined using an income approach based on discounted cash flow models. In determining thefair value of our reporting units, we assumed a discount rate of approximately 10.5%. The estimated fair value of the Activision Publishing
reporting unit exceeded its carrying value by approximately $3 billion or at least 25% as of December 31, 2012. The estimated fair value of the
Blizzard reporting unit substantially exceeded its carrying value as of December 31, 2012. However, changes in our assumptions underlying ourestimates of fair value, which will be a function of our future financial performance, and changes in economic conditions could result in future
impairment charges.

26

We test acquired trade names for possible impairment by using a discounted cash flow model to estimate fair value. We havedetermined that no impairment has occurred at December 31, 2012 and 2011 based upon a set of assumptions regarding discounted future cash
flows, which represent our best estimate of future performance at this time. In determining the fair value of our trade names, we assumed a
discount rate of 10.5%, and royalty saving rates of approximately 1.5%. A one percentage point increase in the discount rate would not yield an
impairment charge to our trade names. Changes in our assumptions underlying our estimates of fair value, which will be a function of our futurefinancial performance and changes in economic conditions, could result in future impairment charges.
Stock-Based Compensation
Stock-based compensation expense is recognized during the requisite service periods (that is, the period for which the employee isbeing compensated) and is based on the value of stock-based payment awards after a reduction for estimated forfeitures. Forfeitures are estimatedat the time of grant and are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
We estimate the value of stock-based payment awards on the measurement date using a binomial-lattice model. Our determination offair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions
regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility
over the term of the awards, and actual and projected employee stock option exercise behaviors.
We generally determine the fair value of restricted stock rights (including restricted stock units, restricted stock awards andperformance shares) based on the closing market price of the Company’s common stock on the date of grant. Certain restricted stock rights
granted to our employees and senior management vest based on the achievement of pre-established performance or market goals. We estimate thefair value of performance-based restricted stock rights at the closing market price of the Company’s common stock on the date of grant. Eachquarter, we update our assessment of the probability that the specified performance criteria will be achieved. We amortize the fair values of
performance-based restricted stock rights over the requisite service period adjusted for estimated forfeitures for each separately vesting tranche of
the award. We estimate the fair value of market-based restricted stock rights at the date of grant using a Monte Carlo valuation methodology andamortize those fair values over the requisite service period adjusted for estimated forfeitures for each separately vesting tranche of the award. The
Monte Carlo methodology that we use to estimate the fair value of market-based restricted stock rights at the date of grant incorporates into thevaluation the possibility that the market condition may not be satisfied. Provided that the requisite service is rendered, the total fair value of themarket-based restricted stock rights at the date of grant must be recognized as compensation expense even if the market condition is not achieved.
However, the number of shares that ultimately vest can vary significantly with the performance of the specified market criteria.
For a detailed discussion of the application of these and other accounting policies see Note 2 of the Notes to Consolidated Financial
Statements included in this Annual Report.
Recently Issued Accounting Pronouncements
Indefinite-lived intangible assets impairment
In July 2012, the FASB issued an update to the authoritative guidance related to testing indefinite-lived intangible assets for
impairment. This update gives an entity the option to first consider certain qualitative factors to determine whether the existence of events andcircumstances indicates that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount as abasis for determining whether it is necessary to perform the quantitative impairment test. This update is effective for the indefinite-lived
intangible asset impairment test performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of thisguidance does not have a material impact on our consolidated financial statements.
Balance sheet offsetting disclosures
In December 2011, the FASB issued authoritative guidance on the disclosure of financial instruments and derivative instruments thatare either offset or subject to an enforceable master netting arrangement or similar agreement and should be applied retrospectively for allcomparative periods presented for annual periods beginning on or after January 1, 2013 and interim periods within those annual periods. The
adoption of this guidance does not have a material impact on our consolidated financial statements.

27

Reclassification of accumulated other comprehensive loss
In February 2013, the FASB issued an accounting standards update requiring new disclosures about reclassifications fromaccumulated other comprehensive loss to net income. These disclosures may be presented on the face of the statements or in the notes to theconsolidated financial statements. The standards update is effective for fiscal years beginning after December 15, 2012. The adoption of thisguidance does not have a material impact on our consolidated financial statements.

28

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from fluctuations in market rates and prices. Our market risk exposures primarily include
fluctuations in interest rates, foreign currency exchange rates and market prices.
Foreign Currency Exchange Rate Risk
We transact business in many different foreign currencies and may be exposed to financial market risk resulting from fluctuations inforeign currency exchange rates. Revenues and related expenses generated from our international operations are generally denominated in theirrespective local currencies. Primary currencies include euros, British pounds, Australian dollars, South Korean won and Swedish krona. Currency
volatility is monitored throughout the year. To mitigate our foreign currency exchange rate exposure resulting from our foreign currency
denominated monetary assets, liabilities and earnings, we periodically enter into currency derivative contracts, principally swaps and forward
contracts with maturities of twelve months or less. Vivendi is our principal counterparty and the risks of counterparty non-performance associatedwith these contracts are not considered to be material. We expect to continue to use economic hedge programs in the future to reduce foreignexchange-related volatility if it is determined that such hedging activities are appropriate to reduce risk. All foreign currency economic hedging
transactions are backed, in amount and by maturity, by an identified economic underlying item. We do not hold or purchase any foreign currency
contracts for trading or speculative purposes. Our foreign exchange forward contracts are not designated as hedging instruments and areaccounted for as derivatives whereby the fair value of the contracts are reported as “Other current assets” or “Other current liabilities” in ourconsolidated balance sheets, and the associated gains and losses from changes in fair value are reported in “Investment and other income(expense), net” and “General and administrative expense” in the consolidated statements of operations.
The gross notional amount of outstanding foreign exchange swaps was $355 million and $85 million at December 31, 2012 and 2011,
respectively. Pretax net unrealized losses of less than $1 million and $1 million for the years ended 2012 and 2011, respectively, resulted from theforeign exchange contracts and swaps with Vivendi and were recognized in the consolidated statements of operations. Pretax realized gains of$5 million and less than $1 million were recognized in “General and administrative expenses” at December 31, 2012 and 2011, respectively.
The consolidated statements of operations are translated into U.S. dollars at exchange rates indicative of market rates during eachapplicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency-denominatedtransactions results in reduced revenues, operating expenses and net income from our international operations. Similarly, our revenues, operating
expenses and net income will increase for our international operations if the U.S. dollar weakens against foreign currencies. We recognized arealized gain of $2 million for the year ended December 31, 2012 from the settlement of the hedging foreign exchange contracts and there was nooutstanding foreign exchange contract hedging translation risk as of December 31, 2012. In the absence of the hedging activities described above,
as of December 31, 2012, a hypothetical adverse foreign currency exchange rate movement of 10% would have resulted in potential declines in
our net income of approximately $100 million. This sensitivity analysis assumes a parallel adverse shift of all foreign currency exchange rates
against the U.S. dollar; however, all foreign currency exchange rates do not always move in such manner and actual results may differ materially.
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. Our investment portfolio
consists primarily of money market funds that invest in highly rated government backed securities, highly rated commercial paper, and debt
instruments with high credit quality and relatively short average maturities. Because short-term securities mature relatively quickly and must be
reinvested at the then current market rates, interest income on a portfolio consisting of cash, cash equivalents or short-term securities is more
subject to market fluctuations than a portfolio of longer term securities. Conversely, the fair value of such a portfolio is less sensitive to market
fluctuations than a portfolio of longer term securities. We do not use derivative financial instruments to manage interest rate risk in ourinvestment portfolio. At December 31, 2012, our $4.0 billion of cash and cash equivalents were comprised primarily of money market funds. At
December 31, 2012, our $416 million of short-term investments included $387 million of U.S. treasury and government sponsored agency debt
securities, $18 million of restricted cash, and $11 million of corporate bonds. We had $8 million in auction rate securities at fair value classified
as “Long-term investments” at December 31, 2012. The Company has determined that, based on the composition of our investment portfolio asof December 31, 2012, there was no material interest rate risk exposure to the Company’s consolidated financial position, results of operations or
cash flows as of that date.

29

CONTROLS AND PROCEDURES
Definition and Limitations of Disclosure Controls and Procedures.
Our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) aredesigned to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act is (i) recorded, processed,
summarized, and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to management,
including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
A control system, no matter how well designed and operated, can provide only reasonable assurance that it will detect or uncover failures within
the Company to disclose material information otherwise required to be set forth in our periodic reports. Inherent limitations to any system of
disclosure controls and procedures include, but are not limited to, the possibility of human error and the circumvention or overriding of suchcontrols by one or more persons. In addition, we have designed our system of controls based on certain assumptions, which we believe arereasonable, about the likelihood of future events, and our system of controls may therefore not achieve its desired objectives under all possible
future events.
Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated theeffectiveness of our disclosure controls and procedures at December 31, 2012, the end of the period covered by this report. Based on thisevaluation, the principal executive officer and principal financial officer concluded that, at December 31, 2012, our disclosure controls andprocedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files orsubmits under the Exchange Act is (i) recorded, processed, summarized, and reported on a timely basis, and (ii) accumulated and communicatedto management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding
required disclosures.
Management’s Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term isdefined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our management, with the participation of our principal executive officer andprincipal financial officer, conducted an evaluation of the effectiveness, as of December 31, 2012, of our internal control over financial reporting
using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—
Integrated Framework. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as ofDecember 31, 2012.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies and procedures may deteriorate.
The effectiveness of our internal control over financial reporting as of December 31, 2012 has been audited byPricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included in this Annual Report.
Changes in Internal Control Over Financial Reporting.
There have not been any changes in our internal control over financial reporting during the most recent fiscal quarter that havematerially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

30

Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Activision Blizzard, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive
income, changes in shareholders’ equity and cash flows, present fairly, in all material respects, the financial position of Activision Blizzard, Inc.
and its subsidiaries at December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. Also in our
opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on
Internal Control Over Financial Reporting appearing on page 30 of this Annual Report to Shareholders. Our responsibility is to express opinions
on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our
audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we planand perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles usedand significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control overfinancial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our
opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management anddirectors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures may deteriorate.

Los Angeles, California
February 22, 201331

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(Amounts in millions, except share data)

AssetsCurrent assets:
Cash and cash equivalents .....................................................................................................................................
Short-term investments .........................................................................................................................................
Accounts receivable, net of allowances of $332 and $300 at December 31, 2012 and 2011, respectively ........
Inventories, net ......................................................................................................................................................
Software development ...........................................................................................................................................
Intellectual property licenses ................................................................................................................................
Deferred income taxes, net ....................................................................................................................................
Other current assets ...............................................................................................................................................
Total current assets ...........................................................................................................................................
Long-term investments..........................................................................................................................................
Software development ...........................................................................................................................................
Intellectual property licenses ................................................................................................................................
Property and equipment, net .................................................................................................................................
Other assets............................................................................................................................................................
Intangible assets, net .............................................................................................................................................
Trademark and trade names ..................................................................................................................................
Goodwill ................................................................................................................................................................
Total assets .......................................................................................................................................................
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable ..................................................................................................................................................
Deferred revenues .................................................................................................................................................
Accrued expenses and other liabilities ..................................................................................................................
Total current liabilities .....................................................................................................................................
Deferred income taxes, net ....................................................................................................................................
Other liabilities ......................................................................................................................................................
Total liabilities..................................................................................................................................................
Commitments and contingencies (Note 17)
Shareholders’ equity:
Common stock, $0.000001 par value, 2,400,000,000 shares authorized, 1,111,606,087 and 1,133,391,371
shares issued at December 31, 2012 and 2011, respectively ...........................................................................
Additional paid-in capital ......................................................................................................................................
Retained earnings ..................................................................................................................................................
Accumulated other comprehensive loss................................................................................................................
Total shareholders’ equity ................................................................................................................................
Total liabilities and shareholders’ equity .........................................................................................................
The accompanying notes are an integral part of these Consolidated Financial Statements.

32

At
December 31,
2012

At
December 31,
2011$3,959
416
707
209
164
11
487
321
6,274
8
129
30
141
11
68
433
7,106
$14,200$3,165
360
649
144
137
22
507
396
5,380
16
62
12
163
12
88
433
7,111
$13,277

$343
1,657
652
2,652
25
206
2,883

$390
1,472
694
2,556
55
174
2,785

—
9,450
1,893
(26)
11,317$14,200

—
9,616
948
(72)
10,492$13,277

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(Amounts in millions, except per share data)
For the Years Ended December 31,
2012

2011

2010

$3,6201,236
4,856$3,257
1,498
4,755$3,087
1,360
4,447

1,116
263
194
89
604
578
561
—
—
3,405
1,451
7
1,458
309
$1,149

1,134
255
218
165
629
545
456
—
25
3,427
1,328
3
1,331
246
$1,085

1,350
250
338
197
626
516
375
326
—
3,978
469
23
492
74
$418

Earnings per common share
Basic ..............................................................................................................................................................................

$1.01

$0.93

$0.34

Diluted ...........................................................................................................................................................................

$1.01

$0.92

$0.33

Weighted-average number of shares outstanding
Basic ..............................................................................................................................................................................
Diluted ...........................................................................................................................................................................
Dividends per common share .............................................................................................................................................

1,112
1,118
$0.18

1,148
1,156
$0.165

1,222
1,236
$0.15

Net revenues
Product sales ..................................................................................................................................................................
Subscription, licensing, and other revenues ..................................................................................................................
Total net revenues ..............................................................................................................................................................
Costs and expenses
Cost of sales—product costs .........................................................................................................................................
Cost of sales—online subscriptions ..............................................................................................................................
Cost of sales—software royalties and amortization .....................................................................................................
Cost of sales—intellectual property licenses ................................................................................................................
Product development .....................................................................................................................................................
Sales and marketing ......................................................................................................................................................
General and administrative ...........................................................................................................................................
Impairment of intangible assets ....................................................................................................................................
Restructuring .................................................................................................................................................................
Total costs and expenses ....................................................................................................................................................
Operating income ...............................................................................................................................................................
Investment and other income (expense), net ......................................................................................................................
Income before income tax expense ....................................................................................................................................
Income tax expense ............................................................................................................................................................
Net income..........................................................................................................................................................................

The accompanying notes are an integral part of these Consolidated Financial Statements.

33

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(Amounts in millions)
For the Year Ended
December 31,
2012

Net income.................................................................................................................................................................................
$1,149Other comprehensive income (loss):
Foreign currency translation adjustment .............................................................................................................................. 46
Unrealized gains on investments, net of deferred income taxes of $0 million, $1 million, and $1 million forthe years ended December 31, 2012, 2011, and 2010, respectively ............................................................................... —Other comprehensive income (loss) ..........................................................................................................................................$46
Comprehensive income .............................................................................................................................................................
$1,195The accompanying notes are an integral part of these Consolidated Financial Statements.

34

2011

2010

$1,085

$418

(61)

11

2
$(59)
$1,026—$11$429

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Years Ended December 31, 2012, 2011, and 2010
(Amounts and shares in millions)

Common Stock
SharesAmountBalance at December 31, 2009 ..................................................
Components of comprehensive income:Net income ............................................................................
Other comprehensive income ................................................
Issuance of common stock pursuant to employee stock options .
Issuance of common stock pursuant to restricted stock rights .....
Restricted stock surrendered for employees’ tax liability............
Stock-based compensation expense related to employee stock
options and restricted stock rights .........................................
Return of capital to Vivendi related to taxes (seeNote 15) ...
Dividends ($0.15 per common share) ..........................................
Shares repurchased (see Note 19) ................................................
Balance at December 31, 2010 ..................................................
Components of comprehensive income:Net income ............................................................................
Other comprehensive income ................................................
Issuance of common stock pursuant to employee stock options .
Issuance of common stock pursuant to restricted stock rights .....
Restricted stock surrendered for employees’ tax liability............
Stock-based compensation expense related to employee stock
options and restricted stock rights .........................................
Dividends ($0.165 per common share) ........................................
Shares repurchased (see Note 19)
Retirement of treasury shares.......................................................
Balance at December 31, 2011 ..................................................
Components of comprehensive income:Net income ............................................................................
Other comprehensive income ................................................
Issuance of common stock pursuant to employee stock options .
Issuance of common stock pursuant to restricted stock rights .....
Restricted stock surrendered for employees’ tax liability............
Forfeiture of restricted stock rights ..............................................
Stock-based compensation expense related to employee stock
options and restricted stock rights .........................................
Dividends ($0.18 per common share) ..........................................
Shares repurchased (see Note 19) ................................................
Retirement of treasury shares.......................................................
Balance at December 31, 2012 ..................................................

Additional
Paid-In
CapitalTreasury Stock
SharesAmountRetained
Earnings(Accumulated
Deficit)Accumulated
Other
Comprehensive
Income (Loss)

Total
Shareholders’Equity1,364$—$12,376(114)$(1,235)$(361)$(24)$10,756

—
—
16
3
(1)

—
—
—
—
—

—
—
81
—
(8)

—
—
—
—
—

—
—
—
—
—

418
—
—
—
—

—
11
—
—
—

418
11
81
—
(8)

—
—
—
—
1,382

—
—
—
—
$—

100
(7)
(189)
—
$12,353

—
—
—
(85)
(199)

—
—
—
(959)
$(2,194)

—
—
—
—
$57

—
—
—
—
$(13)

100
(7)
(189)
(959)
$10,203

—
—
9
3
(1)

—
—
—
—
—

—
—
69
—
(15)

—
—
—
—
—

—
—
—
—
—

1,085
—
—
—
—

—
(59)
—
—
—

1,085
(59)
69
—
(15)

—
—
—
(260)
1,133

—
—
—
—
$—

95
—
—
(2,886)$9,616

—
—
(61)
260
—

—
—
(692)
2,886
$—

—
(194)
—
—
$948

—
—
—
—
$(72)

95
(194)
(692)
—
$10,492

—
—
5
4
(1)
(3)

—
—
—
—
—
—

—
—
33
—
(16)
—

—
—
—
—
—
—

—
—
—
—
—
—

1,149
—
—
—
—
—

—
46
—
—
—
—

1,149
46
33
—
(16)
—

—
—
—
(26)
1,112

—
—
—
—
$—

132
—
—
(315)
$9,450

—
—
(26)
26
—

—
—
(315)
315
$—

—
(204)
—
—
$1,893

—
—
—
—
$(26)

132
(204)
(315)
—
$11,317

The accompanying notes are an integral part of these Consolidated Financial Statements.

35

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts in millions)
For the Years Ended
December 31,
2012

Cash flows from operating activities:
Net income .........................................................................................................................................................................$1,149
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes................................................................................................................................................... (10)Impairment of goodwill and intangible assets (see Notes 10 and 11) ..........................................................................
—
Depreciation and amortization ...................................................................................................................................... 120
Loss on disposal of property and equipment ................................................................................................................
1
Amortization and write-off of capitalized software development costs and intellectual property licenses (1) ........... 208
Stock-based compensation expense (2) ........................................................................................................................ 126
Excess tax benefits from stock option exercises ...........................................................................................................
(5)
Changes in operating assets and liabilities:
Accounts receivable ...................................................................................................................................................... (46)Inventories, net .............................................................................................................................................................. (62)Software development and intellectual property licenses ............................................................................................ (301)
Other assets....................................................................................................................................................................
88
Deferred revenues ......................................................................................................................................................... 153
Accounts payable .......................................................................................................................................................... (54)Accrued expenses and other liabilities .......................................................................................................................... (22)Net cash provided by operating activities .......................................................................................................................... 1,345
Cash flows from investing activities:
Proceeds from maturities of available-for-sale investments .............................................................................................. 444
Proceeds from maturities of auction rate securities classified as trading securities..........................................................
—
Proceeds from auction rate securities called at par ............................................................................................................
10
Payment of contingent consideration .................................................................................................................................
—
Purchases of available-for-sale investments ...................................................................................................................... (503)
Capital expenditures ........................................................................................................................................................... (73)
(Increase) decrease in restricted cash .................................................................................................................................
(2)
Net cash (used in) provided by investing activities ........................................................................................................... (124)Cash flows from financing activities:
Proceeds from issuance of common stock to employees...................................................................................................
33
Tax payment related to net share settlements of restricted stock rights(16)
Repurchase of common stock ............................................................................................................................................ (315)Dividends paid.................................................................................................................................................................... (204)
Excess tax benefits from stock option exercises ................................................................................................................
5
Net cash used in financing activities .................................................................................................................................. (497)
Effect of foreign exchange rate changes on cash and cash equivalents .................................................................................
70
Net increase in cash and cash equivalents .............................................................................................................................. 794
Cash and cash equivalents at beginning of period .................................................................................................................. 3,165
Cash and cash equivalents at end of period ............................................................................................................................$3,959(1)

Excludes deferral and amortization of stock-based compensation expense.

(2)

Includes the net effects of capitalization, deferral, and amortization of stock-based compensation expense.
The accompanying notes are an integral part of these Consolidated Financial Statements.

36

2011

2010

$1,085

$418

75
12
148
4
287
103
(24)

(278)
326
198
1
319
131
(22)

13
(34)
(254)
(67)
(248)
31
(179)
952

43
124
(313)
17
293
70
49
1,376

740
—
10
(3)
(417)
(72)
8
266

519
61
—
(4)
(800)
(97)
9
(312)

69
(15)
(692)
(194)
24
(808)
(57)
353
2,812
$3,165

81
(8)
(959)
(189)
22
(1,053)33
44
2,768$2,812

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Description of Business and Business Combination
Description of Business
Activision Blizzard, Inc. is a worldwide online, personal computer (“PC”), video game console, tablet, handheld, and mobile game
publisher. The terms “Activision Blizzard,” the “Company,” “we,” “us,” and “our” are used to refer collectively to Activision Blizzard, Inc. andits subsidiaries. We maintain significant operations in the United States, Canada, the United Kingdom, France, Germany, Ireland, Italy, Sweden,
Spain, the Netherlands, Australia, South Korea and China.
The common stock of Activision Blizzard is traded on The NASDAQ Stock Market under the ticker symbol “ATVI.” Vivendi S.A.
(“Vivendi”) owned approximately 62% of Activision Blizzard’s outstanding common stock at December 31, 2012.
Based upon our current organizational structure, we operate three operating segments as follows:(i) Activision Publishing, Inc.
Activision Publishing, Inc. (“Activision”) is a leading international developer and publisher of interactive entertainment. Activisiondevelops games based on both internally-developed and licensed intellectual property. Activision markets and sells games we develop and,through our affiliate label program, games developed by certain third-party publishers. We sell games both through retail channels and by digital
download. Activision currently offers games that operate on the Sony Computer Entertainment, Inc. (“Sony”) PlayStation 3 (“PS3”),
Nintendo Co. Ltd. (“Nintendo”) Wii (“Wii”) and Nintendo Wii U (“Wii U”), and Microsoft Corporation (“Microsoft”) Xbox 360 (“Xbox 360”)
console systems; the Nintendo Dual Screen (“DS”) and Nintendo 3DS (3DS”) handheld game systems; the PC; and other handheld and mobile
devices.
(ii) Blizzard Entertainment, Inc.
Blizzard Entertainment, Inc. (“Blizzard”) is a leader in the subscription-based massively multi-player online role-playing game(“MMORPG”) category in terms of both subscriber base and revenues generated through its World of Warcraft® franchise, which it develops,
hosts and supports. Blizzard also develops, markets, and sells role-playing action and strategy PC-based computer games, including games in themultiple-award winning Diablo® and StarCraft® franchises. In addition, Blizzard maintains a proprietary online-game related service, Battle.net®.
Blizzard distributes its products and generates revenues worldwide through various means, including: subscriptions (which consist of fees fromindividuals playing World of Warcraft), sales of prepaid subscription cards, and revenue from value-added services such as realm transfers,
faction changes, and other character customizations within the World of Warcraft gameplay, retail sales of physical “boxed” products; online
download sales of PC products; and licensing of software to third-party or related party companies that distribute World of Warcraft, Diablo® III,and StarCraft® II products.
(iii) Activision Blizzard Distribution
Activision Blizzard Distribution (“Distribution”) consists of operations in Europe that provide warehousing, logistical and sales
distribution services to third-party publishers of interactive entertainment software, our own publishing operations, and manufacturers ofinteractive entertainment hardware.
Business Combination
On July 9, 2008, a business combination (the “Business Combination”) by and among Activision, Inc., Sego Merger Corporation, awholly-owned subsidiary of Activision, Inc., Vivendi, VGAC LLC, a wholly-owned subsidiary of Vivendi , and Vivendi Games, Inc. (“VivendiGames”), a wholly-owned subsidiary of VGAC LLC, was consummated. As a result of the consummation of the Business Combination,
Activision, Inc. was renamed Activision Blizzard, Inc. For accounting purposes, the Business Combination is treated as a “reverse acquisition,”with Vivendi Games deemed to be the acquirer.

37

2. Summary of Significant Accounting Policies
Basis of Consolidation and Presentation
The accompanying consolidated financial statements include the accounts and operations of the Company. All intercompany accounts
and transactions have been eliminated. The consolidated financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America (“U.S. GAAP”). The preparation of the consolidated financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements
and accompanying notes. Actual results could differ from these estimates and assumptions.
Certain reclassifications have been made to prior year amounts to conform to the current period presentation.
The Company considers events or transactions that occur after the balance sheet date, but before the financial statements are issued, toprovide additional evidence relative to certain estimates or to identify matters that require additional disclosures.
Results of Adjustment
We identified through our internal processes that, in previous years, we erroneously over-recognized revenue for a country in our
Europe region. As reported in the Quarterly Report on Form 10-Q for the second quarter of 2012, we performed an evaluation under SEC Staff
Accounting Bulletin No. 108 and concluded the effect of this error was immaterial to prior years’ financial statements as well as full-year 2012financial statements. As such, during the year ended December 31, 2012, we recorded an adjustment to reduce “Net revenues” and “Operating
income” by $11 million in our consolidated statements of operations, and similarly reduced “Net revenues” and “Income from operations before
income tax expenses” in our Blizzard segment, Europe region, and online subscriptions as presented in footnote 13 of the notes to consolidated
financial statements by $11 million. There was no impact to operating cash flows. The adjustment increased the “Deferred revenues” on ourconsolidated balance sheet and represents a correction of an error. The $11 million adjustment related to prior periods as follows:(i) approximately $1 million for the quarter ended March 31, 2012 and the year ended December 31, 2012; (ii) approximately $1 million for eachquarter of 2011 (totaling approximately $4 million for the year ended December 31, 2011); (iii) $2 million for the year ended December 31, 2010;
and (iv) approximately $4 million for periods prior to the year ended December 31, 2010. “Net income” for the year ended December 31, 2012
decreased by approximately $8 million, or less than $0.01 earnings per basic and diluted share, as a result of recording this adjustment.
Cash and Cash Equivalents
We consider all money market funds and highly liquid investments with original maturities of three months or less at the time ofpurchase to be “Cash and cash equivalents.”
Investment Securities
Investments designated as available-for-sale securities are carried at fair value, which is based on quoted market prices for suchsecurities, if available, or is estimated on the basis of quoted market prices of financial instruments with similar characteristics. Unrealized gains
and losses of the Company’s available-for-sale securities are excluded from earnings and reported as a component of “Other comprehensive
income (loss).”
Investments with original maturities greater than 90 days and remaining maturities of less than one year are normally classified as“Short-term investments.” In addition, investments with maturities beyond one year may be classified as “Short-term investments” if they arehighly liquid in nature and represent the investment of cash that is available for current operations.
The specific identification method is used to determine the cost of securities disposed of, with realized gains and losses reflected in“Investment and other income (expense), net” in the consolidated statements of operations.
The Company’s investments include auction rate securities (“ARS”). These ARS are variable rate bonds tied to short-term interest
rates with long-term maturities. ARS have interest rates which reset through a modified Dutch auction at predetermined short-term intervals,
typically every 7, 28, or 35 days. Interest on ARS is generally paid at the end of each auction process and is based upon the interest rate
determined for the prior auction. Our ARS are highly rated, and are partially collateralized by student loans guaranteed by the U.S. government
under the Federal Family Education Loan Program. Our investments in ARS are not material to our consolidated financial statements.

38

Restricted Cash—Compensating Balances
Restricted cash is included within “Short-term investments” on the consolidated balance sheets. The majority of our restricted cash
relates to a standby letter of credit required by one of our inventory manufacturers so that we can qualify for certain payment terms on ourinventory purchases. Under the terms of this arrangement, we are required to maintain with the issuing bank a compensating balance, restricted as
to use, of not less than the sum of the available amount of the letter of credit plus the aggregate amount of any drawings under the letter of credit
that have been honored thereunder, but have not yet been reimbursed.
Financial Instruments
The carrying amount of “Cash and cash equivalents,” “Accounts receivable,” “Accounts payable,” and “Accrued expenses”
substantively approximate fair value due to the short-term nature of these accounts. Our investments in U.S. treasuries, government agency
securities, and corporate bonds are carried at fair value, which is based on quoted market prices for such securities, if available, or is estimated on
the basis of quoted market prices of financial instruments with similar characteristics. ARS are carried at fair value, which is estimated using an
income-approach model (specifically, a discounted cash-flow analysis).
Derivative instruments, primarily foreign exchange contracts, are reported at fair value in “Other assets” or “Other liabilities” in the
consolidated balance sheets. The fair value of foreign currency contracts are estimated based on the prevailing exchange rates of the various
hedged currencies as of the end of the period.
Activision Blizzard transacts business in various foreign currencies and has significant international sales and expenses denominatedin foreign currencies, subjecting us to foreign currency risk. We utilize foreign exchange forward contracts and swaps, with maturities ofgenerally less than one year, to mitigate foreign currency exchange rate risk associated with foreign currency- denominated assets and liabilities.
Activision Blizzard does not use derivatives for speculative or trading purposes, and the Company does not designate these derivatives as hedging
instruments under Accounting Standards Codification (“ASC”) Topic 815. Accordingly, gains and losses resulting from changes in the fair values
through the period are reported as “General and administrative expenses” or “Investment and other income (expense), net” in the consolidated
statements of operations, depending on the nature of the derivative.
Other-Than-Temporary Impairments
The Company regularly reviews its investments to determine whether a decline in fair value below the cost basis is other than atemporary impairment. If the decline is determined to be other-than-temporary, the cost basis of the investment is written down to fair value. For
available-for-sale fixed maturity instruments where credit-related impairments exist, other-than-temporary impairments are reported in the
consolidated statement of operations and non-credit impairments are reported as a component of “Other comprehensive income (loss).”
Concentration of Credit Risk
Our concentration of credit risk relates to depositors holding the Company’s cash and cash equivalents and customers with significant
accounts receivable balances. The majority of our cash and cash equivalents are held in financial instruments issued or fully guaranteed by local
and foreign governments and governmental organizations, with the significant majority of these instruments being money market funds.
Our customer base includes retailers and distributors, including mass-market retailers, consumer electronics stores, discountwarehouses, and game specialty stores in the U.S. and other countries worldwide. We perform ongoing credit evaluations of our customers andmaintain allowances for potential credit losses. We generally do not require collateral or other security from our customers.
We had one customer for the Activision and Blizzard segments, GameStop, who accounted for approximately 10% and 12% of net
revenues for the years ended December 31, 2012 and 2010, respectively. We did not have any single customer that accounted for 10% or more of
net revenues for the year ended December 31, 2011. We had one customer, Wal-Mart, which accounted for 20% and 21% of consolidated grossreceivables at December 31, 2012 and 2011, respectively.

39

Software Development Costs and Intellectual Property Licenses
Software development costs include payments made to independent software developers under development agreements, as well as
direct costs incurred for internally developed products.
We account for software development costs in accordance with the Financial Accounting Standards Board (“FASB”) guidance for thecosts of computer software to be sold, leased, or otherwise marketed within ASC Subtopic 985-20. Software development costs are capitalized
once technological feasibility of a product is established and such costs are determined to be recoverable. Technological feasibility of a productencompasses both technical design documentation and game design documentation, or the completed and tested product design and working
model. Significant management judgments and estimates are utilized in the assessment of when technological feasibility is established. For
products where proven technology exists, this may occur early in the development cycle. Technological feasibility is evaluated on a product-byproduct basis. Prior to a product’s release, we expense, as part of “Cost of sales—software royalties and amortization,” capitalized costs if andwhen we believe such amounts are not recoverable. Capitalized costs for those products that are cancelled or expected to be abandoned arecharged to “Product development expense” in the period of cancellation. Amounts related to software development which are not capitalized arecharged immediately to “Product development expense.”
Commencing upon product release, capitalized software development costs are amortized to “Cost of sales—software royalties andamortization” based on the ratio of current revenues to total projected revenues for the specific product, generally resulting in an amortization
period of six months or less.
Intellectual property license costs represent license fees paid to intellectual property rights holders for use of their trademarks,
copyrights, software, technology, music or other intellectual property or proprietary rights in the development of our products. Depending upon
the agreement with the rights holder, we may obtain the right to use the intellectual property in multiple products over a number of years, oralternatively, for a single product. Prior to the related product’s release, we expense, as part of “Cost of sales—intellectual property licenses,”
capitalized intellectual property costs when we believe such amounts are not recoverable. Capitalized intellectual property costs for those
products that are cancelled or expected to be abandoned are charged to “Product development expense” in the period of cancellation.
Commencing upon the related product’s release, capitalized intellectual property license costs are amortized to “Cost of sales—
intellectual property licenses” based on the ratio of current revenues for the specific product to total projected revenues for all products in which
the licensed property will be utilized. As intellectual property license contracts may extend for multiple years, the amortization of capitalized
intellectual property license costs relating to such contracts may extend beyond one year.
We evaluate the future recoverability of capitalized software development costs and intellectual property licenses on a quarterly basis.
For products that have been released in prior periods, the primary evaluation criterion is actual title performance. For products that are scheduled
to be released in future periods, recoverability is evaluated based on the expected performance of the specific products to which the costs relate orin which the licensed trademark or copyright is to be used. Criteria used to evaluate expected product performance include: historicalperformance of comparable products developed with comparable technology; market performance of comparable titles; orders for the productprior to its release; general market conditions; and, for any sequel product, estimated performance based on the performance of the product onwhich the sequel is based. Further, as many of our capitalized intellectual property licenses extend for multiple products over multiple years, we
also assess the recoverability of capitalized intellectual property license costs based on certain qualitative factors, such as the success of otherproducts and/or entertainment vehicles utilizing the intellectual property, whether there are any future planned theatrical releases or televisionseries based on the intellectual property, and the rights holder’s continued promotion and exploitation of the intellectual property.
Significant management judgments and estimates are utilized in assessing the recoverability of capitalized costs. In evaluating therecoverability of capitalized costs, the assessment of expected product performance utilizes forecasted sales amounts and estimates of additionalcosts to be incurred. If revised forecasted or actual product sales are less than the originally forecasted amounts utilized in the initialrecoverability analysis, the net realizable value may be lower than originally estimated in any given quarter, which could result in an impairment
charge. Material differences may result in the amount and timing of expense for any period if management makes different judgments or utilizes
different estimates in evaluating these qualitative factors.
Inventories
Inventories consist of materials (including manufacturing royalties paid to console manufacturers), labor and freight-in and are statedat the lower of cost (weighted average method) or net realizable value. Inventories are relieved on a weighted average cost method.

40

Long-Lived Assets
Property and Equipment. Property and equipment are recorded at cost and depreciated on a straight-line basis over the estimateduseful life (i.e., 25 to 33 years, for buildings, and 2 to 5 years, for computer equipment, office furniture and other equipment) of the asset. Whenassets are retired or disposed of, the cost and accumulated depreciation thereon are removed and any resulting gains or losses are included in the
consolidated statements of operations. Leasehold improvements are amortized using the straight-line method over the estimated life of the asset,
not to exceed the length of the lease. Repair and maintenance costs are expensed as incurred.
Goodwill and Other Indefinite-Lived Assets. We account for goodwill using the provisions within ASC Topic 350. Under ASC Topic
350, goodwill is considered to have an indefinite life, and is carried at cost. Acquired trade names are assessed as indefinite lived assets as there
are no foreseeable limits on the periods of time over which they are expected to contribute cash flows. Goodwill and acquired trade names are notamortized, but are subject to an impairment test annually, as well as in between annual tests when events or circumstances indicate that thecarrying value may not be recoverable. We perform our annual impairment testing at December 31st.
Our annual goodwill impairment test is performed at the reporting unit level. We have determined our reporting units based on theguidance within ASC Subtopic 350-20, which provides that reporting units are generally operating segments or one reporting level below theoperating segments. As of December 31, 2012 and 2011, the Company’s reporting units are the same as our operating segments: Activision,
Blizzard, and Distribution. We test goodwill for possible impairment by first determining the fair value of the related reporting unit andcomparing this value to the recorded net assets of the reporting unit, including goodwill. In the event the recorded net assets of the reporting unit
exceed the estimated fair value of such assets, we perform a second step to measure the amount of the impairment, which is equal to the amountby which the recorded goodwill exceeds the implied fair value of the goodwill after assessing the fair value of each of the assets and liabilities
within the reporting unit.
Fair value of our reporting units is determined using an income approach based on discounted cash flow models. In determining thefair value of our reporting units, we assumed a discount rate of approximately 10.5%. The estimated fair value of the Activision Publishing
reporting unit exceeded its carrying value by approximately $3 billion or at least 25% as of December 31, 2012. The estimated fair value of the
Blizzard reporting unit substantially exceeded its carrying value as of December 31, 2012. However, changes in our assumptions underlying ourestimates of fair value, which will be a function of our future financial performance, and changes in economic conditions could result in future
impairment charges.
We test acquired trade names for possible impairment by using a discounted cash flow model to estimate fair value. We havedetermined that no impairment has occurred at December 31, 2012 and 2011 based upon a set of assumptions regarding discounted future cash
flows, which represent our best estimate of future performance at this time. In determining the fair value of our trade names, we assumed a
discount rate of 10.5%, and royalty saving rates of approximately 1.5%. A one percentage point increase in the discount rate would not yield an
impairment charge to our trade names. Changes in our assumptions underlying our estimates of fair value, which will be a function of our futurefinancial performance and changes in economic conditions, could result in future impairment charges.
Amortizable Intangible Assets. Intangible assets subject to amortization are carried at cost less accumulated amortization, andamortized over the estimated useful life in proportion to the economic benefits received.
Management evaluates the recoverability of our identifiable intangible assets and other long-lived assets in accordance with FASB
guidance within ASC Subtopic 360-10, which generally requires the assessment of these assets for recoverability when events or circumstancesindicate a potential impairment exists. We considered certain events and circumstances in determining whether the carrying value of identifiableintangible assets and other long-lived assets, other than indefinite-lived intangible assets, may not be recoverable including, but not limited to:significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry
or economic trends; a significant decline in our stock price for a sustained period of time; and changes in our business strategy. In determining
whether an impairment exists, we estimate the undiscounted cash flows to be generated from the use and ultimate disposition of these assets. If an
impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment loss is measured as
the amount by which the carrying amount of the assets exceeds the fair value of the assets).

41

Revenue Recognition
Revenue Arrangements with Multiple Deliverables
Effective January 1, 2011, we adopted amendments to an accounting standard related to revenue recognition for arrangements withmultiple deliverables (which standard, as amended, is referred to herein as the “new accounting principles”). The new accounting principles
establish a selling price hierarchy for determining the selling price of a deliverable and require the application of the relative selling price method
to allocate the consideration received for an arrangement to each deliverable in a multiple deliverables revenue arrangement. Certain of ourrevenue arrangements have multiple deliverables and, as such, are accounted for under the new accounting principles. These revenue
arrangements include product sales consisting of both software and hardware deliverables (such as peripherals or other ancillary collectors’ items
sold together with physical “boxed” software) and our sales of World of Warcraft boxed products, expansion packs and value-added services,each of which is considered with the related subscription services for these purposes. Our assessment of deliverables and units of accounting does
not change under the new accounting principles.
Pursuant to the guidance of ASU 2009-13, when a revenue arrangement contains multiple elements, such as hardware and software
products, licenses and/or services, we allocate revenue to each element based on a selling price hierarchy. The selling price for a deliverable isbased on its vendor- specific-objective-evidence (“VSOE”) if it is available, third-party evidence (“TPE”) if VSOE is not available, or best
estimated selling price (“BESP”) if neither VSOE nor TPE is available. In multiple element arrangements where more-than-incidental softwaredeliverables are included, revenue is allocated to each separate unit of accounting for each of the non-software deliverables and to the softwaredeliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling pricehierarchy. If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables asa group is then allocated to each software deliverable using the guidance for recognizing software revenue.
As noted above, when neither VSOE nor TPE is available for a deliverable, we use BESP. We do not have significant revenue
arrangements that require BESP for the years ended December 31, 2012 and 2011. The inputs we use to determine the selling price of oursignificant deliverables include the actual price charged by the Company for a deliverable that the Company sells separately, which represents the
VSOE, and the wholesale prices of the same or similar products, which represents TPE. The pattern and timing of revenue recognition fordeliverables and allocation of the arrangement consideration did not change upon the adoption of the new accounting principles. Also, theadoption of the new accounting standard has not had a material impact on our financial statements.
Product Sales
We recognize revenue from the sale of our products upon the transfer of title and risk of loss to our customers and once any
performance obligations have been completed. Certain products are sold to customers with a “street date” (which is the earliest date theseproducts may be sold by retailers). For these products, we recognize revenue on the later of the street date or the date the product is sold to thecustomer. Revenue from product sales is recognized after deducting the estimated allowance for returns and price protection.
For our software products with online functionality, we evaluate whether those features or functionality are more than aninconsequential separate deliverable in addition to the software product. This evaluation is performed for each software product and any onlinetransaction, such as a digital download of a title or product add-ons, when it is released.
When we determine that a software title contains online functionality that constitutes a more-than-inconsequential separate service
deliverable in addition to the product, which, when we do, is principally because of its importance to gameplay, we consider our performanceobligations for this title to extend beyond the sale of the game. VSOE of fair value does not exist for the online functionality of some products, as
we do not separately charge for this component of every title. As a result, we recognize all of the software-related revenue from the sale of any
such title ratably over the estimated service period of such title. In addition, we initially defer the costs of sales for the title (excluding intangible
asset amortization), and recognize the costs of sales as the related revenues are recognized. Cost of sales includes manufacturing costs, software
royalties and amortization, and intellectual property licenses.
Determining whether the online functionality for a particular game constitutes more-than-an- inconsequential deliverable, as well as
the estimated service periods and product life over which to recognize the revenue and related costs of sales, is subjective and require
management’s judgment.

42

We recognize revenues from World of Warcraft boxed product, expansion packs and value-added services, in each case with therelated subscription service revenue, ratably over the estimated service period beginning upon activation of the software and delivery of therelated services. Revenues attributed to the sale of World of Warcraft boxed software and related expansion packs are classified as “Productsales,” whereas revenues attributable to subscriptions and other value-added services are classified as “Subscription, licensing, and otherrevenues.”
Revenues for software products with more-than-inconsequential separate service deliverables and World of Warcraft products arerecognized over the estimated service periods, which range from a minimum of five months to a maximum of less than a year.
For our software products with features we consider to be incidental to the overall product offering and an inconsequential deliverable,
such as products which provide limited online features at no additional cost to the consumer, we recognize the related revenue from them upon
the transfer of title and risk of loss of the product to our customer.
With respect to online transactions, such as online downloads of titles or product add-ons that do not include a more-thaninconsequential separate service deliverable, revenue is recognized when the fee is paid by the online customer to purchase online content and the
product is available for download or is activated for gameplay. In addition, persuasive evidence of an arrangement must exist and collection of
the related receivable must be probable.
Sales incentives and other consideration given by us to our customers, such as rebates and product replacement fees, are consideredadjustments of the selling price of our products and are reflected as reductions to revenue. Sales incentives and other consideration that represent
costs incurred by us for assets or services received, such as the appearance of our products in a customer’s national circular ad, are reflected as
sales and marketing expenses when the benefit from the sales incentive is separable from sales to the same customer and we can reasonably
estimate the fair value of the benefit.
Subscription Revenues
Subscription revenues are mostly derived from World of Warcraft. World of Warcraft is a game that is playable through Blizzard’sservers and is generally sold through a subscription-only basis.
For World of Warcraft, after the first month of free usage that is included with the World of Warcraft boxed software, the World of
Warcraft end user may enter into a subscription agreement for additional future access. Revenues associated with the sale of subscriptions via
boxed software and prepaid subscription cards, as well as prepaid subscriptions sales, are deferred until the subscription service is activated by
the consumer and are then recognized ratably over the subscription period. Value-added service revenues associated with subscriptions arerecognized ratably over the estimated service periods.
Licensing Revenues
Third-party licensees in Russia, China and Taiwan distribute and host Blizzard’s World of Warcraft game in their respective countries
under license agreements, for which they pay the Company a royalty. We recognize these royalties as revenues based on the end users’ activationof the underlying prepaid time, if all other performance obligations have been completed, or based on usage by the end user, when we havecontinuing service obligations. We recognize any upfront licensing fee received over the term of the contracts.
With respect to license agreements that provide customers the right to make multiple copies in exchange for guaranteed amounts,
revenue is generally recognized upon delivery of a master copy. Per copy royalties on sales that exceed the guarantee are recognized as earned. In
addition, persuasive evidence of an arrangement must exist and collection of the related receivable must be probable.
Breakage Revenues
World of Warcraft boxed product sales and subscription revenues are recognized upon activation of the game. We analyze historicalactivation patterns over time to determine when the likelihood of activation ever occurring becomes remote. We recognize revenues fromsubscriptions that have not yet been activated, prepaid subscription cards, as well as prepaid subscription sales, when the likelihood of future
activation occurring is remote (defined as “breakage revenues”). We did not record any breakage revenues for the years ended December 31,
2012 and 2011. For the year ended December 31, 2010, we recorded $14 million in breakage revenues from the sale of packaged software in“Product sales,” and $6 million from prepaid and subscription breakage revenues in “Subscription, licensing, and other revenues” in the
consolidated statements of operations.

43Other Revenues
Other revenues primarily include licensing activity of intellectual property other than software to third-parties. Revenue is recorded
upon receipt of licensee statements, or upon the receipt of cash, provided the license period has begun and all performance obligations have been
completed.
Revenues are recorded net of tax assessed by governmental authority that is both imposed on and concurrent with the specificrevenue-producing transaction between us and our customer, such as sales and value added tax.
Allowances for Returns, Price Protection, Doubtful Accounts, and Inventory Obsolescence
We closely monitor and analyze the historical performance of our various titles, the performance of products released by otherpublishers, market conditions, and the anticipated timing of other releases to assess future demand of current and upcoming titles. Initial volumes
shipped upon title launch and subsequent reorders are evaluated with the goal of ensuring that quantities are sufficient to meet the demand fromthe retail markets, but at the same time are controlled to prevent excess inventory in the channel. We benchmark units to be shipped to ourcustomers using historical and industry data.
We may permit product returns from, or grant price protection to, our customers under certain conditions. In general, price protectionrefers to the circumstances in which we elect to decrease, on a short or longer term basis, the wholesale price of a product by a certain amountand, when granted and applicable, allow customers a credit against amounts owed by such customers to us with respect to open and/or future
invoices. The conditions our customers must meet to be granted the right to return products or price protection include, among other things,
compliance with applicable trading and payment terms, and consistent return of inventory and delivery of sell-through reports to us. We may also
consider other factors, including the facilitation of slow-moving inventory and other market factors.
Significant management judgments and estimates must be made and used in connection with establishing the allowance for returns
and price protection in any accounting period based on estimates of potential future product returns and price protection related to current period
product revenue. We estimate the amount of future returns and price protection for current period product revenue utilizing historical experienceand information regarding inventory levels and the demand and acceptance of our products by the end consumer. The following factors are used
to estimate the amount of future returns and price protection for a particular title: historical performance of titles in similar genres; historicalperformance of the hardware platform; historical performance of the franchise; console hardware life cycle; sales force and retail customer
feedback; industry pricing; future pricing assumptions; weeks of on-hand retail channel inventory; absolute quantity of on-hand retail channel
inventory; our warehouse on-hand inventory levels; the title’s recent sell-through history (if available); marketing trade programs; andperformance of competing titles. The relative importance of these factors varies among titles depending upon, among other items, genre,
platform, seasonality, and sales strategy.
Based upon historical experience, we believe that our estimates are reasonable. However, actual returns and price protection could
vary materially from our allowance estimates due to a number of reasons including, among others, a lack of consumer acceptance of a title, therelease in the same period of a similarly themed title by a competitor, or technological obsolescence due to the emergence of new hardware
platforms. Material differences may result in the amount and timing of our revenue for any period if factors or market conditions change or if
management makes different judgments or utilizes different estimates in determining the allowances for returns and price protection. For
example, a 1% change in our December 31, 2012 allowance for sales returns, price protection and other allowances would have impacted net
revenues by approximately $3 million.
Similarly, management must make estimates as to the collectability of our accounts receivable. In estimating the allowance for
doubtful accounts, we analyze the age of current outstanding account balances, historical bad debts, customer concentrations, customer
creditworthiness, current economic trends, and changes in our customers’ payment terms and their economic condition, as well as whether we canobtain sufficient credit insurance. Any significant changes in any of these criteria would affect management’s estimates in establishing ourallowance for doubtful accounts.
We regularly review inventory quantities on-hand and in the retail channels. We write down inventory based on excess or obsolete
inventories determined primarily by future anticipated demand for our products. Inventory write-downs are measured as the difference between
the cost of the inventory and net realizable value, based upon assumptions about future demand, which are inherently difficult to assess anddependent on market conditions. At the point of a loss recognition, a new, lower cost basis for that inventory is established, and subsequentchanges in facts and circumstances do not result in the restoration or increase in that newly established basis.

44

Shipping and Handling
Shipping and handling costs, which consist primarily of packaging and transportation charges incurred to move finished goods tocustomers, are included in “Cost of sales—product costs.”
Advertising Expenses
We expense advertising as incurred, except for production costs associated with media advertising, which are deferred and charged to
expense when the related advertisement is ran for the first time. Advertising expenses for the years ended December 31, 2012, 2011, and 2010
were $396 million, $343 million, and $332 million, respectively, and are included in “Sales and marketing expense” in the consolidated
statements of operations.
Income Taxes
We record a tax provision for the anticipated tax consequences of the reported results of operations. In accordance with FASB income
tax guidance within ASC Topic 740, the provision for income taxes is computed using the asset and liability method, under which deferred tax
assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and operating losses and tax credit carryforwards. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. We evaluate deferred tax assets each period for recoverability. For those assets that do not meet the threshold of“more likely than not” that they will be realized in the future, a valuation allowance is recorded.
We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return.
We recognize interest and penalties, if any, related to unrecognized tax benefits in “Income tax expense.”
Foreign Currency Translation
All assets and liabilities of our foreign subsidiaries are translated into U.S. dollars at the exchange rate in effect at the balance sheet
date, and revenue and expenses are translated at average exchange rates during the period. The resulting translation adjustments are reflected as acomponent of “Accumulated other comprehensive income (loss)” in shareholders’ equity.
Earnings (Loss) Per Common Share“Basic earnings (loss) per common share” is computed by dividing income (loss) available to common shareholders by the weighted
average number of common shares outstanding for the periods presented. “Diluted earnings per share” is computed by dividing income (loss)
available to common shareholders by the weighted average number of common shares outstanding, increased by the weighted average number ofcommon stock equivalents. Common stock equivalents are calculated using the treasury stock method and represent incremental shares issuable
upon exercise of our outstanding options. However, potential common shares are not included in the denominator of the diluted earnings (loss)
per share calculation when inclusion of such shares would be anti-dilutive, such as in a period in which a net loss is recorded.
When we determine whether instruments granted in stock-based payment transactions are participating securities, unvested
stock-based awards which include the right to receive non-forfeitable dividends or dividend equivalents are considered to participate with
common stock in undistributed earnings. With participating securities, we are required to calculate basic and diluted earnings per common shareamounts under the two-class method. The two-class method excludes from earnings per common share calculations any dividends paid or owed
to participating securities and any undistributed earnings considered to be attributable to participating securities.
Stock-Based Compensation
We account for stock-based compensation in accordance with ASC Topic 718-10, Compensation-Stock Compensation, and ASC
Subtopic 505-50, Equity-Based Payments to Non-Employees (“ASC stock-based compensation guidance”). Stock-based compensation expense isrecognized during the requisite service period (that is, the period for which the employee is being compensated) and is based on the value ofstock-based payment awards after a reduction for estimated forfeitures. Forfeitures are estimated at the time of grant and are revised, if necessary,in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation expense recognized in the consolidated
statement of operations for the years ended December 31, 2012, 2011, and 2010 included both compensation expense for stock- based payment

45

awards granted by Activision, Inc. prior to, but not yet vested as of July 9, 2008, based on the revalued fair value estimated at July 9, 2008, andcompensation expense for the stock-based payment awards granted by us subsequent to July 9, 2008.
We estimate the value of stock-based payment awards on the measurement date using a binomial-lattice model. Our determination offair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions
regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility
over the term of the awards, and actual and projected employee stock option exercise behaviors.
We generally determine the fair value of restricted stock rights (including restricted stock units, restricted stock awards andperformance shares) based on the closing market price of the Company’s common stock on the date of grant. Certain restricted stock rights
granted to our employees and senior management vest based on the achievement of pre-established performance or market goals. We estimate thefair value of performance-based restricted stock rights at the closing market price of the Company’s common stock on the date of grant. Eachquarter we update our assessment of the probability that the specified performance criteria will be achieved. We amortize the fair values of
performance-based restricted stock rights over the requisite service period adjusted for estimated forfeitures for each separately vesting tranche of
the award. We estimate the fair value of market-based restricted stock rights at the date of grant using a Monte Carlo valuation methodology andamortize those fair values over the requisite service period adjusted for estimated forfeitures for each separately vesting tranche of the award. The
Monte Carlo methodology that we use to estimate the fair value of market-based restricted stock rights at the date of grant incorporates into thevaluation the possibility that the market condition may not be satisfied. Provided that the requisite service is rendered, the total fair value of themarket-based restricted stock rights at the date of grant must be recognized as compensation expense even if the market condition is not achieved.
However, the number of shares that ultimately vest can vary significantly with the performance of the specified market criteria.
See Note 18 of the Notes to Consolidated Financial Statements.
3. Investment and other income (expense), net
Investment and other income (expense), net is comprised of the following (amounts in millions):
For the Years Ended
December 31,
2012

2011

2010

Interest income ........................................................................................................................ $6
Interest expense .......................................................................................................................(1)Change in fair value of other financial liability ...................................................................... —Net realized gain (loss) on foreign exchange contracts with Vivendi .................................... 2
Investment and other income (expense), net ........................................................................... $7

$14
(4)
—
(7)
$3

$8
(5)
22
(2)
$23

4. Cash and Cash Equivalents
The following table summarizes the components of our cash and cash equivalents with original maturities of three months or less atthe date of purchase (amounts in millions):
At December 31,

Cash...............................................................................................................................................
Time deposits ................................................................................................................................
Money market funds .....................................................................................................................
U.S. treasuries and/or foreign government bonds ........................................................................
Cash and cash equivalents ............................................................................................................

46

2012

2011

$425
23
3,511
—
$3,959

$270
24
2,869
2
$3,165

5. Investments
The following table summarizes our short-term and long-term investments at December 31, 2012 and 2011 (amounts in millions):

Amortized
cost

At December 31, 2012

Short-term investments:
Available-for-sale investments:
U.S. treasuries and government agency securities ..............
Corporate bonds ...................................................................
Restricted cash ..........................................................................
Total short-term investments.........................................................
Long-term investments:
Available-for-sale investments:
Auction rate securities held through Morgan Stanley
Smith Barney LLC ..........................................................

Short-term investments:
Available-for-sale investments:
U.S. treasuries and government agency securities ..............
Restricted cash ..........................................................................
Total short-term investments.........................................................
Long-term investments:
Available-for-sale investments:
Auction rate securities held through Morgan Stanley
Smith Barney LLC ..........................................................

Gross
unrealized
losses

Fair
Value

$387
11

$—
—

$—
—

$387
11
18
$416

$8

$—

$—

$8

Amortized
cost

At December 31, 2011

Gross
unrealized
gains

Gross
unrealized
gains

Gross
unrealized
losses

Fair
Value

$344

$—

$—

$344
16
$360

$17

$—

$(1)

$16

The following table illustrates the gross unrealized losses on available-for-sale securities, the fair value of those securities, aggregatedby investment categories, and the length of time that they have been in a continuous unrealized loss position at December 31, 2011 (amounts inmillions):

At December 31, 2011

Taxable auction rate securities .......................

Less than 12 months
Unrealized
Fair
lossesValue$—

12 months or more
Unrealized
Fair
losses
Value

$—

$(1)

Total
Unrealized
losses

$16

Fair
Value

$(1)

$16

The following table summarizes the contractually stated maturities of our short-term and long-term investments classified as availablefor-sale at December 31, 2012 (amounts in millions):
Amortized
cost

At December 31, 2012

U.S. government agency securities and corporate bonds due in 1 year or less..............................................
$398
Auction rate securities due after ten years ......................................................................................................8
$406

47

Fair
Value

$398
8
$406

6. Software development and intellectual property licenses
The following table summarizes the components of our software development and intellectual property licenses (amounts in millions):At
December 31,
2012

At
December 31,
2011

Internally developed software costs .........................................................................
Payments made to third-party software developers .................................................
Total software development costs ............................................................................

$159
134
$293

$115
84
$199

Intellectual property licenses....................................................................................

$41

$34

Amortization, write-offs and impairments of capitalized software development costs and intellectual property licenses are comprisedof the following (amounts in millions):
For the Years Ended
December 31,
2012

2011

2010

Amortization ............................................................................................................................ $205
Write-offs and impairments ..................................................................................................... 12

$258
60

$322
63

7. Restructuring
On February 3, 2011, the Board of Directors of the Company authorized a restructuring plan (the “2011 Restructuring”) involving a
focus on the development and publication of a reduced slate of titles on a going-forward basis. The 2011 Restructuring included thediscontinuation of the development of music-based games, the closure of the related business unit and the cancellation of other titles then in
production, along with a related reduction in studio headcount and corporate overhead.
The following table details the amount of the 2011 Restructuring reserves included in “Accrued Expenses and Other Liabilities” in the
consolidated balance sheet at December 31, 2012 and 2011 (amounts in millions):

Severance

Balance at January 1, 2011 ......................................................
Costs charged to expense ..........................................................
Costs paid or otherwise settled .................................................
Balance at December 31, 2011 .................................................
Costs paid or otherwise settled .................................................
Balance at December 31, 2012 .................................................

$—
20
(16)
$4
(4)
$—

Contract
termination
costs

Facilities
costs

$—
4
(1)
$3
—
$3

Total

$—
1
(1)
$—
—
$—

$—
25
(18)
$7
(4)
$3

The 2011 Restructuring charges for the year ended December 31, 2011 was $25 million. These charges, as well as the 2011
Restructuring reserve balances at December 31, 2012 and 2011, were recorded within our Activision segment. We completed the 2011
Restructuring as of December 31, 2011 and we do not expect to incur significant additional restructuring expenses relating thereto.
We have also completed our implementation of our organizational restructuring plan as a result of the Business Combination. There
were minimal cash payments and additional charges in our consolidated statement of operations for the year ended December 31, 2011 relating tothat restructuring and we do not expect to incur additional restructuring expenses relating thereto.

48

8. Inventories, net
Our inventories consist of the following (amounts in millions):
At December 31,
2012

Finished goods ....................................................................................................................
Purchased parts and components .......................................................................................
Inventories, net ...................................................................................................................

2011

$151
58
$209

$116
28
$144

9. Property and Equipment, Net
Property and equipment, net was comprised of the following (amounts in millions):
At December 31,

Land ..................................................................................................................................................
Buildings ...........................................................................................................................................
Leasehold improvements ..................................................................................................................
Computer equipment ........................................................................................................................
Office furniture and other equipment ...............................................................................................
Total cost of property and equipment ..........................................................................................
Less accumulated depreciation .........................................................................................................
Property and equipment, net ........................................................................................................

2012

2011

$1
5
80
362
65
513
(372)
$141

$1
5
72
406
49
533
(370)
$163

Depreciation expense for the years ended December 31, 2012, 2011, and 2010 was $90 million, $75 million, and $68 million,
respectively.
Rental expenses were $37 million, $38 million and $37 million for the years ended December 31, 2012, 2011, and 2010, respectively.
10. Goodwill
The changes in the carrying amount of goodwill by reporting unit for the years ended December 31, 2012 and 2011 are as follows(amounts in millions):
Activision

Balance at December 31, 2010.......................................................................................
Tax benefit credited to goodwill ...............................................................................
Issuance of contingent consideration ........................................................................
Impairment of goodwill.............................................................................................
Balance at December 31, 2011.......................................................................................
Tax benefit credited to goodwill ...............................................................................
Balance at December 31, 2012.......................................................................................

$6,942(12)
3—$6,933(5)$6,928Blizzard

$178
—
—
—
$178
—
$178

Distribution

$12
—
—
(12)
$—
—
$—

Total

$7,132(12)
3(12)$7,111(5)$7,106

Issuance of contingent consideration consists of additional purchase consideration paid or accrued in relation to previous acquisitions.
The tax benefit credited to goodwill represents the tax deduction resulting from the exercise of stock options that were outstanding and vested at
the consummation of the Business Combination and included in the purchase price of Activision, Inc. to the extent that the tax deduction did notexceed the fair value of those options. Conversely, to the extent that the tax deduction did exceed the fair value of those options, the tax benefit iscredited to accumulated paid in capital.
During our 2011 annual impairment testing, the Company identified and recorded a $12 million impairment of goodwill to “Generaland administrative” in the statement of operations related to the Distribution reporting unit. The impairment was due to declines in our expected
future performance of the distribution business, which was a reflection of a continuing shift in the distribution of interactive entertainment
software from retail distribution channels towards digital distribution and online gaming.

49

At December 31, 2012 and 2011, the gross goodwill and accumulated impairment losses by reporting unit are as follows:
Activision

Blizzard

Distribution

Total

Balance at December 31, 2011:
Goodwill ....................................................................................................................
Accumulated impairment losses ...............................................................................
Total ...........................................................................................................................

$6,933—$6,933

$178
—
$178

$12
(12)
$—

$7,123(12)$7,111

Balance at December 31, 2012:
Goodwill ....................................................................................................................
Accumulated impairment losses ...............................................................................
Total ...........................................................................................................................

$6,928—$6,928

$178
—
$178

$—
—
$—

$7,106—$7,106

11. Intangible Assets, Net
Intangible assets, net consist of the following (amounts in millions):

Estimated
usefullives

Acquired definite-lived intangible assets:
License agreements and other ....................................................................
3 - 10 years
Internally developed franchises .................................................................
11 - 12 years
Acquired indefinite-lived intangible assets:
Activision trademark ..................................................................................
Indefinite
Acquired trade names .................................................................................
Indefinite
Total .................................................................................................................

Estimated
usefullives

Acquired definite-lived intangible assets:
License agreements and other .........................................................................
Game engines ..................................................................................................
Internally developed franchises ......................................................................
Distribution agreements ..................................................................................
Acquired indefinite-lived intangible assets:
Activision trademark .......................................................................................
Acquired trade names ......................................................................................
Total ......................................................................................................................

At December 31, 2012
Gross
carrying
Accumulated
amountamortization

Impairment
chargeNet carrying
amount

$98
309

$(88)
(251)

$—
—

$10
58

386
47
$840

—
—
$(339)

—
—
$—

386
47
$501

At December 31, 2011
Gross
carrying
Accumulated
amountamortization

Impairment
chargeNet
carrying
amount3 - 10 years
2 - 5 years
11 - 12 years
4 years

$88
32
309
18

$(82)
(32)
(227)
(18)

$—
—
—
—

$6
—
82
—

Indefinite
Indefinite

386
47
$880

—
—
$(359)

—
—
$—

386
47
$521

Amortization expense of intangible assets was $30 million, $72 million, and $130 million for the years ended December 31, 2012,2011, and 2010, respectively.
The gross carrying amount as of December 31, 2011 in the tables above reflect a new cost basis for license agreements, game engines
and internally developed franchises due to impairment charges for the year ended December 31, 2010. The new cost basis includes the original
gross carrying amount, less accumulated amortization and impairment charges on the intangible assets as of December 31, 2011.

50

At December 31, 2012, future amortization of definite-lived intangible assets is estimated as follows (amounts in millions):
2013 ........................................................................................................................................................................
2014 ........................................................................................................................................................................
2015 ........................................................................................................................................................................
2016 ........................................................................................................................................................................
2017 ........................................................................................................................................................................
Thereafter ................................................................................................................................................................
Total ........................................................................................................................................................................

$24
20
10
6
4
4
$68

We did not record any impairment charges against our intangible assets for the year ended December 31, 2012 and 2011.
In 2010, we considered the continued economic downturn within our industry and the change in the buying habits of casual consumers
while planning for 2011 during the fourth quarter of 2010. This resulted in a significant revision of our outlook for retail sales of software and astrategy change to, among other things, focus on fewer title releases in the casual genre and discontinue the development of music-based titles. As
we considered this change in strategy to be an indicator of a potential impairment of our intangible assets, we updated our future projected
revenue streams for certain franchises in the casual games and music genres. We performed recoverability tests and, where applicable, measured
the impairment of the related intangible assets in accordance with ASC Subtopic 360-10. This resulted in impairment charges of $67 million,$9 million and $250 million to license agreements, game engines and internally developed franchises intangible assets, respectively, recorded
within our Activision segment for the year ended December 31, 2010.
12. Current Accrued Expenses and Other Liabilities, and Other Current Assets
Included in “Current accrued expenses and other liabilities” of our consolidated balance sheets are accrued payroll related costs of$280 million and $363 million at December 31, 2012 and 2011, respectively.
Included in “Other current assets” of our consolidated balance sheets are deferred cost of sales—product costs of $245 million and$246 million at December 31, 2012 and 2011, respectively.
13. Operating Segments and Geographic Region
Our operating segments are consistent with our internal organizational structure, the manner in which our operations are reviewed andmanaged by our Chief Executive Officer, who is our Chief Operating Decision Maker (“CODM”), the manner in which we assess operating
performance and allocate resources, and the availability of separate financial information. Currently, we operate under three operating segments:
Activision, Blizzard and Distribution (see Note 1 of the Notes to the Consolidated Financial Statements). We do not aggregate operating
segments.
The CODM reviews segment performance exclusive of the impact of the change in deferred net revenues and related cost of sales with respect tocertain of our online-enabled games, stock-based compensation expense, restructuring expense, amortization of intangible assets, and impairmentof intangible assets and goodwill. The CODM does not review any information regarding total assets on an operating segment basis and,accordingly, no disclosure is made. Information on the operating segments and reconciliations of total net revenues and total segment operating
income to consolidated net revenues from external customers and consolidated income before income tax expense for the years ended
December 31, 2012, 2011, and 2010 are presented below (amounts in millions):

51

Years Ended December 31,
2012

2011

2010

2012

Net Revenues

Activision .....................................................................................................................
Blizzard ........................................................................................................................
Distribution ..................................................................................................................
Operating segments total ........................................................................................
Reconciliation to consolidated net revenues / consolidated income before tax expense:
Net effect from changes in the deferral of net revenues and related cost of sales ......
Stock-based compensation expense .............................................................................
Restructuring ................................................................................................................
Amortization of intangible assets ................................................................................
Impairment of goodwill/intangible assets....................................................................
Consolidated net revenues / operating income .................................................................

2011

2010

Income from operations$3,072
1,609
306
4,987

$2,828
1,243
418
4,489

$2,769
1,656
378
4,803

$970
717
11
1,698

$851
496
11
1,358

$511
850
10
1,371

(131)
—
—
—
—
$4,856266————$4,755

(356)
—
—
—
—
$4,447

(91)
(126)
—
(30)
—

183
(103)
(26)
(72)
(12)

(319)
(131)
(3)
(123)
(326)

$1,4517$1,458$1,3283$1,331

$469
23
$492

Investment and other income (expense), net ...............................................................
Consolidated income before income tax expense.............................................................

For the years ended December 31, 2011 and 2010, restructuring expense of $1 million and $3 million, related to the Business
Combination consummated in July 2008, is reflected in the “General and administrative expense” in the consolidated statement of operations,
respectively. See Note 7 of the Notes to Consolidated Financial Statements for more detail.
Geographic information for the years ended December 31, 2012, 2011, and 2010 is based on the location of the selling entity. Net
revenues from external customers by geographic region were as follows (amounts in millions):
Years Ended
December 31,
2012

2011

2010

$2,436
1,968
452$4,856$2,405
1,990
360$4,755$2,4091,743
295$4,447

Net revenues by geographic region:
North America .....................................................................................................
Europe ..................................................................................................................
Asia Pacific ..........................................................................................................
Total consolidated net revenues................................................................................
Net revenues by platform were as follows (amounts in millions):
Years Ended December 31,
2012

2011

2010

$2,186
1,214
986
164
4,550
306
$4,856$2,439
374
1,357
167
4,337
418
$4,755$2,330
325
1,230
184
4,069
378
$4,447

Net revenues by platform:
Console.................................................................................................................
PC and Other(1) .....................................................................................................
Online subscriptions(2)..........................................................................................
Handheld ..............................................................................................................
Total platform net revenues ......................................................................................
Distribution ...............................................................................................................
Total consolidated net revenues ................................................................................

(1)

Revenues from PC and other consists of net revenues from the sale of PC boxed products, Skylanders franchise standalone
toys products, mobile sales and other physical merchandise and accessories.

(2)

Revenue from online subscriptions consists of revenue from all World of Warcraft® products, including subscriptions,boxed products, expansion packs, licensing royalties, value-added services, and revenues from Call of Duty® Elite
memberships.

52

Long-lived assets by geographic region at December 31, 2012, 2011, and 2010 were as follows (amounts in millions):
Years Ended
December 31,

Long-lived assets* by geographic region:
North America ...................................................................................................................
Europe ................................................................................................................................
Asia Pacific ........................................................................................................................
Total long-lived assets by geographic region .........................................................................

*

2012

2011

2010

$90
40
11
$141

$105
46
12
$163

$113
46
10
$169

The only long-lived assets that we classify by region are our long term tangible fixed assets, which only include property,
plant and equipment assets; all other long term assets are not allocated by location.

For information regarding significant customers, see “Concentration of Credit Risk” in Note 2 of the Notes to Consolidated Financial
Statements.
14. Computation of Basic/Diluted Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per common share (amounts in millions, except per sharedata):
Years Ended December 31,
2012

Numerator:
Consolidated net income .............................................................................................................................................................
$1,149Less: Distributed earnings to unvested stock-based awards that participate in earnings ......................................................(4)Less: Undistributed earnings allocated to unvested stock-based awards that participate in earnings ..................................
(20)
Numerator for basic and diluted earnings per common share—income available to common shareholders ............................
$1,125
Denominator:
Denominator for basic earnings per common share—weighted-average common shares outstanding ....................................
1,112
Effect of potential dilutive common shares under the treasury stock method: Employee stock options .................................. 6
Denominator for diluted earnings per common share—weighted-average common shares outstanding plus
1,118
dilutive effect of employee stock options .........................................................................................................................

2011

2010

$1,085(3)(13)$1,069

$418
(2)
(2)
$414

1,148
8

1,222
14

1,156

1,236

Basic earnings per common share ....................................................................................................................................................
$1.01

$0.93

$0.34

Diluted earnings per common share .................................................................................................................................................
$1.01

$0.92

$0.33

Our unvested restricted stock rights (including restricted stock units, restricted stock awards, and performance shares) are consideredparticipating securities since these securities have non-forfeitable rights to dividends or dividend equivalents during the contractual period of theaward. Since the unvested restricted stock rights are considered participating securities, we are required to use the two-class method in our
computation of basic and diluted earnings per common share. For the years ended December 31, 2012 and 2011, we had outstanding unvested
restricted stock rights with respect to 24 million and 17 million shares of common stock on a weighted-average basis, respectively.
Potential common shares are not included in the denominator of the diluted earnings per common share calculation when inclusion ofsuch shares would be anti-dilutive. Therefore, options to acquire 25 million shares of common stock were not included in the calculation ofdiluted earnings per common share for the years ended December 31, 2012, 2011, and 2010, as the effect of their inclusion would be anti-dilutive.

53

15. Income Taxes
Domestic and foreign income (loss) before income taxes and details of the income tax expense (benefit) are as follows (amounts inmillions):
For the Years Ended
December 31,

Income before income tax expense:
Domestic ...................................................................................................................
Foreign ......................................................................................................................

2012

2011

2010

$668
790
$1,458$623
708$1,331

$228
264
$492

$256
14
49
319

$144
(2)
28
170

$314
31
29
374

12
(11)
(11)
(10)

61
(4)
19
76

(264)
8
(45)
(301)

—
$309

—
$246

1
$74

Income tax expense (benefit):
Current:
Federal .................................................................................................................
State .....................................................................................................................
Foreign .................................................................................................................
Total current ........................................................................................................
Deferred:Federal .................................................................................................................
State .....................................................................................................................
Foreign .................................................................................................................
Total deferred ......................................................................................................
Add back tax benefit credited to additional paid-in capital:
Excess tax benefit associated with stock options .....................................................
Income tax expense .......................................................................................................

The items accounting for the difference between income taxes computed at the U.S. federal statutory income tax rate and the income
tax expense (benefit) (the effective tax rate) for each of the years are as follows (amounts in millions):
For the Years Ended December 31,
2012

Federal income tax provision at statutory rate .....................
$510
State taxes, net of federal benefit ......................................... 31
Research and development credits .......................................(10)Domestic production activity deduction ..............................(17)Foreign rate differential........................................................
(241)
Change in tax reserves ......................................................... 53
Shortfall from employee stock option exercises .................. 8
Return to provision adjustment ............................................(4)Net Operating Loss tax attribute received fromInternal Revenue Service audit .......................................(46)
Other
25
Income tax expense ..............................................................
$309

2011

2010

35%
2
(1)
(1)
(17)
4
—
—

$466
18
(21)
(15)
(202)
10
9
(31)

35%
1
(2)
(1)
(15)
1
1
(2)

$172
30
(11)
(13)
(109)
(1)
8
—

35%
6
(2)
(3)
(22)
—
1
—

(3)
2
21%

—
12
$246

—
1
19%

—
(2)
$74

—
—
15%

As previously disclosed, on July 9, 2008, a business combination (“the Business Combination”) occurred amongst Vivendi, theCompany and certain of their respective subsidiaries pursuant to which Vivendi Games, Inc. (“Vivendi Games”), then a member of theconsolidated U.S. tax group of Vivendi’s subsidiary, Vivendi Holdings I Corp. (“VHI”), became a subsidiary of the Company. As a result of thebusiness combination, the favorable tax attributes of Vivendi Games, Inc. carried forward to the Company. In late August 2012, VHI settled afederal income tax audit with the Internal Revenue Service (“IRS”) for the tax years ended December 31, 2002, 2003, and 2004. In connection
with the settlement agreement, VHI’s consolidated federal net operating loss carryovers were adjusted and allocated to various companies thatwere part of its consolidated group during the relevant periods. This allocation resulted in a $132 million federal net operating loss allocation toVivendi Games. In September 2012, the Company filed an amended tax return for its December 31, 2008 tax year to utilize these additional
federal net operating losses allocated as a result of the aforementioned settlement, resulting in the recording of a one-time tax benefit of$46 million. Prior to the settlement, and given the uncertainty of the VHI audit, the Company had insufficient information to allow it to record or
disclose any information related to the audit until the quarter ended September 30, 2012, as disclosed in the Company’s Form 10-Q for that
period.

54

On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law by the President of the United States. Under theprovisions of the American Taxpayer Relief Act of 2012, the research and development (“R&D”) tax credit that had expired December 31, 2011,
was reinstated retroactively to January 1, 2012, and is now scheduled to expire on December 31, 2013. The Company will record the impact of
the extension of the R&D tax credit related to the tax year ended December 31, 2012, as a discrete item the first quarter of 2013. The impact of
the extension of the R&D tax credit is expected to result in a tax benefit related to the tax year ended December 31, 2012.
Deferred income taxes reflect the net tax effects of temporary differences between the amounts of assets and liabilities for accounting
purposes and the amounts used for income tax purposes. The components of the net deferred tax assets (liabilities) are as follows (amounts inmillions):
As of December 31,
2012

Deferred tax assets:
Reserves and allowances ........................................................................................................ $11
Allowance for sales returns and price protection................................................................... 56
Inventory reserve .................................................................................................................... 5
Accrued expenses ................................................................................................................... 65
Deferred revenue .................................................................................................................... 357
Tax credit carryforwards ........................................................................................................ 62
Net operating loss carryforwards ........................................................................................... 14
Stock-based compensation ..................................................................................................... 119
Foreign deferred assets ........................................................................................................... 7
Other ....................................................................................................................................... 2
Deferred tax assets....................................................................................................................... 698
Valuation allowance .................................................................................................................... —Deferred tax assets, net of valuation allowance .......................................................................... 698
Deferred tax liabilities:
Intangibles ..............................................................................................................................(161)
Prepaid royalties ..................................................................................................................... —Capitalized software development expenses ......................................................................... (54)State taxes ............................................................................................................................... (21)Deferred tax liabilities .................................................................................................................(236)
Net deferred tax assets.................................................................................................................$462

2011

$20
59
2
101
330
43
15
91
16
5
682
—
682
(177)
(2)
(33)
(18)
(230)
$452

As of December 31, 2012, we have various state net operating loss carryforwards totaling $17 million which will begin to expire in
2013. These net operating loss carryforwards are not subject to limitations under Section 382 of the Internal Revenue Code, which imposes alimitation on a corporation’s ability to utilize net operating losses if it experiences an ownership change, as defined under the Internal Revenue
Code. We have tax credit carryforwards of $6 million and $56 million for federal and state purposes, respectively, which will begin to expire in2016.
Through our foreign operations, we have approximately $45 million in net operating loss carryforwards at December 31, 2012,attributed mainly to losses in France and Ireland. We evaluate our deferred tax assets, including net operating losses and tax credits, to determine
if a valuation allowance is required. We assess whether a valuation allowance should be established or released based on the consideration of allavailable evidence using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can beobjectively verified. At December 31, 2012, there are no valuation allowances on deferred tax assets.
Realization of the U.S. deferred tax assets is dependent upon the continued generation of sufficient taxable income prior to expirationof tax credits and loss carryforwards. Although realization is not assured, management believes it is more likely than not that the net carrying
value of the U.S. deferred tax assets will be realized.
Cumulative undistributed earnings of foreign subsidiaries for which no deferred taxes have been provided approximated$1,978 million at December 31, 2012. Deferred income taxes on these earnings have not been provided as these amounts are considered to bepermanent in duration. It is not practical to estimate the amount of tax that would be payable upon distribution of these earnings.
On July 9, 2008, Activision Blizzard entered into a Tax Sharing Agreement (the “Tax Sharing Agreement”) with Vivendi. The Tax
Sharing Agreement generally governs Activision Blizzard’s and Vivendi’s respective rights, responsibilities and obligations with respect to the55ordinary course of business taxes. Currently, under the Tax Sharing Agreement, with certain exceptions, Activision Blizzard generally is
responsible for the payment of U.S. and certain non-U.S. income taxes that are required to be paid to tax authorities on a stand-alone Activision
Blizzard basis. In the event that Activision Blizzard joins Vivendi in the filing of a group tax return, Activision Blizzard will pay its share of the
tax liability for such group tax return to Vivendi, and Vivendi will pay the tax liability for the entire group to the appropriate tax authority.
Vivendi will indemnify Activision Blizzard for any tax liability imposed upon it due to Vivendi’s failure to pay any group tax liability. Activision
Blizzard will indemnify Vivendi for any tax liability imposed on Vivendi (or any of its subsidiaries) due to Activision Blizzard’s failure to pay
any taxes it owes under the Tax Sharing Agreement.
For periods prior to the Business Combination, Vivendi Games’ income taxes were presented in the financial statements as if VivendiGames were a stand-alone taxpayer even though Vivendi Games’ operating results were included in the consolidated federal, certain foreign, andstate and local income tax returns of Vivendi or Vivendi’s subsidiaries. Based on the subsequent filing of these tax returns by Vivendi orVivendi’s subsidiaries, we determined that the amount paid by Vivendi Games was greater than the actual amount due (and settled) based upon
filing of these returns for the year ended December 31, 2008. This difference between the amount paid and the actual amount due (and settled)
represents a return of capital to Vivendi, which, in accordance with the terms of the Business Combination agreement, occurred immediately
prior to the close of the Business Combination. This difference has resulted in no additional payment to Vivendi and no impact to ourconsolidated statement of cash flows for the years ended December 31, 2012, 2011, and 2010.
Vivendi Games results for the period January 1, 2008 through July 9, 2008 are included in the consolidated federal and certain foreign,state and local income tax returns filed by Vivendi or its affiliates while Vivendi Games results for the period July 10, 2008 throughDecember 31, 2008 are included in the consolidated federal and certain foreign, state and local income tax returns filed by Activision Blizzard.
Vivendi Games tax years 2005 through 2008 remain open to examination by the major taxing authorities. The Internal Revenue Service iscurrently examining Vivendi Games tax returns for the 2005 through 2008 tax years. Although the final resolution of the examination is
uncertain, based on current information, in the opinion of the Company’s management, the ultimate resolution of these matters will not have amaterial adverse effect on the Company’s consolidated financial position, liquidity or results of operations.
Activision Blizzard’s tax years 2008 through 2011 remain open to examination by the major taxing jurisdictions to which we aresubject. The Internal Revenue Service is currently examining the Company’s federal tax returns for the 2008 and 2009 tax years. The Company
also has several state and non-U.S. audits pending. Although the final resolution of the Company’s global tax disputes is uncertain, based on
current information, in the opinion of the Company’s management, the ultimate resolution of these matters will not have a material adverse effecton the Company’s consolidated financial position, liquidity or results of operations. However, an unfavorable resolution of the Company’s global
tax disputes could have a material adverse effect on our business and results of operations in the period in which the matters are ultimately
resolved.
As of December 31, 2012, we had approximately $207 million in total unrecognized tax benefits of which $206 million would affectour effective tax rate if recognized. A reconciliation of unrecognized tax benefits for the years ended December 31, 2012, 2011 and 2010 is asfollows (amounts in millions):
For the Years Ended
December 31,
2012

Unrecognized tax benefits balance at January 1 ....................................................................
$154
Gross increase for tax positions of prior years....................................................................... 3
Gross increase for tax positions of current year.....................................................................59
Settlement with taxing authorities..........................................................................................
(8)
Lapse of statute of limitations ................................................................................................
(1)
Unrecognized tax benefits balance at December 31 ..............................................................
$207

2011

2010

$132
4
65
—
(47)
$154

$139
—
21
(16)
(12)
$132

In addition, as of December 31, 2012 and 2011, we reflected $197 million and $146 million, respectively, of income tax liabilities as
non-current liabilities because payment of cash or settlement is not anticipated within one year of the balance sheet date. These non-current
income tax liabilities are recorded in “Other liabilities” in the consolidated balance sheets as of December 31, 2012 and 2011.
We recognize interest and penalties related to uncertain tax positions in “Income tax expense.” As of December 31, 2012 and 2011,
we had approximately $11 million and $12 million, respectively, of accrued interest and penalties related to uncertain tax positions. For the year
ended December 31, 2012, we did not have any material interest expense and penalties related to uncertain tax positions. For the years ended
December 31, 2011 and 2010, we recorded $1 million and $3 million, respectively, of interest expense related to uncertain tax positions.

56Based on the current status with the IRS, there is insufficient information to identify any significant changes in unrecognized tax
benefits in the next twelve months. However, the Company may recognize a benefit of up to approximately $10 million related to the settlementof tax audits and/or the expiration of statutes of limitations in the next twelve months.
Although the final resolution of the Company’s global tax disputes, audits, or any particular issue with the applicable taxing authority
is uncertain, based on current information, in the opinion of the Company’s management, the ultimate resolution of these matters will not have amaterial adverse effect on the Company’s consolidated financial position, liquidity or results of operations. However, any settlement or resolutionof the Company’s global tax disputes, audits, or any particular issue with the applicable taxing authority could have a material favorable orunfavorable effect on our business and results of operations in the period in which the matters are ultimately resolved.
16. Fair Value Measurements
Fair Value Measurements on a Recurring BasisFASB literature regarding fair value measurements for financial and non-financial assets and liabilities establishes a three-level fairvalue hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of “observable inputs”
and minimize the use of “unobservable inputs.” The three levels of inputs used to measure fair value are as follows:•

Level 1—Quoted prices in active markets for identical assets or liabilities.

•

Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in
active markets or other inputs that are observable or can be corroborated by observable market data.

•

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of theassets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use
significant unobservable inputs.

The table below segregates all assets and liabilities that are measured at fair value on a recurring basis (which means they are someasured at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value atthe measurement date (amounts in millions):
Fair Value Measurements at
December 31, 2012 Using

As of
December 31,
2012

Financial assets:
Money market funds...................................................
U.S. treasuries and government agency
securities ................................................................
Corporate bonds .........................................................
ARS held through Morgan Stanley
Smith Barney LLC ................................................
Total financial assets at fair value ..............................

QuotedPrices in
ActiveMarkets for
Identical
Financial
Instruments

Significant
Other
Observable
InputsSignificant
Unobservable
Inputs(Level 1)(Level 2)(Level 3)

Balance SheetClassification$3,511$3,511$—$— Cash and cash equivalents

387
11

387
11

—
—

— Short-term investments— Short-term investments

8$3,917—$3,909—$—8 Long-term investments$857

Fair Value Measurements at
December 31, 2011 Using

As of
December 31,
2011

Financial assets:
Money market funds...................................................
U.S. treasuries with original maturities of threemonths or less ........................................................
U.S. treasuries and government agency
securities ................................................................
ARS held through Morgan Stanley
Smith Barney LLC ................................................
Total financial assets at fair value ..............................

QuotedPrices in
ActiveMarkets for
Identical
Financial
Instruments

Significant
Other
Observable
InputsSignificant
Unobservable
Inputs(Level 1)(Level 2)(Level 3)

Balance SheetClassification$2,869$2,869$—$— Cash and cash equivalents

2

2

—

— Cash and cash equivalents

344

344

—

— Short-term investments

16$3,231—$3,215—$—16 Long-term investments$16

The following table provides a reconciliation of the beginning and ending balances of our financial assets and financial liabilities
classified as Level 3 by major categories (amounts in millions) at December 31, 2012 and 2011:
Level 3

ARS(a)Balance at January 1, 2011 .............................................................................................................................
$23
Total unrealized gains included in other comprehensive income .............................................................
3
Settlements .................................................................................................................................................
(10)
Balance at December 31, 2011 .......................................................................................................................
$16
Total unrealized gains included in other comprehensive income .............................................................
2
Settlements .................................................................................................................................................
(10)
Balance at December 31, 2012 .......................................................................................................................
$8

(a)

Total
financialassets at
fair
value

$23
3
(10)
$16
2
(10)
$8

Fair value measurements have been estimated using an income-approach model (specifically, discounted cash-flow
analysis). When estimating the fair value, we consider both observable market data and non-observable factors,
including credit quality, duration, insurance wraps, collateral composition, maximum rate formulas, comparable
trading instruments, and the likelihood of redemption. Significant assumptions used in the analysis include estimatesfor interest rates, spreads, cash flow timing and amounts, and holding periods of the securities. Assets measured atfair value using significant unobservable inputs (Level 3) represent less than 1% of our financial assets measured atfair value on a recurring basis at December 31, 2012.

Foreign Currency Forward Contracts Not Designated as Hedges
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. To mitigate our risk from foreign currency
fluctuations we periodically enter into currency derivative contracts, principally swaps and forward contracts with maturities of twelve months or
less, with Vivendi as our principal counterparty. We do not hold or purchase any foreign currency contracts for trading or speculative purposes
and we do not designate these forward contracts or swaps as hedging instruments. Accordingly, we report the fair value of these contracts in the
consolidated balance sheet within “Other current assets” or “Other current liabilities” and with changes in fair value recorded in the consolidated
statement of operations within “Investment and other income (expense), net” and “General and administrative expense.” The fair value of foreign58

currency contracts is estimated based on the prevailing exchange rates of the various hedged currencies as of the end of the period and was notmaterial as of December 31, 2012 and 2011.
Fair Value Measurements on a Non-Recurring Basis
We measure the fair value of certain assets on a non-recurring basis, generally annually or when events or changes in circumstancesindicate that the carrying amount of the assets may not be recoverable.
During our annual impairment review of goodwill performed as of December 31, 2011, we identified and recorded an impairment of$12 million in our Distribution segment. The decrease in fair value of the reporting unit was primarily due to the decrease of forecasted revenue
from our Distribution segment in view of the industry trend towards digital distribution. No impairments of goodwill were recorded for the years
ended December 31, 2012 and 2010.
In accordance with the provisions of the impairment of long-lived assets subsections of ASC Subtopic 360-10, intangible assets were
written down to their fair value during in the quarter ended December 31, 2010 within our Activision operating segment. The write down resulted
in impairment charges of $67 million, $9 million and $250 million to license agreements, game engines and internally developed franchises
intangible assets, respectively (see Note 11 of the notes to the Consolidated Financial Statements for details).
The tables below present intangible assets that were measured at fair value on a non-recurring basis at December 31, 2011 (amounts inmillions):
Fair Value Measurements at
December 31, 2011 Using

As of
December 31,
2011

Non-financial assets:
Goodwill .........................................................................................
Total non-financial assets at fair value ..........................................

$7,111$7,111

QuotedPrices in
ActiveMarkets for
Identical
Financial
Instruments

Significant
Other
Observable
InputsSignificant
Unobservable
Inputs(Level 1)(Level 2)(Level 3)

$—
$—

$—
$—

$7,111$7,111

Total Losses

$12
$12

17. Commitments and Contingencies
Credit Facilities
At December 31, 2012 and 2011, we maintained a $15 million irrevocable standby letter of credit. The standby letter of credit isrequired by one of our inventory manufacturers so that we can qualify for certain payment terms on our inventory purchases. Under the terms ofthis arrangement, we are required to maintain on deposit with the bank a compensating balance, restricted as to use, of not less than the sum of
the available amount of the letter of credit plus the aggregate amount of any drawings under the letter of credit that have been honored thereunder,
but not reimbursed. The letter of credit was undrawn at December 31, 2012 and 2011.
At December 31, 2012 and 2011, our subsidiary located in Europe maintained an irrevocable standby letter of credit of EUR 5 million($7 million) and EUR 5 million ($7 million), respectively. This standby letter of credit is required by one of our inventory manufacturers so that
we can qualify for certain payment terms on our inventory purchases. There were no amounts outstanding at December 31, 2012 and 2011.
Commitments
In the normal course of business, we enter into contractual arrangements with third parties for non-cancelable operating leaseagreements for our offices, for the development of products and for the rights to intellectual property. Under these agreements, we commit toprovide specified payments to a lessor, developer or intellectual property holder, as the case may be, based upon contractual arrangements. The
payments to third-party developers are generally conditioned upon the achievement by the developers of contractually specified development
milestones. Further, these payments to third-party developers and intellectual property holders typically are deemed to be advances and, as such,are recoupable against future royalties earned by the developer or intellectual property holder based on the sale of the related game. Additionally,in connection with certain intellectual property rights acquisitions and development agreements, we will commit to spend specified amounts for59marketing support for the game(s) which is to be developed or in which the intellectual property will be utilized. Assuming all contractual
provisions are met, the total future minimum commitments for these and other contractual arrangements in place at December 31, 2012 arescheduled to be paid as follows (amounts in millions):

Facility andEquipment
LeasesFor the years ending December 31,
2013 ..........................................................................
2014 ..........................................................................
2015 ..........................................................................
2016 ..........................................................................
2017 ..........................................................................
Thereafter .................................................................
Total .....................................................................

(1)

$33
31
22
18
17
52
$173

Contractual Obligations(1)Developer andIntellectual
Properties
Marketing

Total

$119
5
1
—
—
3
$128

$210
87
23
24
23
55
$422

$58
51
—
6
6
—
$121

We have omitted uncertain tax liabilities from this table due to the inherent uncertainty regarding the timing ofpotential issue resolution. Specifically, either (a) the underlying positions have not been fully developed under
audit to quantify at this time or, (b) the years relating to the issues for certain jurisdictions are not currently under
audit. At December 31, 2012, we had $207 million of unrecognized tax benefits, of which $197 million was
included in “Other Liabilities” and $10 million was included in “Accrued Expenses and Other Liabilities” in the
consolidated balance sheets.

Legal Proceedings
The Company is subject to various legal proceedings and claims. FASB Accounting Standards Codification (ASC) Topic 450 governs
the disclosure of loss contingencies and accrual of loss contingencies in respect of litigation and other claims. The Company records an accrualfor a potential loss when it is probable that a loss will occur and the amount of the loss can be reasonably estimated. When the reasonableestimate of the potential loss is within a range of amounts, the minimum of the range of potential loss is accrued, unless a higher amount within
the range is a better estimate than any other amount within the range. Moreover, even if an accrual is not required, the Company provides
additional disclosure related to litigation and other claims when it is reasonably possible (i.e., more than remote) that the outcomes of such
litigation and other claims include potential material adverse impacts on the Company.
The outcomes of legal proceedings and other claims are subject to significant uncertainties, many of which are outside the Company’scontrol. There is significant judgment required in the analysis of these matters, including the probability determination and whether a potential
exposure can be reasonably estimated. In making these determinations, the Company, in consultation with outside counsel, examines the relevantfacts and circumstances on a quarterly basis assuming, as applicable, a combination of settlement and litigated outcomes and strategies.
Moreover, legal matters are inherently unpredictable and the timing of development of factors on which reasonable judgments and estimates canbe based can be slow. As such, there can be no assurance that the final outcome of any legal matter will not materially and adversely affect ourbusiness, financial condition, results of operations, or liquidity.
In prior periods, the Company reported on litigation involving former employees at Infinity Ward, as well as Electronic Arts, Inc. As
previously disclosed, all parties to these litigation matters reached a settlement of the disputes on May 31, 2012.
We are party to routine claims, suits, investigations, audits and other proceedings arising from the ordinary course of business,
including with respect to intellectual property rights, contractual claims, labor and employment matters, regulatory matters, tax matters,
unclaimed property matters, compliance matters, and collection matters. In the opinion of management, after consultation with legal counsel,
such routine claims and lawsuits are not significant and we do not expect them to have a material adverse effect on our business, financial
condition, results of operations, or liquidity.

60

18. Stock-Based Compensation
Activision Blizzard Equity Incentive Plans
The Activision Blizzard Inc. 2008 Incentive Plan was adopted by our Board on July 28, 2008, approved by our stockholders andamended and restated by our Board on September 24, 2008, further amended and restated by our Board with stockholder approval on June 3,
2009, further amended and restated by the Compensation Committee of our Board with stockholder approval on December 17, 2009, further
amended and restated by our Board with shareholder approval on June 3, 2010, and further amended and restated by our Board with shareholder
approval on June 7, 2012 (as so amended and restated, the “2008 Plan”). The 2008 Plan authorizes the Compensation Committee of our Board of
Directors to provide stock-based compensation in the form of stock options, share appreciation rights, restricted stock, restricted stock units,
performance shares, performance units and other performance- or value-based awards structured by the Compensation Committee withinparameters set forth in the 2008 Plan, including custom awards that are denominated or payable in, valued in whole or in part by reference to, or
otherwise based on or related to, shares of our common stock, or factors that may influence the value of our common stock or that are valued
based on our performance or the performance of any of our subsidiaries or business units or other factors designated by the Compensation
Committee, as well as incentive bonuses, for the purpose of providing incentives and rewards for performance to the directors, officers, andemployees of, and consultants to, Activision Blizzard and its subsidiaries.
While the Compensation Committee has broad discretion to create equity incentives, our stock-based compensation program for themost part currently utilizes a combination of options and restricted stock units. Options have time-based vesting schedules, generally vesting
annually over a period of three to five years, and all options expire ten years from the grant date. Restricted stock units either have time-based
vesting schedules, generally vesting in their entirety on the third anniversary of the date of grant, or vesting annually over a period of three to five
years, or vest only if certain performance measures are met. In addition, under the terms of the 2008 Plan, the exercise price for the options must
be equal to or greater than the closing price per share of our common stock on the date the award is granted, as reported on NASDAQ.
At December 31, 2012, 39 million shares of our common stock were available for issuance under the 2008 Plan. The number of sharesof our common stock reserved for issuance under the 2008 Plan may be further increased from time to time by: (i) the number of shares relating
to awards outstanding under any prior stock compensation plans that: (a) expire, or are forfeited, terminated or cancelled, without the issuance ofshares; (b) are settled in cash in lieu of shares; or (c) are exchanged, prior to the issuance of shares of our common stock, for awards not involving
our common stock; and (ii) if the exercise price of any option outstanding under any prior plan is, or the tax withholding requirements withrespect to any award outstanding under any prior plan are, satisfied by withholding shares otherwise then deliverable in respect of the award or
the actual or constructive transfer to the Company of shares already owned, the number of shares equal to the withheld or transferred shares. At
December 31, 2012, we had approximately 51 million shares of our common stock reserved for future issuance under the 2008 Plan. Sharesissued in connection with awards made under the 2008 Plan are generally issued as new stock issuances.
Method and Assumptions on Valuation of Stock Options
Our employee stock options have features that differentiate them from exchange-traded options. These features include lack oftransferability, early exercise, vesting restrictions, pre- and post-vesting termination provisions, blackout dates, and time-varying inputs. In
addition, some of the options have non-traditional features, such as accelerated vesting upon the satisfaction of certain performance conditions
that must be reflected in the valuation. A binomial-lattice model was selected because it is better able to explicitly address these features thanclosed-form models such as the Black-Scholes model, and is able to reflect expected future changes in model inputs, including changes involatility, during the option’s contractual term.
We have estimated expected future changes in model inputs during the option’s contractual term. The inputs required by our
binomial-lattice model include expected volatility, risk-free interest rate, risk-adjusted stock return, dividend yield, contractual term, and vestingschedule, as well as measures of employees’ exercise and post-vesting termination behavior. Statistical methods were used to estimate employee
rank specific termination rates. These termination rates, in turn, were used to model the number of options that are expected to vest and postvesting termination behavior. An exercise multiple based on a stock to strike price ratio was used to reflect the employee exercise behavior
pattern.
The following tables present the weighted-average assumptions and the weighted-average fair value at grant date using thebinomial-lattice model:

61

For the Year Ended
December 31, 2012

Expected life (in years) ..................................................................................
Risk free interest rate......................................................................................
Volatility .........................................................................................................
Dividend yield ................................................................................................
Weighted-average fair value at grant date .....................................................

Employee and director options
For the Year Ended
December 31, 2011

7.05
1.12%
40.76%
1.65%
$3.47

6.58
1.91%
43.50%
1.34%$4.17

For the Year Ended
December 31, 2010

5.79
2.97%
46.20%
1.33%$3.98

To estimate volatility for the binomial-lattice model, we use methods that consider the implied volatility method based upon thevolatilities for exchange-traded options on our stock to estimate short-term volatility, the historical method (annualized standard deviation of theinstantaneous returns on Activision Blizzard’s stock) during the option’s contractual term to estimate long-term volatility, and a statistical model
to estimate the transition or “mean reversion” from short-term volatility to long-term volatility. Based on these methods, for options granted
during the year ended December 31, 2012, the expected stock price volatility ranged from 29.70% to 42.70%.
As is the case for volatility, the risk-free rate is assumed to change during the option’s contractual term. Consistent with thecalculation required by a binomial-lattice model, the risk-free rate reflects the interest from one time period to the next (“forward rate”) as
opposed to the interest rate from the grant date to the given time period (“spot rate”). The expected dividend yield assumption for options granted
during the year ended December 31, 2012 is based on the Company’s historical and expected future amount of dividend payouts.
The expected life of employee stock options represents the weighted-average period the stock options are expected to remain
outstanding and is an output from the binomial-lattice model. The expected life of employee stock options depends on all of the underlying
assumptions and calibration of our model. A binomial-lattice model can be viewed as assuming that employees will exercise their options when
the stock price equals or exceeds an exercise multiples, of which the multiple is based on historical employee exercise behaviors.
As stock-based compensation expense recognized in the consolidated statement of operations for the years ended December 31, 2012,2011, and 2010 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the timeof grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on
historical experience.
Accuracy of Fair Value Estimates
We developed the assumptions used in the binomial-lattice model, including model inputs and measures of employees’ exercise andpost-vesting termination behavior. Our ability to accurately estimate the fair value of stock-based payment awards at the grant date depends upon
the accuracy of the model and our ability to accurately forecast model inputs as long as ten years into the future. These inputs include, but are notlimited to, expected stock price volatility, risk-free rate, dividend yield, and employee termination rates. Although the fair value of employee
stock options is determined using an option-pricing model, the estimates that are produced by this model may not be indicative of the fair value
observed between a willing buyer and a willing seller. Unfortunately, it is difficult to determine if this is the case, as markets do not currently
exist that permit the active trading of employee stock option and other stock-based instruments.
Stock Option Activities
Stock option activities for the year ended December 31, 2012 are as follows (amounts in millions, except number of shares, which arein thousands, and per share amounts):

SharesOutstanding stock options at December 31, 2011 ............................
Granted ..............................................................................................
Exercised ...........................................................................................
Forfeited ............................................................................................
Expired ..............................................................................................
Outstanding stock options at December 31, 2012 ............................
Vested and expected to vest at December 31, 2012 .........................
Exercisable at December 31, 2012 ....................................................

53,162
4,296(4,790)(423)(497)
51,74850,55339,47362

Weighted-average
exercise price

Weighted-averageremaining contractual
term

Aggregate
intrinsic value$11.12
10.95
6.91
12.35
14.86
11.45
$11.44$11.36

6.06
5.52
5.35

$37
$37
$37

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between our closing stock
price on the last trading day of the period and the exercise price, multiplied by the number of options where the exercise price is below theclosing stock price) that would have been received by the option holders had all option holders exercised their options on that date. This amountchanges as it is based on the fair market value of our stock. Total intrinsic value of options exercised was $25 million, $47 million and$104 million for the years ended December 31, 2012, 2011 and 2010, respectively. Total grant date fair value of options vested was $47 million,$57 million and $114 million for the years ended December 31, 2012, 2011 and 2010, respectively.
At December 31, 2012, $22 million of total unrecognized compensation cost related to stock options is expected to be recognized overa weighted-average period of 1.4 years.
Income tax benefit from stock option exercises was $20 million, $28 million and $36 million for the years ended December 31, 2012,2011 and 2010, respectively.
Restricted Stock Units and Restricted Stock Awards Activities
We grant restricted stock units, which represent the right to receive shares of our common stock, and restricted stock awards, which
are issued and outstanding upon grant but subject to the risk of forfeiture (collectively referred to as “restricted stock rights”), under the 2008 Plan
to employees around the world, and we have assumed as a result of the Business Combination the restricted stock rights granted by
Activision, Inc. Vesting for restricted stock rights is contingent upon the holders’ continued employment with us and may be subject to otherconditions (which may include the satisfaction of a performance measure). If the vesting conditions are not met, unvested restricted stock rights
will be forfeited. Holders of restricted stock are restricted from selling the shares until they vest. Upon vesting of restricted stock rights, we may
withhold shares otherwise deliverable to satisfy tax withholding requirements.
In connection with the consummation of the Business Combination, on July 9, 2008, Robert A. Kotick, our Chief Executive Officer,
received a grant of 2,500,000 market performance-based restricted shares, which vested in 20% increments on each of the first, second, third, andfourth anniversaries of the date of grant, with another 20% vesting on December 31, 2012, the expiration date of Mr. Kotick’s employment
agreement with the Company, in each case subject to the Company attaining the specified compound annual total shareholder return target forthat vesting period. If the Company did not achieve the market performance measure for a vesting period, no performance shares would vest forthat vesting period. If, however, the Company achieved the market performance measure for a subsequent vesting period, then all of theperformance shares that would have vested on the previous vesting date would vest on the vesting date when the market performance measure
was achieved. As of December 31, 2012, the market performance measure was not achieved and all of the market performance-based restricted
shares granted to Mr. Kotick were forfeited.
The following table summarizes our restricted stock rights activity for the year ended December 31, 2012 (amounts in thousands
except per share amounts):

Restricted
Stock Rights

Unvested restricted stock rights balance at December 31, 2011 ......................
Granted ..............................................................................................................
Vested ................................................................................................................
Forfeited ............................................................................................................
Unvested restricted stock rights balance at December 31, 2012 ......................

17,13915,498(3,554)(3,478)25,605Weighted-Average
Grant Date Fair
Value

$12.28
11.81
12.32
14.16
12.29

At December 31, 2012, approximately $112 million of total unrecognized compensation cost was related to restricted stock rights,
which is expected to be recognized over a weighted-average period of 1.73 years. Of the total unrecognized compensation cost, $37 million was
related to performance- vesting restricted stock rights, which is expected to be recognized over a weighted-average period of 1.71 years. Total
grant date fair value of vested restricted stock rights was $45 million, $37 million and $40 million for the years ended December 31, 2012, 2011
and 2010, respectively.
Stock-Based Compensation Expense
The following table sets forth the total stock-based compensation expense included in our consolidated statements of operations forthe years ended December 31, 2012, 2011, and 2010 (amounts in millions):

63

For the Years Ended
December 31,
2012
2011
2010

Cost of sales—software royalties and amortization ..............................................................$9
Product development ..............................................................................................................20
Sales and marketing ............................................................................................................... 8
General and administrative.....................................................................................................89
Stock-based compensation expense before income taxes .....................................................
126
Income tax benefit ..................................................................................................................
(46)
Total stock-based compensation expense, net of income tax benefit ....................................
$80

$10
40
6
47
103
(38)
$65

$65
12
8
46
131
(51)
$80

The following table summarizes stock-based compensation included in our consolidated balance sheets as a component of “Softwaredevelopment” (amounts in millions):

SoftwareDevelopment

Balance at December 31, 2009......................................................................................................................................
$54
Stock-based compensation expense capitalized and deferred during period ...............................................................
63
Amortization of capitalized and deferred stock-based compensation expense ............................................................
(97)
Balance at December 31, 2010......................................................................................................................................
$20
Stock-based compensation expense capitalized and deferred during period ...............................................................
27
Amortization of capitalized and deferred stock-based compensation expense ............................................................
(37)
Balance at December 31, 2011......................................................................................................................................
$10
Stock-based compensation expense capitalized and deferred during period ...............................................................
27
Amortization of capitalized and deferred stock-based compensation expense ............................................................
(18)
Balance at December 31, 2012......................................................................................................................................
$19
19. Capital transactions
Repurchase Program
On February 2, 2012, our Board of Directors authorized a stock repurchase program (“the 2012 Stock Repurchase Program”) underwhich we may repurchase up to $1 billion of our common stock, on terms and conditions to be determined by the Company, during the period
between April 1, 2012 and the earlier of March 31, 2013 and a determination by the Board of Directors to discontinue the repurchase program.
During the year ended December 31, 2012, we repurchased 4 million shares of our common stock for $54 million pursuant to the 2012 Stock
Repurchase Program. For the year ended December 31, 2012, we repurchased in total 26 million shares of our common stock for an aggregate
purchase price of $315 million pursuant to stock repurchase plans authorized in 2011 and 2012.
On February 3, 2011, our Board of Directors authorized a stock repurchase program (the “2011 Stock Repurchase Program”) underwhich we were authorized to repurchase up to $1.5 billion of our common stock. During the year ended December 31, 2011, we repurchased
59 million shares of our common stock for $670 million pursuant to the 2011 Stock Repurchase Program. Additionally, in January 2012, wesettled the purchase of 1 million shares of our common stock that we had committed to repurchase in December 2011 pursuant to this program for$12 million. The 2011 Stock Repurchase Program expired on March 31, 2012.
On February 10, 2010, our Board of Directors authorized a stock repurchase program (the “2010 Stock Repurchase Program”) underwhich we were authorized to repurchase up to $1 billion of our common stock. During the year ended December 31, 2010, we repurchased
84 million shares of our common stock for $944 million pursuant to the 2010 Stock Repurchase Program. In January 2011, we settled a$22 million purchase of 1.8 million shares of our common stock that we had agreed to repurchase in December 2010 pursuant to the 2010 Stock
Repurchase Program. The 2010 Stock Repurchase Program expired on December 31, 2010.
On October 30, 2008, our Board of Directors authorized a stock repurchase program (the “2008-2009 Stock Repurchase Program”)
under which we were authorized to repurchase up to $1 billion of our common stock. On July 31, 2009, our Board of Directors authorized anincrease of $250 million to the 2008-2009 Stock Repurchase Program bringing the total authorization to $1.25 billion. During 2009, werepurchased 101 million shares of our common stock for an aggregate purchase price of $1,109 million pursuant to the 2008-2009 Stock
Repurchase Program. In January 2010, we settled a $15 million purchase of 1.3 million shares of our common stock that we had agreed torepurchase in December 2009 pursuant to the 2008-2009 Stock Repurchase Program, completing that program.

64

Dividend
On February 7, 2013, our Board of Directors declared a cash dividend of $0.19 per common share payable on May 15, 2013 toshareholders of record at the close of business on March 20, 2013.
On February 9, 2012, our Board of Directors declared a cash dividend of $0.18 per common share payable on May 16, 2012 toshareholders of record at the close of business on March 21, 2012. On May 16, 2012, we made an aggregate cash dividend payment of$201 million to such shareholders. On June 1, 2012, the Company made dividend equivalent payments of $3 million related to that cash dividend
to the holders of restricted stock units.
On February 9, 2011, our Board of Directors declared a cash dividend of $0.165 per common share payable on May 11, 2011 toshareholders of record at the close of business on March 16, 2011. On May 11, 2011, we made an aggregate cash dividend payment of$192 million to such shareholders. On August 12, 2011, the Company made dividend equivalent payments of $2 million related to that cash
dividend to the holders of restricted stock units.
On February 10, 2010, Activision Blizzard’s Board of Directors declared a cash dividend of $0.15 per common share payable on
April 2, 2010 to shareholders of record at the close of business on February 22, 2010. On April 2, 2010, we made an aggregate cash dividend
payment of $187 million to such shareholders. On October 22, 2010, the Company made dividend equivalent payments of $2 million related tothat cash dividend to the holders of restricted stock units.
20. Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) at December 31, 2012 and 2011 were as follows (amounts inmillions):At
December 31,
2012

Foreign currency translation adjustment .....................................................................
Unrealized depreciation on investments, net of deferred income taxes .....................
Accumulated other comprehensive loss ......................................................................

At
December 31,
2011

$(26)
—
$(26)

$(72)
—
$(72)

Income taxes were not provided for foreign currency translation items as these are considered indefinite investments in non-U.S.
subsidiaries.
21. Supplemental Cash Flow Information
Supplemental cash flow information is as follows (amounts in millions):
For the Years Ended
December 31,
2012

Supplemental cash flow information:
Cash paid for income taxes ...............................................................................................
$159
Cash paid for interest......................................................................................................... 2

2011

2010

$317
4

$255
2

22. Related Party Transactions
Treasury
Our foreign currency risk management program seeks to reduce risks arising from foreign currency fluctuations. We use derivative
financial instruments, primarily currency forward contracts and swaps, with Vivendi as our principal counterparty. The gross notional amount ofoutstanding foreign exchange swaps was $355 million and $85 million at December 31, 2012 and 2011, respectively. A pretax net unrealized lossof less than $1 million, $1 million and pretax gain of less than $1 million for the years ended December 31, 2012, 2011 and 2010, respectively,
resulted from the foreign exchange contracts and swaps with Vivendi and were recognized in the consolidated statements of operations within“General and administrative expenses.” A pretax realized gain of $5 million, a pretax loss of less than $1 million and $9 million were recognized65

in “General and administrative expenses” at December 31, 2012 and 2011 and 2010, respectively; a pretax realized gain of $2 million, loss of$7 million and loss of $2 million were recognized in “Investment and other income, net” at December 31, 2012 2011, and 2010, respectively.
OthersActivision Blizzard has entered into various transactions and agreements, including cash management services, investor agreement,
tax sharing agreement, and music royalty agreements with Vivendi and its subsidiaries and affiliates. Effective July 23, 2010, we terminated our
unsecured credit agreement with Vivendi, the lender, which provided for a revolving credit facility of up to $475 million. None of these services,transactions and agreements with Vivendi and its subsidiaries and affiliates is material either individually or in the aggregate to the consolidated
financial statements as a whole.
In addition, we are party to a number of agreements with Universal Music Group, a wholly owned subsidiary of Vivendi, and its
affiliates. These agreements pertain to the licensing of master recordings and compositions for our games and for marketing and promotional
purposes. We expensed and paid an aggregate of $2 million, $5 million and $12 million in royalties and other fees (including fees relating to themarketing of artists whose music was licensed for our games) to Universal Music Group and its affiliates for those uses during the years ended
December 31, 2012, 2011 and 2010, respectively. Royalty amounts due to Universal Music Group and its affiliates are not material at
December 31, 2012, 2011 and 2010.
23. Recently Issued Accounting Pronouncements
Indefinite-lived intangible assets impairment
In July 2012, the FASB issued an update to the authoritative guidance related to testing indefinite-lived intangible assets for
impairment. This update gives an entity the option to first consider certain qualitative factors to determine whether the existence of events andcircumstances indicates that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount as abasis for determining whether it is necessary to perform the quantitative impairment test. This update is effective for the indefinite-lived
intangible asset impairment test performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of thisguidance does not have a material impact on our consolidated financial statements.
Balance sheet offsetting disclosures
In December 2011, the FASB issued authoritative guidance on the disclosure of financial instruments and derivative instruments thatare either offset or subject to an enforceable master netting arrangement or similar agreement and should be applied retrospectively for allcomparative periods presented for annual periods beginning on or after January 1, 2013 and interim periods within those annual periods. The
adoption of this guidance does not have a material impact on our consolidated financial statements.
Reclassification of accumulated other comprehensive loss
In February 2013, the FASB issued an accounting standards update requiring new disclosures about reclassifications fromaccumulated other comprehensive loss to net income. These disclosures may be presented on the face of the statements or in the notes to theconsolidated financial statements. The standards update is effective for fiscal years beginning after December 15, 2012. The adoption of thisguidance does not have a material impact on our consolidated financial statements.
24. Subsequent events
Cash Dividend. On February 7, 2013, our Board of Directors declared a cash dividend of $0.19 per common share payable on
May 15, 2013 to shareholders of record at the close of business on March 20, 2013.

66

25. Quarterly Financial and Market Information (Unaudited)

December 31,
2012

For the Quarters Ended
September 30,
June 30,
2012
2012

March 31,
2012

(Amounts in millions, except per share data)

Net revenues .........................................................................................................................
Cost of sales..........................................................................................................................
Operating income .................................................................................................................
Net income............................................................................................................................
Basic earnings per share .......................................................................................................
Diluted earnings per share ....................................................................................................

$1,768
682
484
354
0.31
0.31

December 31,
2011

$841
237
227
226
0.20
0.20

$1,075
377
227
185
0.16
0.16

For the Quarters Ended
September 30,
June 30,2011
2011$1,172
364
513
384
0.34
0.33

March 31,
2011

(Amounts in millions, except per share data)

Net revenues .........................................................................................................................
Cost of sales..........................................................................................................................
Operating income .................................................................................................................
Net income............................................................................................................................
Basic earnings per share .......................................................................................................
Diluted earnings per share ....................................................................................................

67$1,407
729
25
99
0.09
0.08

$754
241
162
148
0.13
0.13

$1,146
346
467
335
0.29
0.29

$1,449
455
674
503
0.42
0.42

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OFEQUITY SECURITIESMarket Information and Holders
Our common stock is quoted on the NASDAQ National Market under the symbol “ATVI.”The following table sets forth, for the periods indicated, the high and low reported sale prices for our common stock. At February 15,
2013, there were 1,801 holders of record of our common stock.
High

Low

2011
First Quarter Ended March 31, 2011 ........................................................................................................................................................
$12.64
Second Quarter Ended June 30, 2011 .......................................................................................................................................................
12.06
Third Quarter Ended September 30, 2011 ................................................................................................................................................
12.30
Fourth Quarter Ended December 31, 2011 ...............................................................................................................................................
14.40$10.40
10.85
10.40
11.60

2012
First Quarter Ended March 31, 2012 ........................................................................................................................................................
$12.95
Second Quarter Ended June 30, 2012 .......................................................................................................................................................
13.00
Third Quarter Ended September 30, 2012 ................................................................................................................................................
12.57
Fourth Quarter Ended December 31, 2012 ...............................................................................................................................................
11.74$11.54
11.32
11.00
10.45

Stock Performance Graph
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to theliabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Activision Blizzard Inc. under the
Exchange Act or the Securities Act of 1933, as amended.
The graph below matches the cumulative 69-month total return of holders of our common stock with the cumulative total returns of
the NASDAQ Composite index and the RDG Technology Composite index. The graph assumes that the value of the investment in our common
stock and in each of the indexes (including reinvestment of dividends) was $100 on March 31, 2007 (the end of the Company’s 2007 fiscal year)
and tracks each such investment through December 31, 2012.
For periods prior to July 9, 2008, before the Business Combination, the share price information for the Company is for Activision, Inc.
In connection with the Business Combination, Activision, Inc. changed its name to Activision Blizzard, Inc. and changed its fiscal year end fromMarch 31 to December 31.

68

COMPARISON OF 69 MONTH CUMULATIVE TOTAL RETURN*
Among Activision Blizzard, Inc., the NASDAQ Composite Index,
and the RDG Technology Composite Index*$100 invested on 3/31/07 in stock or index, including reinvestment of dividends.

Fiscal year ending December 31.
3/07
Activision Blizzard, Inc. .................................................................... 100.00
NASDAQ Composite ......................................................................... 100.00
RDG Technology Composite ............................................................ 100.00

3/08
144.19
94.95
97.34

12/08
91.24
66.85
65.49

12/09
117.32
93.14
105.3712/10
133.18110.20118.7012/11
133.89111.69118.74

12/12
117.08125.45135.56The stock price performance included in this graph is not necessarily indicative of future stock price performance.
Cash Dividends
On February 7, 2013, our Board of Directors declared a cash dividend of $0.19 per common share payable on May 15, 2013 toshareholders of record at the close of business on March 20, 2013.
On February 9, 2012, our Board of Directors declared a cash dividend of $0.18 per common share payable on May 16, 2012 toshareholders of record at the close of business on March 21, 2012. On May 16, 2012, we made an aggregate cash dividend payment of$201 million to such shareholders. On June 1, 2012, the Company made dividend equivalent payments of $3 million related to that cash dividend
to the holders of restricted stock units.
On February 9, 2011, our Board of Directors declared a cash dividend of $0.165 per common share payable on May 11, 2011 toshareholders of record at the close of business on March 16, 2011. On May 11, 2011, we made an aggregate cash dividend payment of$192 million to such shareholders. On August 12, 2011, the Company made dividend equivalent payments of $2 million related to that cash
dividend to the holders of restricted stock units.

69

On February 10, 2010, our Board of Directors declared a cash dividend of $0.15 per common share payable on April 2, 2010 toshareholders of record at the close of business on February 22, 2010. On April 2, 2010, we made an aggregate cash dividend payment of$187 million to such shareholders. Additionally, on October 22, 2010, the Company made dividend equivalent payments of $2 million related tothat cash dividend to the holders of restricted stock units.
Future dividends will depend upon our earnings, financial condition, cash requirements, future prospects, and other factors deemed
relevant by our Board of Directors. There can be no assurances that dividends will be declared in the future.
Return of capital to Vivendi related to settlement of pre-Business Combination Taxes
Prior to the Business Combination in 2008, Vivendi Games’ income taxes were presented in the financial statements as if VivendiGames were a stand-alone taxpayer even though Vivendi Games’ operating results were included in the consolidated federal, certain foreign, andstate and local income tax returns of Vivendi or Vivendi’s subsidiaries. Based on the subsequent filing of these tax returns by Vivendi orVivendi’s subsidiaries, we determined that the amount paid by Vivendi Games was greater than the actual amount due (and settled) based upon
filing of these returns. This difference between the amount paid and the actual amount due (and settled) represents a return of capital to Vivendi
which, in accordance with the terms of the Business Combination agreement, occurred immediately prior to the close of the Business
Combination.
10b5-1 Stock Trading Plans
The Company’s directors and employees may, at a time they are not in possession of material non-public information, enter into plans(“Rule 10b5-1 Plans”) to purchase or sell shares of our common stock that satisfy the requirements of Exchange Act Rule 10b5-1. Rule 10b5-1
permits trading on a pre-arranged, “automatic-pilot” basis, subject to certain conditions, including that the person for whom the plan is created (oranyone else aware of material non-public information acting on such person’s behalf) not exercise any subsequent influence regarding theamount, price and dates of transactions under the plan. In addition, any such plan of the Company’s directors and employees is required to beestablished and maintained in accordance with the Company’s “Policy on Establishing and Maintaining 10b5-1 Trading Plans.”
Rule 10b-5-1 Plans permit persons whose ability to purchase or sell our common stock may otherwise be substantially restricted (byquarterly and special stock-trading blackouts and by their possession from time to time of material nonpublic information) to engage in prearranged trading. Trades under a Rule 10b5-1 Plan by our directors and employees are not necessarily indicative of their respective opinions of
our current or potential future performance at the time of the trade. Trades by our directors and executive officers pursuant to a Rule 10b5-1 Plan
will be disclosed publicly through Form 144 and Form 4 filings with the SEC, in accordance with applicable laws, rules and regulations.
Issuer Purchase of Equity Securities
On February 3, 2011, our Board of Directors approved a stock repurchase program (the “2011 Stock Repurchase Program”) pursuant
to which we were authorized to repurchase up to $1.5 billion of the Company’s common stock from time to time on the open market or in privatetransactions, including structured or accelerated transactions, on terms and conditions to be determined by the Company. The 2011 Stock
Repurchase Program expired on March 31, 2012.
On February 2, 2012, our Board of Directors authorized a stock repurchase program (the “2012 Stock Repurchase Program”) pursuant
to which we may repurchase up to $1 billion of the Company’s common stock from time to time on the open market or in private transactions,
including structured or accelerated transactions, on terms and conditions to be determined by the Company, during the period between April 1,2012 and the earlier of March 31, 2013 and a determination by the Board of Directors to discontinue the repurchase program.

70

The following table provides the number of shares purchased and the average price paid per share during each quarter of 2012, thetotal number of shares purchased as part of our publicly announced share repurchase programs, and the approximate dollar value of shares that
could still be purchased under our stock repurchase program as of the end of each relevant period.

Total numberof shares
purchased(1)PeriodJanuary 1, 2012—March 31, 2012 ....................
April 1, 2012—June 30, 2012 ...........................
July 1, 2012—September 30, 2012 ...................
October 1, 2012—October 31, 2012 .................
November 1, 2012—November 30, 2012 .........
December 1, 2012—December 31, 2012 ..........
Subtotal for the fourth quarter of 2012 .............
Total ...................................................................

Averageprice paid
per share

21,606,635
4,400,070—————
26,006,705$12.08
12.32
—
—
—
—
—
$12.12

Total number ofshares purchased as partof publicly announcedplans or programs

21,566,373(2)4,400,070(3)
—
—
—
—
—
25,966,443

Approximate dollar
value of shares that may
yet be purchased
under the plans orprograms$—
945,772,518
945,772,518
945,772,518
945,772,518
945,772,518(1)

In addition to purchases under the 2011 Stock Repurchase Program and the 2012 Stock Repurchase Program, included in this column
are transactions under the Company’s equity compensation plans involving the delivery to the Company of an aggregate of 40,262
shares of our common stock, with an average value of $12.40 per share as of the date of delivery, to satisfy tax withholding
obligations in connection with the vesting of restricted stock awards to our employees.

(2)

These repurchases were made under the 2011 Stock Repurchase Program, which expired on March 31, 2012.

(3)

These repurchases were made under the 2012 Stock Repurchase Program.

71

CAUTIONARY STATEMENT
This Annual Report contains, or incorporates by reference, certain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements consist of any statement other than a recitation of historical fact and include, but are
not limited to: (1) projections of revenues, expenses, income or loss, earnings or loss per share, cash flow or other financial items; (2) statementsof our plans and objectives, including those relating to product releases; (3) statements of future financial or operating performance; and(4) statements of assumptions underlying such statements. Activision Blizzard, Inc. (“Activision Blizzard”) generally uses words such as“outlook,” “forecast,” “will,” “could,” “should,” “would,” “to be,” “plans,” “believes,” “may,” “expects,” “intends,” “anticipates,”“estimate,” “future,” “positioned,” “potential,” “project,” “remain,” “scheduled,” “set to,” “subject to,” “upcoming” and other similar
expressions to help identify forward-looking statements. Forward-looking statements are subject to business and economic risk, reflect
management’s current expectations, estimates and projections about our business, and are inherently uncertain and difficult to predict. Our
actual results could differ materially from expectations stated in forward-looking statements. The forward-looking statements contained hereinspeak only at the date on which our Form 10-K was first filed. Some of the risk factors that could cause our actual results to differ from thosestated in forward-looking statements can be found in “Risk Factors” included in Part I, Item 1A of our Annual Report on Form 10-K. The
forward-looking statements contained herein are based upon information available to us as of the date of this Annual Report on Form 10-K and
we assume no obligation to update any such forward-looking statements. Although these forward-looking statements are believed to be true when
made, they may ultimately prove to be incorrect. These statements are not guarantees of our future performance and are subject to risks,
uncertainties and other factors, some of which are beyond our control and may cause actual results to differ materially from current
expectations.
Activision Blizzard, Inc.’s names, abbreviations thereof, logos, and product and service designators are all either the registered or unregisteredtrademarks or trade names of Activision Blizzard. All other product or service names are the property of their respective owners.

72

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESFINANCIAL INFORMATION
For the Three Months Ended December 31, 2012 and 2011
(Amounts in millions)Three Months Ended
December 31, 2011
Amount% of Total

December 31, 2012
Amount% of Total
GAAP Net Revenues by Segment/Platform Mix
Activision and Blizzard:
Online subscriptions1
PC and Other5Sony PlayStation 3
Microsoft Xbox 360
Nintendo Wii and Wii U
Total console2
Sony PS Vita
Nintendo 3DS and DS
Total handheld
Total Activision and Blizzard

$

285
487
259
314
183
756
18
82
100
1,628

16 %
27
15
18
10
43
1
5
6
92

Distribution:
Total Distribution
Total consolidated GAAP net revenues

140
1,768

8
100

Change in Deferred Net Revenues3
Activision and Blizzard:
Online subscriptions1
PC and Other5Sony PlayStation 3
Microsoft Xbox 360
Nintendo Wii and Wii U
Total console2
Nintendo 3DS and DS
Total changes in deferred net revenues

(8)
(89)
441
467
16
924
--827

Non-GAAP Net Revenues by Segment/Platform Mix
Activision and Blizzard:
Online subscriptions1
PC and Other5Sony PlayStation 3
Microsoft Xbox 360
Nintendo Wii and Wii U
Total console2
Sony PS Vita
Nintendo 3DS and DS
Total handheld
Total Activision and Blizzard
Total Distribution
Total non-GAAP net revenues4

$

$

268
123
262
300
166
728
3
82
85
1,204

19 %
9
19
21
12
52
--6
6
86

203
1,407

$ Increase(Decrease)$% Increase(Decrease)

17
364
(3)
14
17
28
15
15
424

6%
296
(1)
5
10
4
500
18
35

14
100

(63)
361

(31)
26

250
177
715
783
190
1,688
3
87
90
2,205

10
7
30
32
8
70
--4
4
91

27
221
(15)
(2)
9
(8)
15
(5)
10
250

11
125
(2)
5
500
(6)
11
11

203
2,408

9
100 %

(63)
187

(31)
8%

(18)
54
453
483
24
960
5
1,001

277
398
700
781
199
1,680
18
82
100
2,455

11
15
27
30
8
65
1
3
4
95

140
2,595

5
100 %

1

$

$

Revenue from online subscriptions consists of revenue from all World of Warcraft products, including subscriptions, boxed products, expansion
packs, licensing royalties, and value-added services. It also includes revenues from Call of Duty Elite memberships.
2
Downloadable content and their related revenues are included in each respective console platforms and total console.
3
We provide net revenues including (in accordance with GAAP) and excluding (non-GAAP) the impact of changes in deferred net revenues.
4
Total non-GAAP net revenues presented also represents our total operating segment net revenues.
5
Other includes standalone sales of toys and accessories products from Skylanders franchise, mobile sales and other physical merchandise and accessories.

73

74

$

$

$

$

1,183
69
1,114
$

813 $
28
785

December 31,
2009

1,376
97
1,279 $

993 $
21
972

134 $
4
130

1,083
71
1,012
$

1,175
84
1,091
$

(26) $
27(53)

Three Months Ended
June 30,
2010

227 $
12
215

March 31,
2010

1,231
76
1,155 $

(78) $
14(92)

Three Months Ended
June 30,
2011

1,283
89
1,194 $March 31,
2011

1,196
104
1,092

182
37
145

September 30,
2010

$

$

1,095
68
1,027 $

46 $
29
17

September 30,
2011

1,376
97
1,279

993
21
972

December 31,
2010

952
72
880

850
25
825

December 31,
2011

Year over Year
% Increase(Decrease)

Year over Year
% Increase(Decrease)

16
41
15%

22%
(25)
24

(31)
(26)
(31)%

(14)%
19
(15)

$

$

March 31,
2012

972
76
896 $

154 $
8
146
1,143
79
1,064 $

93 $
17
76

1,219
71
1,148 $

122 $
21
101

Three Months Ended
June 30,
September 30,
2012
2012

1,345
73
1,272

976
27
949

December 31,
2012

Year over Year
% Increase(Decrease)

2 TTM represents trailing twelve months. Operating Cash Flow for the year ended December 31, 2009, three months ended September 30, 2009, three months ended June 30, 2009, and three months ended March 31, 2009 was $1,183 million, $161 million, $(181) million, and $327 million,
respectively. Capital expenditures for the year ended December 31, 2009, three months ended September 30, 2009, three months ended June 30, 2009, and three months ended March 31, 2009 was $69 million, $17 million, $14 million, and $10 million, respectively.

1Non-GAAP free cash flow represents operating cash flow minus capital expenditures (which includes payment for acquisition of intangible assets).

Operating Cash Flow – TTM2
Capital Expenditures – TTM2
Non-GAAP Free Cash Flow – TTM2

Cash Flow Data
Operating Cash Flow
Capital Expenditures
Non-GAAP Free Cash Flow1

Operating Cash Flow – TTM
Capital Expenditures – TTM
Non-GAAP Free Cash Flow – TTM

Cash Flow Data
Operating Cash Flow
Capital Expenditures
Non-GAAP Free Cash Flow1

December 31,
2010

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION(Amounts in millions)

41
1
45%

15%
8
15

75
$

306
4,987

3,082
1,599
4,681
6
100 % $

62
32
94

6
100

62 % $
32
94

418
4,489

2,512
1,559
4,071

(185)
(81)
(266)

418
4,755

2,697
1,640
4,337

9
100 % $

56
35
91

9
100

57 % $
34
91

Year Ended
December 31, 2011
Amount% of Total

(112)
498

570
40
610

(112)
101

316
(103)
213

$ Increase(Decrease)

(27)
11 %

23
3
15

(27)
2

12 %
(6)
5

% Increase(Decrease)

We provide net revenues including (in accordance with GAAP) and excluding (non-GAAP) the impact of changes in deferred net revenues.

Total non-GAAP net revenues presented also represents our total operating segment net revenues.

2

3

Net revenues from digital online channel represent revenues from subscriptions and memberships, licensing royalties, value-added services, downloadable content,
digitally distributed products, and wireless devices.

1

Distribution
Total non-GAAP net revenues 3

Non-GAAP Net Revenues by Distribution Channel
Retail channel
Digital online channels1
Total Activision and Blizzard

69
62
131

Change in Deferred Net Revenues2
Retail channel
Digital online channels1
Total changes in deferred net revenues

3,013
1,537
4,550
306
4,856

$

Distribution
Total consolidated GAAP net revenues

GAAP Net Revenues by Distribution Channel
Retail channel
Digital online channels1
Total Activision and Blizzard

December 31, 2012
Amount% of Total

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESFINANCIAL INFORMATION
For the Three Months and Year Ended December 31, 2012 and 2011
(Amounts in millions)

76
$

$

4,489

2,251
1,886
352

(154)
(104)
(8)
(266)

2,405
1,990
360
4,755

100 %

50
42
8

50 %
42
8
100

$

$

Total non-GAAP net revenues presented also represents our total operating segment net revenues.

100 %

50
40
10

50 %
41
9
100

We provide net revenues including (in accordance with GAAP) and excluding (non-GAAP) the impact of changes in deferred net revenues.

4,987

2,514
1,996
477

78
28
25
131

2,436
1,968
452
4,856

498

263
110
125

31
(22)
92
101

$ Increase(Decrease)

2

$

$

Year Ended
December 31, 2011
Amount% of Total

1

Total non-GAAP net revenues2

Non-GAAP Net Revenues by Geographic Region
North America
EuropeAsia Pacific

Change in Deferred Net Revenues1
North America
EuropeAsia PacificTotal changes in net revenues

GAAP Net Revenues by Geographic Region
North America
EuropeAsia PacificTotal consolidated GAAP net revenues

December 31, 2012
Amount% of Total

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESFINANCIAL INFORMATION
For the Three Months And Year Ended December 31, 2012 and 2011
(Amounts in millions)

11 %

12
6
36

1%
(1)
26
2

% Increase(Decrease)

77

3

2

1

$

$

$

$

34.0%

(91)
(126)
--(30)--1,451
7
1,458

970
717
11
1,698

(131)
4,856

4,987

3,072
1,609
306

Amount

(3)
100 %

103

64 %
33
6

% of Total

December 31, 2012

$

$

$

$

Year Ended

30.3%

183
(103)
(26)
(72)
(12)
1,328
3
1,331

851
496
11
1,358

266
4,755

4,489

2,828
1,243
418

Amount

6
100 %

94

59 %
26
9

% of Total

December 31, 2011

Activision Publishing (“Activision”) — publishes interactive entertainment products and contents.
Blizzard — Blizzard Entertainment, Inc. and its subsidiaries (“Blizzard”) publishes PC games and online subscription-based games in the MMORPG category.
Activision Blizzard Distribution (“Distribution”) — distributes interactive entertainment software and hardware products.

Operating margin from total operating segments

Reconciliation to consolidated operating income (loss)
and consolidated income (loss) before income tax expense:
Net effect from deferral of net revenues and related cost of sales
Stock-based compensation expense
Restructuring
Amortization of intangible assets
Impairment of goodwill/intangible assets
Consolidated operating income
Investment and other income (expense), net
Consolidated income before income tax expense

Segment income from operations:
Activision1
Blizzard2
Distribution3
Operating segment total

Reconciliation to consolidated net revenues:
Net effect from deferral of net revenues
Consolidated net revenues

Operating segment total

Segment net revenues:
Activision1
Blizzard2
Distribution3

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESSEGMENT INFORMATION
For the Three Months And Year Ended December 31, 2012 and 2011
(Amounts in millions)

$

$

$

$

$ Increase

127

123

119
221
340

101

498

244
366
(112)

(Decrease)

10 %

9

14 %
45
25

2 %

11

9%
29
(27)

(Decrease)% Increase

78

1,116

1,116
-

Net Income
$
1,149
84
98
19
$
1,350

$

$

Cost of Sales Product Costs

264

263
1
$

$

221

194
36
(9)
-

Cost of Sales Software Royalties
and Amortization

Basic Earnings Diluted Earnings per
per Share
Share$
1.01 $
1.01
0.07
0.07
0.09
0.09
0.02
0.02
$
1.19 $
1.18$$

Cost of Sales Online
Subscriptions

$

$

62

89
3
(30)

Cost of Sales Intellectual
Property Licenses

$

$

584

604
(20)
-

Product
Development

$

$

570

578
(8)
-

Sales andMarketing

$

$

472

561
(89)
-

General and
Administrative

$

$

3,289

3,405
40
(126)
(30)

Total Costs andExpenses

The per share adjustments are presented as calculated, and the GAAP and non-GAAP earnings per share information is also presented as calculated. The sum of these measures, as presented, may differ due to the impact of rounding.

The company calculates earnings per share pursuant to the two-class method which requires the allocation of net income between common shareholders and participating security holders. Net income attributable to Activision Blizzard Inc.
common shareholders used to calculate non-GAAP earnings per common share assuming dilution was $870 million and $1,322 million for the three months and year ended December 31, 2012 as compared to the total
non-GAAP net income of $891 million and $1,350 million for the same periods, respectively.

(a) Reflects the net change in deferred net revenues and related cost of sales.
(b) Includes expense related to stock-based compensation.
(c) Reflects amortization of intangible assets from purchase price accounting.

(a)
(b)
(c)

Operating
Income
1,451
91
126
30
$
1,698
$

Year Ended December 31, 2012
GAAP Measurement
Less: Net effect from deferral in net revenues and related cost of sales
Less: Stock-based compensation
Less: Amortization of intangible assets
Non-GAAP Measurement

4,987

$

Non-GAAP Measurement

4,856
131
-

$

GAAP Measurement
Less: Net effect from deferral in net revenues and related cost of sales
Less: Stock-based compensation
Less: Amortization of intangible assets
(a)
(b)
(c)

Net Revenues

Year Ended December 31, 2012

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESRECONCILIATION OF GAAP NET INCOME TO NON-GAAP MEASURES(Amounts in millions, except earnings per share data)

79

(a)
(b)
(c)
(d)
(e)

(d)
(e)

1,087

$

1,358

$

Net Income
$
1,085
(151)
76
19
46
12

1,121

4,489
$

(2)
-

-

1,134
(11)
-

Operating
Income
$
1,328
(183)
103
26
72
12

$

$

255

-

255
-

$

$

159

(1)
-

218
(48)
(10)
-

$

0.93
$

0.93

Basic
DilutedEarnings per Earnings per
Share
Share
$
0.93 $
0.92(0.13)(0.13)
0.07
0.06
0.02
0.02
0.04
0.04
0.01
0.01

$

$

$

$

72

(69)
-

165
(24)
-

Cost of Sales Cost of Sales Cost of Sales - - SoftwareIntellectual
Cost of Sales Online
Royalties andProperty
Product Costs Subscriptions Amortization
Licenses

$

$

Basic

589

-

629
(40)
-

Product
Development

$

$

591

539

-

545
(6)
-

Sales andMarketing

$

$

396

(12)

456
(47)
(1)

General and
Administrative

$

$

-

-

25
(25)

Restructuring

$

$

3,131

(72)
(12)

3,427
(83)
(103)
(26)

Total Costs
and Expenses

The per share adjustments are presented as calculated, and the GAAP and non-GAAP earnings per share information is also presented as calculated. The sum of these measures, as presented, may differ due to the impact of rounding.

The company calculates earnings per share pursuant to the two-class method which requires the allocation of net income between common shareholders and participating security holders. Net income attributable to Activision Blizzard Inc. common shareholders used to
calculate non-GAAP earnings per common share assuming dilution was $715 million and $1,071 million for the three months and year ended December 31, 2011 as compared to the total non-GAAP net income of $725 million and $1,087 million for the same periods, respectively.

(a) Reflects the net change in deferred net revenues and related cost of sales.
(b) Includes expense related to stock-based compensation.
(c) Reflects restructuring related to our Activision Publishing operations.
(d) Reflects amortization of intangible assets from purchase price accounting.
(e) Reflects impairment of goodwill.

Year Ended December 31, 2011
GAAP Measurement
Less: Net effect from deferral in net revenues and related cost of sales
Less: Stock-based compensation
Less: Restructuring
Less: Amortization of intangible assets
Less: Impairment of goodwill
Non-GAAP Measurement

Non-GAAP Measurement

Less: Amortization of intangible assets
Less: Impairment of goodwill

4,755
(266)
-

$

GAAP Measurement
Less: Net effect from deferral in net revenues and related cost of sales
Less: Stock-based compensation
Less: Restructuring
(a)
(b)
(c)

Net Revenues

Year Ended December 31, 2011

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESRECONCILIATION OF GAAP NET INCOME TO NON-GAAP MEASURES(Amounts in millions, except earnings per share data)

80

(a)
(b)
(c)
(d)
(e)

(c)
(d)
(e)

991

$

1,371

$

Net Income
$
418
232
88
2
53
198

1,348

4,803
$

(5)
-

-

1,350
3
-

Operating
Income
$
469
319
131
3
123
326

$

$

241

-

241
-

$

$

287

(15)
-

338
29
(65)

$

0.81
$

0.79

Basic
DilutedEarnings per Earnings per
Share
Share
$
0.34 $
0.33
0.19
0.19
0.07
0.07
0.04
0.04
0.16
0.16

$

$

$

$

100

(102)
-

197
5
-

Cost of Sales Cost of Sales Cost of Sales - - SoftwareIntellectual
Cost of Sales Online
Royalties andProperty
Product Costs Subscriptions Amortization
Licenses

$

Basic

623

-

635
(12)

Product
Development
$

$

$

591

508

-

516
(8)

Sales andMarketing

$

$

$

-

(326)

326
-

$

$

3,432

The per share adjustments are presented as calculated, and the GAAP and non-GAAP earnings per share information is also presented as calculated. The sum of these measures, as presented, may differ due to the impact of rounding.

(3)
(123)
(326)

3,978
37
(131)

Impairment of Total Costs andIntangible Assets
Expenses

The company calculates earnings per share pursuant to the two-class method which requires the allocation of net income between common shareholders and participating security holders. Net income attributable to Activision Blizzard Inc. common shareholders used to
calculate non-GAAP earnings per common share assuming dilution was $646 million and $982 million for the three months and year ended December 31, 2010 as compared to the total non-GAAP net income of $655 million and $991 million for the same periods, respectively.

325

(3)
(1)
-

375
(46)

General and
Administrative$(a) Reflects the net change in deferred net revenues and related cost of sales.
(b) Includes expense related to stock-based compensation.
(c) Reflects restructuring related to the Business Combination with Vivendi Games. Restructuring activities includes severance costs, facility exit costs and balance sheet write down and exit costs from the cancellation of projects.
(d) Reflects amortization of intangible assets.
(e) Reflects impairment of intangible assets acquired as a result of purchase accounting.

Year Ended December 31, 2010
GAAP Measurement
Less: Net effect from deferral in net revenues and related cost of sales
Less: Stock-based compensation
Less: Restructuring (included in general and administrative)
Less: Amortization of intangible assets
Less: Impairment of intangible assets
Non-GAAP Measurement

Non-GAAP Measurement

Less: Restructuring (included in general and administrative)
Less: Amortization of intangible assets
Less: Impairment of intangible assets

(a)
(b)

$

GAAP Measurement
Less: Net effect from deferral in net revenues and related cost of sales
Less: Stock-based compensation

4,447
356
-

Net Revenues

Year Ended December 31, 2010

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESRECONCILIATION OF GAAP NET INCOME TO NON-GAAP MEASURES(Amounts in millions, except earnings per share data)

CORPORATE INFORMATION
Board of Directors

Officers

Domestic Offices

World Wide Web Site

Philippe Capron
Chief Financial Officer,
Vivendi, andChairman of the Board,
Activision Blizzard

Robert A. Kotick
President andChief Executive Officer,
Activision Blizzard

www.activisionblizzard.com

Frédéric Crépin
Executive Vice President andGeneral Counsel, Vivendi

Eric Hirshberg
President andChief Executive Officer,
Activision Publishing

Jean-François Dubos
Chairman of the Management
Board and Chief Executive Officer,
VivendiMike Morhaime
President andChief Executive Officer,
Blizzard Entertainment

Austin, Texas
Bloomington, Minnesota
Carlsbad, California
Dallas, Texas
Eden Prairie, Minnesota
El Segundo, California
Encino, California
Foster City, California
Fresno, California
Irvine, California
Los Angeles, California
Menands, New York
Middleton, Wisconsin
New York, New York
Novato, California
Portland, Maine
Rogers, Arkansas
Santa Clara, California
Santa Monica, California
Woodland Hills, California

Lucian Grainge
Chairman andChief Executive Officer,
Universal Music Group

Brian Hodous
Chief Customer Officer,
Activision Blizzard

International
Offices

Jean-Yves Charlier
Senior Executive Vice President,
Telecommunications, Vivendi
Robert J. Corti
Chairman,
Avon Products Foundation

Brian G. Kelly
Co-Chairman of the Board,
Activision Blizzard
Robert A. Kotick
President andChief Executive Officer,
Activision Blizzard

Annual Report Design by Curran & Connors, Inc. / www.curran-connors.com

Robert J. Morgado
Chairman,
Maroley Media Group
Richard Sarnoff
Senior Advisor,
Kohlberg Kravis Roberts & Co.
Régis Turrini
Senior Executive Vice President,
M&A, Vivendi

Thomas Tippl
Chief Operating Officer,
Activision Blizzard
Dennis M. Durkin
Chief Financial Officer,
Activision Blizzard

Humam Sakhnini
Chief Strategy and Talent Officer,
Activision Blizzard
Chris B. Walther
Chief Legal Officer,
Activision Blizzard

Special Advisor
Michael Griffith
Vice Chairman,
Activision Blizzard

Transfer AgentContinental Stock Transfer &Trust Company
17 Battery PlaceNew York, New York 10004(800) 509-5586

AuditorPricewaterhouseCoopers LLP
Los Angeles, California

Corporate
Headquarters
Activision Blizzard, Inc.
3100 Ocean Park BoulevardSanta Monica, California 90405(310) 255-2000

Birmingham, United Kingdom
Buenos Aires, Argentina
Burglengenfeld, Germany
Copenhagen, Denmark
Cork, Ireland
Dublin, Ireland
Hong Kong, China
Leamington Spa, United Kingdom
Leeds, United Kingdom
Legnano, Italy
Madrid, Spain
Mexico City, Mexico
Mississauga, Canada
Munich, Germany
Paris, France
Quebec City, Canada
São Paulo, Brazil
Schiphol, The Netherlands
Seoul, South Korea
Shanghai, China
Singapore
Stockholm, Sweden
Stockley Park, United Kingdom
Sydney, Australia
Taipei, Region of Taiwan
Vancouver, Canada
Venlo, The Netherlands
Versailles, France
Warrington, United Kingdom

E-MailIR@activisionblizzard.com

Annual Meeting
June 6, 2013, 9:00 am PDT
Equity Office3200 Ocean Park BoulevardSanta Monica, California 90405

Annual Report on
Form 10-K
Activision Blizzard’s Annual
Report on Form 10-K for thecalendar year ended December 31,
2012 and amendments thereto areavailable to shareholders withoutcharge upon request by calling
our Investor Relations department
at (310) 255-2000 or by mailing arequest to our Corporate Secretaryat our corporate headquarters.

Non-Incorporation
Portions of the Company’s 2012
Form 10-K, as filed with the SEC,
are included within this Annual
Report. Other than these portionsof the Form 10-K, all otherportions of this Annual Report
are not “filed” with the SEC andshould not be deemed so.

3100 Ocean Park BoulevardSanta Monica, California 90405
T: (310) 255-2000 F: (310) 255-2100
www.Activisionblizzard.Com