Revenue Recognition at EA

N’Gai Croal asks Michael Pachter why EA’s revenues are primarily PS3-focused at this time, even though the PS3 is not the majority of its sales.  Pachter answers, somewhat cryptically:

“Two things are at work. First, the way deferred revenue works: EA recognizes revenue on Xbox 360 over six months following the sale, but does NOT do so for PS3. So sales of Xbox 360 games during the last two quarters (Battlefield: Bad Company and Army of Two) are rolling through till December, while sales of PS3 games are booked when sold. Second, some of EA’s sales are skewed in Europe, where UEFA Euro 2008 and Battlefield probably sold a little better on PS3, and with Rock Band launching in Europe this year (also skewed PS3). Ubisoft was because of Haze, which was a PS3 exclusive.”

Commenters ask the obvious follow-up, “Why would EA recognize revenue differently for the PS3 than it does for the Xbox 360?

Since there is no response, I’ll hazard a guess: my suspicion is that the answer is in this note from EA’s 10K:

Seasonality

Our business is highly seasonal. We have historically experienced our highest sales volume in the holiday season quarter ending in December and a seasonal low in sales volume in the quarter ending in June. Starting in fiscal 2008, we began to defer the recognition of a significant amount of net revenue related to our online-enabled packaged goods over an extended period of time (i.e., typically six months). As a result, the quarter in which we generate the highest sales volume may be different than the quarter in which we recognize the highest amount of net revenue. Our results can also vary based on a number of factors, including title release dates, consumer demand for our products, shipment schedules and our revenue recognition policies.

In other words, many of the 360 titles are online-enabled, and since they probably make more money from them relative to the PS3, they decided to defer their revenue.  Why?  I’m not entirely sure, but they may need to increase the accuracy of their earnings estimates since more money will be coming from revenue not related to the sticker price of the game… which may be an unknown quantity.  According to FASB pronouncements, they need to recognize when the amount is “determinable.”  As the 10-K states: 

“Prior to fiscal 2008, we were able to determine VSOE [Vendor-Specific Objective Evidence; vendor-specific money, for the layman - ed] for the online service to be delivered; therefore, we were able to allocate the total price received from the combined product and online service sale between these two elements and recognize the related revenue separately. However, starting in fiscal 2008, VSOE does not exist for the online service to be delivered for certain platforms and all revenue from these transactions are recognized over the estimated online service period.”

In any case, that’s my best bet… although it assumes they’re getting substantially more online revenue from the 360 than from the PS3.  Mr. Pachter, feel free to weigh in.