Segment Information

9 Months Ended

Sep. 30, 2011

Segment Information

Note 16. Segment Information

As of July 1, 2010, the Company reorganized the management of its product lines and businesses in order to more efficiently develop and sell its products, and more cost effectively manage its operations. Beginning in the quarter ended September 30, 2010, the Company’s financial results reflect the new corporate reorganization with the following reporting segments: (1) Core Products, which includes financial results from existing and future software as a service offerings of ringback tones, music on demand, video on demand, storefront services and inter-carrier messaging; systems integration and professional services; Helix software and licenses for handsets; SuperPass; and the Company’s international radio subscriptions; (2) Emerging Products, which includes financial results from RealPlayer, including distribution of third-party products, advertising and other revenue, and new products and services that will be introduced over time for consumers or enterprise customers; and (3) Games, which is unchanged and includes all games-related financial results, including game sales, subscriptions services, syndication services, advertising-supported games, and mobile and social games. In addition, the Company will continue to present financial results for its former Music segment on a historical basis only. The Music segment primarily includes financial results and operating performance of the Company’s Rhapsody joint venture, which was restructured as of March 31, 2010. As a result of the restructuring, Rhapsody’s results are no longer consolidated with the Company’s financial statements for periods after March 31, 2010. The Company now reports its share of Rhapsody’s income or losses as “Equity in net loss of Rhapsody and other equity method investments” in “Other income (expenses), net.” The Company has adjusted the financial information for periods prior to September 30, 2010, to reflect the segment reorganization to allow comparability between the periods.

Beginning with the third quarter of 2010, the Company also changed how it allocates corporate and shared overhead expenses. Historically, the Company allocated common corporate overhead expenses, including but not limited to finance, legal and headquarters facilities, to each business segment. Beginning in the quarter ended September 30, 2010, these shared expenses, as well as stock compensation costs, are shown in the aggregate as “Corporate” expenses and are not reflected in segment results for the business segments described in the preceding paragraph. Only direct business segment expenses, such as research and development, marketing and certain other business shared services are reflected in the associated business segment results. The changes in the allocation of corporate expenses are designed to help ensure that business segment results reflect only those items that are directly attributable to that segment’s performance and that shared overhead expenses are centrally managed to promote focus on and accountability for the overall corporate cost structure.

The Company reports three ongoing reporting segments based on factors such as how the Company manages its operations and how its Chief Operating Decision Maker reviews results. The Company’s Chief Operating Decision Maker is considered to be the Company’s CEO Staff (CEOS), which includes the Company’s Interim Chief Executive Officer, Chief Financial Officer, Chief Legal Officer and certain Senior Vice Presidents. The CEOS reviews financial information presented on both a consolidated basis and on a business segment basis, accompanied by disaggregated information about products and services, geographical regions and corporate expenses for purposes of making decisions and assessing financial performance. The CEOS reviews discrete financial information regarding profitability of the Company’s Core Products, Emerging Products, Games, and, prior to April 1, 2010, Music segments and, therefore, the Company reports these as operating segments. The accounting policies used to derive segment results are generally the same as those described in Note 1, Summary of Business and Summary of Significant Accounting Policies.

Segment operating income (loss) for the quarters and nine months ended September 30, 2011 and 2010, are as follows (in thousands):

Core Products
	Quarter Ended September 30,												Nine Months Ended September 30,
	2011			2010			$ Change			% Change			2011			2010			$ Change			% Change
Revenue	$	50,705		$	51,870		$	(1,165	)		(2	)%	$	144,547		$	154,815		$	(10,268	)		(7	)%
Cost of revenue		22,492			22,230			262			1			62,829			58,054			4,775			8
Gross profit		28,213			29,640			(1,427	)		(5	)		81,718			96,761			(15,043	)		(16	)
Gross margin		55	%		57	%								57	%		63	%
Operating expenses		19,398			19,772			(374	)		(2	)		57,958			66,366			(8,408	)		(13	)
Operating income (loss)	$	8,815		$	9,868		$	(1,053	)		(11	)%	$	23,760		$	30,395		$	(6,635	)		(22	)%
Emerging Products
	Quarters Ended September 30,												Nine Months Ended September 30,
	2011			2010			$ Change			% Change			2011			2010			$ Change			% Change
Revenue	$	10,764		$	8,778		$	1,986			23	%	$	34,616		$	29,203		$	5,413			19	%
Cost of revenue		3,913			1,076			2,837			264			8,431			5,944			2,487			42
Gross profit		6,851			7,702			(851	)		(11	)		26,185			23,259			2,926			13
Gross margin		64	%		88	%								76	%		80	%
Operating expenses		8,884			6,059			2,825			47			28,144			20,694			7,450			36
Operating income (loss)	$	(2,033	)	$	1,643		$	(3,676	)		(224	)%	$	(1,959	)	$	2,565		$	(4,524	)		(176	)%
Games
	Quarters Ended September 30,												Nine Months Ended September 30,
	2011			2010			$ Change			% Change			2011			2010			$ Change			% Change
Revenue	$	22,945		$	25,784		$	(2,839	)		(11	)%	$	76,304		$	84,165		$	(7,861	)		(9	)%
Cost of revenue		7,197			6,279			918			15			23,771			21,210			2,561			12
Gross profit		15,748			19,505			(3,757	)		(19	)		52,533			62,955			(10,422	)		(17	)
Gross margin		69	%		76	%								69	%		75	%
Operating expenses		14,159			17,092			(2,933	)		(17	)		46,184			60,695			(14,511	)		(24	)
Operating income (loss)	$	1,589		$	2,413		$	(824	)		(34	)%	$	6,349		$	2,260		$	4,089			181	%

Music
	Quarters Ended September 30,												Nine Months Ended September 30,
	2011			2010			$ Change			% Change			2011			2010			$ Change			% Change
Revenue	$	0		$	0		$	0			0		$	0		$	35,733		$	(35,733	)		(100	)%
Cost of revenue		0			0			0			0			0			21,864			(21,864	)		(100	)
Gross profit		0			0			0			0			0			13,869			(13,869	)		(100	)
Gross margin																	39	%
Operating expenses		0			0			0			0			0			13,911			(13,911	)		(100	)
Operating loss	$	0		$	0		$	0			0		$	0		$	(42	)	$	42			(100	)%
Corporate
	Quarters Ended September 30,												Nine Months Ended September 30,
	2011			2010			$ Change			% Change			2011			2010			$ Change			% Change
Cost of revenue		(1,786	)		1,125			(2,911	)		(259	)		(483	)		1,946			(2,429	)		(125	)
Operating expenses		13,640			16,949			(3,309	)		(20	)		42,566			73,738			(31,172	)		(42	)
Operating income (loss)	$	(11,854	)	$	(18,074	)	$	6,220			(34	)%	$	(42,083	)	$	(75,684	)	$	33,601			(44	)%

The Company’s customers consist primarily of consumers and corporations located in the U.S., Europe and various foreign countries. Revenue by geographic region is as follows (in thousands):

	Quarters Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
United States	$	38,969	$	46,874	$	125,422	$	179,775
Europe		18,059		17,504		56,043		59,302
Rest of the world		27,386		22,054		74,002		64,839
Total net revenue	$	84,414	$	86,432	$	255,467	$	303,916

Long-lived assets, consisting of equipment, software, leasehold improvements, other intangible assets, and goodwill by geographic region are as follows (in thousands):

	September 30, 2011		December 31, 2010
United States	$	41,240	$	43,655
Republic of Korea		4,409		5,659
Europe		3,025		3,069
Rest of the world		5,550		2,900
Total long-lived assets	$	54,224	$	55,283

Net assets including minority interest by geographic location are as follows (in thousands):

	September 30, 2011		December 31, 2010
United States	$	207,452	$	352,341
Republic of Korea		4,919		12,374
Europe		41,495		33,029
Rest of the world		19,222		15,001
Total net assets	$	273,088	$	412,745