Segment Information

12 Months Ended

Dec. 31, 2011

Segment Information

Note 17. 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. Since the quarter ended September 30, 2010, the Company’s financial results have reflected the new corporate organization 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 was 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 continues to present financial results for its former Music segment on a historical basis only. The Music segment primarily included 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 not consolidated with the Company’s financial statements for periods after March 31, 2010. The Company reports its share of Rhapsody’s income or losses as “Equity in net loss of Rhapsody and other equity method investments” in “Other income.” The Company reflected the reorganization of its segments for periods prior to September 30, 2010, to allow for comparability between the periods.

Beginning with the third quarter of 2010, the Company also changed how it allocates corporate and shared overhead expenses. Previously, RealNetworks 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 was 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 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 Chief Executive Officer, Chief Financial Officer, Executive Vice President, 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 certain 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, Description of Business and Summary of Significant Accounting Policies.

Segment operating income (loss) before income taxes for the years ended December 31, 2011, 2010 and 2009, respectively is as follows:

Core Products

	2011		2010		2009		2011-2010 Change			% Change			2010-2009 Change			% Change
Revenue	$	191,240	$	212,845	$	233,365	$	(21,605	)		(10	)%	$	(20,520	)		(9	)%
Cost of revenue		83,696		83,733		81,774		(37	)		(0	)%		1,959			2	%
Impairment of deferred costs		19,329		—		—		19,329			100	%		—			—
Gross profit		88,215		129,112		151,591		(40,897	)		(32	)%		(22,479	)		(15	)%
Operating expenses		75,188		86,217		138,502		(11,029	)		(13	)%		(52,285	)		(38	)%
Operating income	$	13,027	$	42,895	$	13,089	$	(29,868	)		(70	)%	$	29,806			228	%

Emerging Products

	2011			2010		2009			2011-2010 Change			% Change			2010-2009 Change			% Change
Revenue	$	46,590		$	41,761	$	45,207		$	4,829			12	%	$	(3,446	)		(8	)%
Cost of revenue		11,879			7,123		6,884			4,756			67	%		239			3	%
Impairment of deferred costs		633			—		—			633			100	%		—			—
Gross profit		34,078			34,638		38,323			(560	)		(2	)%		(3,685	)		(10	)%
Operating expenses		36,011			28,053		73,211			7,958			28	%		(45,158	)		(62	)%
Operating income (loss)	$	(1,933	)	$	6,585	$	(34,888	)	$	(8,518	)		(129	)%	$	41,473			119	%

Games

	2011		2010		2009			2011-2010 Change			% Change			2010-2009 Change			% Change
Total revenue	$	97,856	$	111,394	$	122,824		$	(13,538	)		(12	)%	$	(11,430	)		(9	)%
Cost of revenue		30,646		29,071		32,862			1,575			5	%		(3,791	)		(12	)%
Gross profit		67,210		82,323		89,962			(15,113	)		(18	)%		(7,639	)		(8	)%
Operating expenses		60,633		78,275		127,908			(17,642	)		(23	)%		(49,633	)		(39	)%
Operating income (loss)	$	6,577	$	4,048	$	(37,946	)	$	2,529			63	%	$	41,994			111	%

Music

	2011		2010			2009			2011-2010 Change			% Change			2010-2009 Change			% Change
Total revenue	$	—	$	35,733		$	160,868		$	(35,733	)		(100	)%	$	(125,135	)		(78	)%
Cost of revenue		—		21,864			98,322			(21,864	)		(100	)%		(76,458	)		(78	)%
Gross profit		—		13,869			62,546			(13,869	)		(100	)%		(48,677	)		(78	)%
Total operating expenses		—		13,911			129,085			(13,911	)		(100	)%		(115,174	)		(89	)%
Operating income (loss)	$	—	$	(42	)	$	(66,539	)	$	42			100	%	$	66,497			100	%

Corporate

	2011			2010			2009			2011-2010 Change			% Change			2010-2009 Change			% Change
Cost of revenue	$	416		$	2,932		$	2,300		$	(2,516	)		(86	)%	$	632			27	%
Total operating expenses		54,865			85,081			108,654			(30,216	)		(36	)%		(23,573	)		(22	)%
Operating loss	$	(55,281	)	$	(88,013	)	$	(110,954	)	$	32,732			37	%	$	22,941			21	%

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):

	Years Ended December 31,
	2011		2010		2009
United States	$	162,720	$	227,823	$	374,283
Europe		74,602		79,820		96,146
Rest of the World		98,364		94,090		91,835
Total	$	335,686	$	401,733	$	562,264

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

	December 31,
	2011		2010
United States	$	38,543	$	43,655
Republic of Korea		4,063		5,659
Europe		2,949		3,069
Rest of the World		5,286		2,900
Total long-lived assets	$	50,841	$	55,283

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

	December 31,
	2011		2010
United States	$	225,271	$	352,341
Republic of Korea		1,903		12,374
Europe		30,130		33,029
Rest of the World		13,983		15,001
Total	$	271,287	$	412,745