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The importance of retail sales to our business exposes us to the risks of that business model.

        In the United States and Canada, our "boxed" products are often sold on a direct basis to mass-market retailers, consumer electronics stores, discount warehouses and game specialty stores. Our "boxed" products are sold internationally on a direct-to-retail basis, through third-party distribution and licensing arrangements, and through our wholly-owned European distribution subsidiaries. Our sales are made primarily on a purchase order basis without long-term agreements or other forms of commitments, and our retail customers and distributors have generally been reducing the levels of inventory they are willing to carry. The loss of, or significant reduction in sales to, any of Activision's principal retail customers or distributors could have adverse consequences. TheIn addition, having such a large portion of our retail total net revenues concentrated in a few customers reduces our negotiating leverage with these customers.

        Further, the concentration of sales in a small number of large customers also makes us more vulnerable to collection risk if one or more of these large customers becomes unable to pay for our products or seeks protection under the bankruptcy laws. In addition, having such a large portion of our total net revenues concentrated in a few customers reduces our negotiating leverage with these customers.

Our business may be harmed if our distributors, retailers, development and licensing partners, or other parties with whom we do business become unable to honor their existing financial obligations to us or seek protection under the bankruptcy laws.

        Some of our business partners are highly-leveraged or small businesses that may be particularly vulnerable to difficult economic conditions. As a result of current economic conditions in some parts of the world, we are subject to heightened counterparty risks, including the risks that our business partners may default on their obligations to us or seek protection under the bankruptcy laws.

        For example, retailersRetailers and distributors in the interactive entertainment industry have from time to time experienced significant fluctuations in their businesses and a number of them have failed. We typically make sales to most retailers and some distributors on unsecured credit, with terms that vary depending upon the customer's credit history, solvency, credit limits and sales history, as well as prevailing terms with similarly situated customers and whether sufficient credit insurance can be obtained. Challenging economic conditions may impair the ability of our customers to pay for products they have purchased and, as a result, our reserves for doubtful accounts and write-off of accounts receivable could increase and, even if increased, may turn out to be insufficient. Moreover, even in

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cases where we have insolvency risk insurance to protect against a customer's bankruptcy, insolvency or liquidation, this insurance typically contains a significant deductible and co-payment obligation, and does not cover all instances of non-payment. Further, the insolvency or business failure of other types of business partners could result in disruptions to the manufacturing or distribution of our products or the cancellation of contractual arrangements that we consider to be favorable. A payment default by, or the insolvency or business failure of, a significant business partner could negatively impact our business.

Our business may be harmed if our distributors, retailers, development and licensing partners, or other parties with whom we do business act in ways that place our brand at risk.

        The actions        Moreover, the importance of our business partners may put our business and our reputation at risk. In many cases, these third parties are given access to sensitive and proprietary information in order to provide services and support our team. These third parties may misappropriate our information and engage in unauthorized use of it. The failure of these third parties to provide adequate services and technologies, or the failure of third parties to adequately maintain or update their services and technologies, could result in a disruptionretail sales to our business operations,exposes us to the risk of product returns and price protection with respect to our distributors and retailers. In some cases, return policies allow distributors and retailers to return defective, shelf-worn, damaged and certain other products in accordance with terms granted. Price protection, when granted and applicable, allows these distributors and retailers a credit against amounts owed with respect to merchandise unsold by them. We may permit product returns from, or grant price protection to, distributors and retail customers who meet certain conditions. These conditions may include compliance with applicable payment terms, delivery of weekly inventory and sales information and consistent participation in the launches of premium title releases. We may also consider other factors, including the facilitation of slow-moving inventory and other industry factors. Activision also offers a 90-day limited warranty to end users that Activision products will be free from manufacturing defects. Although we maintain a reserve for returns and price protection, and although we may place limits on product returns and price protection, we could be forced to accept substantial product returns and provide substantial price protection to maintain our relationships with retailers and our access to distribution channels. We face similar issues and risks, including exposure to risk of chargebacks, with respect to end users to whom we sell products directly, whether through our proprietary online gaming service or otherwise.

        Further, retailers typically have a limited amount of shelf space and promotional resources, and there is intense competition for high-quality retail shelf space and promotional support from retailers. Competition for shelf space may intensify and may negativelyrequire us to increase our marketing expenditures. Retailers with limited shelf space typically devote the most and highest quality shelf space to those products expected to be best sellers. We cannot be certain that our new products will consistently achieve such "best seller" status. Due to increased competition for limited shelf space, retailers and distributors are in an increasingly better position to negotiate favorable terms of sale, including price discounts, price protection, marketing and display fees and product return policies. Our products

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constitute a relatively small percentage of most retailers' sales volume. We cannot be certain that retailers will continue to purchase our products or provide those products with adequate levels of shelf space and promotional support on acceptable terms.

        Additionally, we make provisions for retail inventory price protection based upon certain assumed lowest prices and if competitive pressures force us to lower our prices below those levels, it could similarly have a negative impact on our business. Further, because we pay a licensing fee to the console hardware manufacturer for each physical copy of a product manufactured for that manufacturer's game platform regardless of whether that product is actually sold, if we overestimate demand and make too many physical "boxed" copies of any title, we will incur unrecoverable manufacturing costs for unsold units.

Our business isWe are a global company and are subject to the risks and uncertainties of international trade.conducting business outside the U.S.

        We conduct business throughout the world, and we derive a substantial amount of our revenues and profits from international trade, particularly from Europe, Asia and Australia. WeMoving forward, we expect that international sales will continue to account for a significant portion of our total revenues and profits in the future and, moreover, that sales in emerging markets in Asia and elsewhere will be an increasingly important part of our international sales.

As such, we are, and may be increasingly, subject to risks inherent in foreign trade generally, as well as risks inherent in doing business in emerging markets, including increased tariffs and duties, compliance with economic sanctions, fluctuations in currency exchange rates, shipping delays, increases in transportation costs, international political, regulatory and economic developments, unexpected changes to laws, regulatory requirements and enforcement on us and our platform partners and differing local business practices, all of which may impact operatingprofit margins or make it more difficult, if not impossible, for us to conduct business in foreign markets.

        A deterioration in relations between either us or the United States and any country in which we have significant operations or sales, or the implementation of government regulations in such a country, including China in particular, could result in the adoption or expansion of trade restrictions, including economic sanctions, that could have a material adverse effectnegative impact on our business. For instance, to operate in China, all games must have regulatory approval. A decision by the Chinese government to revoke its approval for any of our games or to decline to approve any products we desire to sell in China in the future could have a material adverse effectnegative impact on our business. Additionally, in the past, legislation has been implemented in China that has required modifications to our software. The future implementation of similar laws or regulations in China or any other country in which we have operations or sales may restrict or prohibit the sale of our products or may require engineering modifications to our products that are not cost-effective, if even feasible at all, or could degrade the consumer experience to the point where consumers cease to purchase such products. Further, the enforcement of regulation of mobile and other games with an online element in China remains uncertain, and further changes, either in the regulations or their enforcement, could have a materialnegative impact on our business in China.

        We are also subject to risks that our operations outside the United States could be conducted by our employees, contractors, third-party partners, representatives or agents in ways that violate the Foreign Corrupt Practices Act, the U.K. Anti-Bribery Act or other similar anti-bribery laws, as well as the 2017 U.K. Criminal Finances Act or other similar financial crime laws. While we have policies and procedures, as well as training for our employees, intended to secure compliance with these laws, our employees, contractors, third-party partners, representatives or agents may take actions

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that violate our policies. Moreover, it may be more difficult to oversee the conduct of any such persons who are not our employees, potentially exposing us to greater risk from their actions.

        Additionally, in June 2016, voters in the United Kingdom approved an advisory referendum to withdraw from the European Union (the "E.U."), commonly referred to as "Brexit." The United

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Kingdom commenced withdrawal proceedings with the E.U. in March 2017. These proceedings have created political and economic uncertainty, particularly in the United Kingdom and the E.U., and this uncertainty may persist for years. The uncertainty surrounding the terms of the United Kingdom's withdrawal and its consequences could adversely impact consumer and investor confidence and the level of sales of discretionary items, including our products. Any of these effects could negatively impact our business.

        In addition, cultural differences may affect consumer preferences and limit the international popularity of games that are popular in the U.S, or require us to modify the content of the games or the method by which we charge our customers for the games in order to be successful. If we do not correctly assess consumer preferences in the countries in which we sell our products, or if the other risks discussed herein come to fruition, it could negatively impact our business.

Changes in tax rates or exposure to additional tax liabilities could have a material adverse effect onnegatively impact our business.

        We are subject to income taxes in the United States and in various other jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes, and inIn the ordinary course of business there are many transactions and calculations where the ultimate income tax determination is uncertain. We areSignificant judgment is required to estimate future taxes.in determining our worldwide income tax provision. Although we currently believe our income tax estimates are reasonable, the estimation process is inherently uncertain,ultimate outcomes may have a material adverse effect on the Company's consolidated financial position, liquidity, or results of operations.

        Our income tax liability and such estimates are not binding on tax authorities. Further, our effective tax rate could be adversely affected by a variety of factors, including changes in our business, including the mix of earnings in countries with differing statutory tax rates, changes in tax elections, andlaws or tax rulings, changes in applicableinterpretations of existing laws, or developments in tax laws. Additionally,examinations or investigations. Any of these factors could have a material adverse effect on the Company's consolidated financial position, liquidity, or results of operations or require us to change the manner in which we operate our business. The tax determinationsregimes we are regularly subject to audit byor operate under are unsettled and may be subject to significant change. The E.U. and its member states, and a number of other countries are actively pursuing fundamental changes to the tax laws applicable to multinational companies like us. Furthermore, tax authorities and developments in those audits could adversely affectmay choose to examine or investigate our tax reporting or tax liability, including under transfer pricing or permanent establishment theories. These proceedings may lead to adjustments or proposed adjustments to our income taxes or provisions for uncertain tax provision. Should the ultimate tax liability exceed estimates, our income tax provision and net income could be materially adversely affected.positions.

        We earn a significant amount of our operating income,On December 22, 2017, tax reform legislation known as the Tax Cuts and hold a significant portion of our cash and investments, outsideJobs Act (the "U.S. Tax Reform Act") was enacted in the United States. WhileThe U.S. Tax Reform Act introduces significant changes to U.S. income tax law that will have a meaningful impact on our intent is to permanently reinvest these funds outsidefinancial position and effective tax rate. Accounting for the income tax effects of the United States,U.S. Tax Reform Act requires complex new calculations to be performed and significant judgments in interpreting the legislation. Additional guidance may be issued on how the provisions of the U.S. Tax Reform Act will be applied or otherwise administered that is different from our interpretation. Due to the timing of enactment and the complexity in determining the income tax effects of the U.S. Tax Reform Act, we made reasonable estimates of the effects and recorded provisional amounts in our financial statements for the year ended December 31, 2017. We may make adjustments to the provisional amounts as we collect and prepare the data necessary to finalize our calculations, interpret the U.S. Tax Reform Act and any repatriationadditional guidance issued, and consider the effects of funds currently held in foreign jurisdictions would likelyany additional actions we may take as a result in higherof the U.S. Tax Reform Act. These adjustments could materially affect our financial position and results of operations as well as our effective tax ratesrate in the period in which these adjustments are made.

        In late 2017, we received a Notice of Reassessment from the French Tax Authority ("FTA") related to transfer pricing concerning intercompany transactions involving one of our French subsidiaries for the Company.2011 through 2013 tax years. We disagree with the proposed assessment and intend to vigorously

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contest it. We plan to pursue all remedies available to us to successfully resolve this matter, including administrative remedies with the FTA, and judicial remedies, if necessary. While we believe our tax provisions at December 31, 2017 are appropriate, until such time as this matter is ultimately resolved we could be subject to significant additional tax liabilities. In addition there have been proposals to change U.S.the risk of additional tax laws that would significantly impact how U.S. multinational corporations are taxed on foreign earnings. Althoughfor years 2011 through 2013, if litigation regarding this matter were adversely determined and/or if the FTA were to seek adjustments of a similar nature for subsequent years, we cannot predict whether, or in what form, this proposed legislation will pass, if enacted it could negatively impact our business.be subject to significant additional tax liabilities.

        We are also required to pay taxes other than income taxes, such as payroll, sales, use, value-added, net worth, property, and goods and services taxes, in both the United States and various other jurisdictions. Tax authorities regularly examine these non-income taxes. The outcomes from these examinations, changes in the business, changes in applicable tax rules or other tax matters may have a material adverse effectnegative impact on our business.

Fluctuations in currency exchange rates may have a material adverse effect oncould negatively impact our business.

        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. A substantial portion of our international sales and expenses are denominated in local currencies, including the euro,euros, British pound,pounds, Australian dollar,dollars, South Korean won, Chinese renminbi,yuan, and Swedish krona, and Korean won, which could fluctuate against the U.S. dollar. Since we have significant international sales, but incur the majority of our costs in the United States, the impact of foreign currency fluctuations, particularly the strengthening of the U.S. dollar, may have an asymmetric and disproportional impact on our business. We have, in the past, utilized currency derivative contracts to hedge certain foreign exchange exposures with hedge maturities of generally less than 12 months, and managed these exposures with natural offsets. However, there can be no assurance that we will continue our hedging programs, or that we will be successful in managing exposure to currency exchange rate risks whether or not we do so.

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Our reported financial results could be adversely affected by changes in financial accounting standards or by the application of existing or future accounting standards to our business as it evolves.

        Our reported financial results are impacted by the accounting policies promulgated by the SEC and national accounting standards bodies and the methods, estimates and judgments that we use in applying our accounting policies. Policies affecting revenue recognition have and could further significantly affect the way we report revenues related to our products and services. We recognize a majority of the revenues from bundled sales (i.e., packaged goods video games that include an online service component) on a deferred basis over an estimated service period for such games. In addition, we defer the costs of sales of those products. We expect that an increasing number of our games will be online-enabled in the future and that we could be required to recognize the related revenues over a period of time rather than at the time of sale. Further, as we increase our downloadable content and add new features to our online services, our estimate of the service period may change and we could be required to recognize revenues, and defer related costs, over a shorter or longer period of time. As we enhance, expand and diversify our business and product offerings, the application of existing or future financial accounting standards, particularly those relating to the way we account for revenues and taxes, could have an adverse effect on our reported net revenues, net income and earnings per share under accounting principles generally accepted in the United States in any given period.

Certain of our key operating metrics are subject to inherent challenges in measurement, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.

        We track certain key operating metrics using internal tools, which have certain limitations. In addition, we rely on data received from third parties, including third-party platforms, to track certain performance indicators. We only have a limited ability to verify data from bothscrutiny regarding the appropriateness of these sources.

        Our methodologies for tracking metrics may also change over time, which could result in changes to the metrics we report.their content. If we undercount or overcount performance duefail to the internal tools we use or issues with the data received from third parties,receive our target ratings for certain titles, or if our internal tools contain errors, the data we report may not be accurate or comparable with prior periods. In addition, limitations, changes or errors with respectretailers refuse to how we measure data may affect our understanding of certain details of our business, which could affect our longer term strategies. If our performance metrics are not accurate representations of our financial or operational performance, if we discover material inaccuracies in our metrics, or if we can no longer calculate any of our key performance metrics with a sufficient degree of accuracy and cannot find an adequate replacement for the metric, our business could be negatively impacted.

We may permit our customerssell such titles due to return products and to receive pricing concessions which could negatively impact our business.

        We are exposed to the risk of product returns and price protection with respect to our distributors and retailers. In some cases, return policies allow distributors and retailers to return defective, shelf-worn, damaged and certain other products in accordance with terms granted. Price protection, when granted and applicable, allows these distributors and retailers a credit against amounts owed with respect to merchandise unsold by them. We may permit product returns from, or grant price protection to, our customers under certain conditions. These conditions may include compliance with applicable payment terms, delivery of weekly inventory and sales information and consistent participation in the launches of premium title releases. We may also consider other factors, including the facilitation of slow-moving inventory and other industry factors. When we offer price protection, it may be offered with respect to a particular product to all of our distributors and retailer customers who meet the applicable conditions. Activision also offers a 90-day limited warranty to its consumer end users that Activision products will be free from manufacturing defects. Although we maintain a reserve for returns and price protection, and although we may place limits on product returns and price protection, we

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could be forced to accept substantial product returns and provide substantial price protection to maintain our relationships with retailers and our access to distribution channels. We face similar issues and risks, including exposure to risk of chargebacks, with respect to consumer end users to whom we sell products directly, whether through Battle.net or otherwise.

We may face difficulty obtaining access to the retail shelf space necessary to market and sell our products effectively.

        Retailers typically have a limited amount of shelf space and promotional resources, and there is intense competition among consumer interactive entertainment software products for high-quality retail shelf space and promotional support from retailers. To the extent that the number of products and platforms increase, competition for shelf space may intensify and may require us to increase our marketing expenditures. Those issues are exacerbated to the extent any of our products involve physical goods in addition to software and, as such, require additional shelf space, like the titles in our Skylanders franchise, which include both action figures and accessories, as well as an electronic "portal", and the title in our Guitar Hero franchise, which includes a "life sized" guitar-shaped controller. Retailers with limited shelf space typically devote the most and highest quality shelf space to those products expectedwhat they perceive to be best sellers. We cannot be certain that our new products will consistently achieve such "best seller" status. Due to increased competition for limited shelf space, retailers and distributors are in an increasingly better position to negotiate favorable terms of sale, including price discounts, price protection, marketing and display fees and product return policies. Our products constitute a relatively small percentage of most retailers' sales volume. We cannot be certain that retailers will continue to purchase our products or provide those products with adequate levels of shelf space and promotional support on acceptable terms.

If our marketing and advertising efforts fail to resonate with our consumers, our business could be negatively impacted.

        Our products are marketed worldwide through a diverse spectrum of advertising and promotional programs. Our ability to sell our products and services is dependent in part upon the success of these programs. If the marketing for our products and services fails to resonate with our consumers, particularly during the critical holiday season or during other key selling periods, or advertising rates or other media placement costs increase, or if the use of cost-effective cross-promotion within our mobile games to retain consumers becomes less effective, these factorsobjectionable content, it could have a negative impact on our business.

Increased sales of used interactive entertainment products could lower our sales.

        Certain of our larger customers sell used interactive entertainment products, which are generally priced lower than new interactive entertainment productsOur console and do not result in any revenues to the publisher of the games. Sales of used interactive entertainment products could negatively affect our sales of new products.

OurPC games are subject to ratings includingby the rating systems of the Entertainment Software Rating Board in the U.S. and similar agencies in international jurisdictions. Our failure to obtain our target ratings for our products could negatively impact our business.

        The Entertainment Software Rating Board (the "ESRB") is, a self-regulatory body based in the United StatesU.S. that provides U.S. and Canadian consumers of interactive entertainment software with ratings information, including information on the content in such software, such as violence, nudity or sexual content, contained in software products. The ESRB rating categories are "Early Childhood" (i.e.,along with an assessment of the suitability of the content is intended for young children), "Everyone" (i.e., content is generally suitable for all ages), "Everyone 10+" (i.e., content is generally suitable for ages 10 and up), "Teen" (i.e., content is generally

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suitable for ages 13 and up), "Mature" (i.e., content is generally suitable for ages 17 and up) and "Adults Only" (i.e., content is suitable for adults ages 18 and up). Our console and PC games are subject to ratings by the ESRB and some of our most significant titles have received a "Mature" rating, inherently limiting the target audience.certain age groups. Certain countries other than the United Statescountries have also established content rating systems as prerequisites for product sales in those countries. CertainIn addition, certain stores use other ratings systems, such as Apple's Appuse of its proprietary "App Rating SystemSystem" and Google Play's use of the International Age Rating Coalition (IARC) rating system. If we are unable to obtain the ratings we have targeted for our products, it could have a negative impact on our business. In some instances, a companywe may be required to modify itsour products to comply with the requirements of the rating systems, which could delay or disrupt the release of any given product, or may prevent its sale altogether in certain territories. Further, if an agency re-rates one of our games is "re-rated" for any reason, a ratings organization could require corrective actions, which could include a recall, retailers could refuse to sell it and demand that we accept the return of any unsold or returned copies or consumers could demand a refund for copies previously purchased. If we are unable to obtain the ratings we have targeted for our products, it could have a negative impact on our business.

Additional content-related policies adopted by retailers could negatively affect sales of our products.

        RetailersAdditionally, retailers may decline to sell interactive entertainment software containing what they judge to be graphic violence or sexually explicit material or other content that they deem inappropriate for their businesses, whether because a product received a certain rating by the ESRB or other content rating system, or otherwise. If retailers decline to sell our products based upon their opinion that they contain objectionable themes, graphic violence or sexually explicit material or other generally

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objectionable content, we might be required to modify particular titles or forfeit the revenue opportunity of selling such titles with that retailer.

Our business, products, and distribution are subject to increasing regulation in key territories. If we do not successfully respond to these regulations, our business could be materially adversely affected.

        Legislation is continually being introduced, and litigation and regulatory enforcement actions are taking place, that may affect the way in which we, and other industry participants, may offer content and features, and distribute and advertise our products. Many foreign countries, such as China and Germany, have laws that permit governmental entities to restrict or prohibit marketing or distribution of interactive entertainment software products because of the content therein (and similar legislation has been introduced at one time or another at the federal and state levels in the United States).        Further, the growth and development of electronic commerce and virtual items and currency may prompt calls for more stringent consumer protection laws that may impose additional burdens on or limitations on operations of companies such as ours conducting business through the Internet and mobile devices. We are also subject to laws and regulations related to protection of minors, consumer privacy, advertising, taxation, payments, intellectual property, distribution, and antitrust, among others. Furthermore, existing laws or new laws regarding the marketing of in-app purchases, regulation of currency, banking institutions, unclaimed property, and money laundering may be interpreted to cover virtual currency or goods. The adoption and enforcement of legislation which restricts the marketing, content, business model, or sales of our products in countries in which we do business may harm the sales of our products, as the products we are able to offer to our customers and the size of the potential market for our products may be limited. We may be required to modify certain product development processes or products or alter our marketing strategies to comply with such regulations, which could be costly or delay the release of our products. The laws and regulations affecting our products vary by territory and may be inconsistent with one another, imposing conflicting or uncertain restrictions. Failure to comply with any applicable legislation may also result in government-imposed fines or other penalties, as well as harm to our reputation. Moreover, the public dialogue concerning interactive entertainment may have an adverse impact on our reputation and consumers' willingness to purchase our products. The King Acquisition has significantly increased our user population, and may

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subject us to laws and regulations in additional jurisdictions and exacerbate the potential adverse impact on our business.

        Although we have structured and operate our skill tournaments with applicable laws in mind, including any applicable laws relating to gambling, and believe that playing these games does not constitute gambling, our skill tournaments could in the future become subject to gambling-related rules and regulations and expose us to civil and criminal penalties. We also sometimes offer consumers of our online and casual games various types of contests and promotional opportunities. We are subject to laws in a number of jurisdictions concerning the operation and offering of such activities and games, many of which are still evolving and could be interpreted in ways that could harm our business. If these were to occur, we might be required to seek licenses, authorizations, or approvals from relevant regulators, the granting of which may be dependent on us meeting certain capital and other requirements, and we may be subject to additional regulation and oversight, such as reporting to regulators, all of which could significantly increase our operating costs. Changes in current laws or regulations or the imposition of new laws and regulations in the United States, Europe, or elsewhere regarding these activities may lessen the growth of casual game services and impair our business.

The laws and regulations concerning data privacy are continually evolving. Failure to comply with these laws and regulations could harm our business.

        Consumers can play certain of our games online using third-party platforms and networks and on mobile devices. We collect and store significant amounts of information about our consumers of these games—both personally identifying and non-personally identifying information. We are subject to laws from a variety of jurisdictions regarding privacy and the protection of this information. For example, the European Union (the "E.U.") has traditionally taken a broader view than the United States and certain other jurisdictions as to what is considered personal information and has imposed greater obligations under data privacy regulations. The U.S. Children's Online Privacy Protection Act ("COPPA") also regulates the collection, use, and disclosure of personal information from children under 13 years of age. Failure to comply with COPPA may increase our costs, subject us to expensive and distracting government investigations, and result in substantial fines.

        Data privacy protection laws are rapidly changing and likely will continue to do so for the foreseeable future, which could impact our approach to operating and marketing our games. For example, the Court of Justice of the European Union's recent decision to invalidate the E.U.-U.S. Safe Harbor regime that legitimized the transfer of personal data from the E.U. to the U.S. was a material change to laws on data privacy applicable to our business. The European Commission and the U.S. government have recently agreed to a new framework for transatlantic data flows known as the "E.U.-U.S. Privacy Shield," which is intended to replace the Safe Harbor regime, but the details of how this will operate in practice and the compliance implications for our business are not yet clear. The U.S. government, including the Federal Trade Commission and the Department of Commerce, is continuing to review the need for greater regulation over the collection of personal information and information about consumer behavior on the Internet and on mobile devices, and the E.U. has proposed reforms to its existing data protection legal framework. Various government and consumer agencies worldwide have also called for new regulation and changes in industry practices. In addition, in some cases, we are dependent upon our platform providers to solicit, collect and provide us with information regarding our consumers that is necessary for compliance with these various types of regulations.

        Player interaction with our games is subject to our privacy policy, end user license agreements, and terms of service. If we fail to comply with our posted privacy policy, EULAs, or terms of service, or if we fail to comply with existing privacy-related or data protection laws and regulations, it could result in proceedings or litigation against us by governmental authorities or others, which could result in fines or judgments against us, damage our reputation, impact our financial condition and harm our business. If

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regulators, the media, or consumers raise any concerns about our privacy and data protection or consumer protection practices, even if unfounded, this could also result in fines or judgments against us, damage our reputation, negatively impact our financial condition, and damage our business.

We may not be able to maintain our distribution relationships with key vendors and customers.

        We have subsidiaries that distribute interactive entertainment software and hardware products and provide related services in Germany and the United Kingdom, respectively, and via export in other European countries for a variety of entertainment software publishers, many of which are our competitors, and hardware manufacturers. From time to time, these subsidiaries also maintain exclusive relationships to serve certain retail customers. These services are generally performed subject to limited-term arrangements. Although we expect to use reasonable efforts to retain these vendors and retail customer relationships, we may not be successful in this regard. The cancellation or non-renewal of one or more of these arrangements could negatively impact our business.

Credit card or other fraud could have a material adverse effect on our business.

        A substantial portion of the subscription revenues generated byWorld of Warcraft, as well as revenues generated from other sales through Battle.net, are paid by subscribers using credit cards. At times, there may be attempts to use fraudulently obtained credit card numbers to pay for our products and services. Additionally, the credit card numbers and other sensitive or personally identifiable information ofWorld of Warcraft's subscribers and Battle.net account holders are maintained in a proprietary database that may be subject to malicious intrusion by hackers or otherwise compromised internally or externally. As fraudulent schemes become more sophisticated, it may become more difficult and more costly for us to detect credit card or other fraud and we may be required to incur costs to implement additional security measures to protect subscriber information. An increase in credit card or other fraud could have adverse consequences. In addition, we may be subject to legal claims or legal proceedings, including regulatory investigations and actions, if there is loss, disclosure or misappropriation of or access to our customers' credit card or other sensitive or personally identifiable information.

Data breaches involving the source code for our products or customer, consumer or employee data stored by us, or by a third party operating on our behalf, could negatively impact our business.

        In the course of our day-to-day business, we and third parties operating on our behalf create, store and/or use commercially sensitive information, such as the source code and game assets for our interactive entertainment software products and confidential information with respect to our customers, consumers and employees. A malicious intrusion by hackers or other breach of the systems on which such source code and assets, account information (including personally identifiable information) and other sensitive data is stored could lead to piracy of our software, fraudulent activity, disclosure or misappropriation of, or access to, our customers', consumers' or employees' personally identifiable information or our own sensitive business data. A data intrusion into a server for a game with online features or for Battle.net could also disrupt the operation of such game or platform. If we are subject to data security breaches, or a security-related incident which materially disrupts the availability of our products and services, we may have a loss in sales or subscriptions or be forced to pay damages or incur other costs, including from the implementation of additional security measures, or suffer reputational damage. Moreover, even if there were a public perception that our data protection measures are inadequate, whether or not the case, it could result in reputational damage and potential harm to our business relationships or the public perception of our business model. In addition, we may be subject to legal claims or proceedings in connection with data security breaches, including regulatory investigations and actions.

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We rely on complex information technology systems and networks to operate our business. Any significant system or network disruption could negatively impact our business.

        We rely on the efficient and uninterrupted operation of complex information technology systems and networks, some of which are within Activision Blizzard and some of which are managed and/or hosted by third-party providers. All information technology systems and networks are potentially vulnerable to damage or interruption from a variety of sources, including but not limited to cyber- attacks, malicious software, security breach, energy blackouts, natural disasters, terrorism, war and telecommunication failures. We may also face sophisticated attacks, referred to as advanced persistent threats, which are cyber-attacks aimed at compromising our intellectual property and other commercially-sensitive information, such as the source code and game assets for our software or confidential customer or employee information, which remain undetected for prolonged periods of time. Information technology system or network failure or security breach could negatively impact our business continuity, operations and financial results. These risks extend to the networks and e-commerce sites of console platform providers and other partners who sell and host our content online. We may incur additional costs to remedy the damages caused by these disruptions or security breaches.

Our results of operations or reputation may be harmed as a result of offensive consumer-created content.

        We are subject to risks associated with the collaborative online features in our games which allow consumers to post narrative comments, in real time, that are visible to other consumers. From time to time, objectionable and offensive consumer content may be posted to a gaming or other site with online chat features or game forums which allow consumers to post comments. We may be subject to lawsuits, governmental regulation or restrictions, and consumer backlash (including decreased sales and harmed reputation), as a result of consumers posting offensive content. We may also be subject to consumer backlash from comments made in response to postings we make on social media sites such as Facebook, YouTube and Twitter.

If one or more of our titles were found to contain objectionable undisclosed content, our business may be negatively impacted.

        Throughoutthroughout the history of the interactive entertainment industry, many interactive software products have included hidden content and/or hidden gameplay features, some of which have been accessible through the use of in-game codes or other technological means, that are intended to enhance the gameplay experience. In some cases, such undisclosed content or features have been considered to be objectionable. While publishers are required to disclose pertinent hidden content during the ESRB ratings process, in a few cases, publishers have failed to disclose hidden content, and the ESRB has required the recall of the game, changed the rating or associated content descriptors originally assigned to the product, required the publisher to change the game or game packaging and/or imposed fines on the publisher. Retailers have on occasion reacted to the discovery of such undisclosed content by removing these games from their shelves, refusing to sell them and demanding that their publishers accept them as product returns. Likewise, some interactive entertainment software consumers have reacted to the revelation of undisclosed content by refusing to purchase such games, demanding refunds for games they have already purchased, refraining from buying other games published by the company whose game contained the objectionable material, and, on at least one occasion, filing a lawsuit against the publisher of the product containing such content.

        We have implemented preventive measures designed to reduce the possibility of objectionable undisclosed content from appearing in the interactive software products we publish. Nonetheless, these preventive measures are subject to human error, circumvention, overriding and reasonable resource constraints. If an interactive software product we publish is found to contain undisclosed content, we could be subject to any of these consequences.

Our business, products, and distribution are subject to increasing regulation in key territories. If we do not successfully respond to these regulations, our business could be negatively impacted.

        Legislation is continually being introduced, and litigation and regulatory enforcement actions are taking place, that may affect the way in which we, and other industry participants, may offer content and features, and distribute and advertise our products. The video game industry continues to evolve, and new and innovative business opportunities are often subject to new attempts at regulation. Many foreign countries, such as China and Germany, have laws that permit governmental entities to restrict or prohibit marketing or distribution of interactive entertainment software products because of the content therein (and similar legislation has been introduced at one time or another at the federal and state levels in the United States). Further, the growth and development of electronic commerce and virtual items and currency may prompt calls for more stringent consumer protection laws that may impose additional burdens or limitations on operations of companies such as ours conducting business through the Internet and mobile devices. We are subject to laws and regulations related to protection of minors, consumer privacy, accessibility, advertising, taxation, payments, intellectual property, distribution, and antitrust, among others. Also, existing laws or new laws regarding the marketing of in-app purchases, regulation of currency, banking institutions, virtual currencies, unclaimed property, and money laundering may be interpreted to cover virtual currency or goods. Furthermore, the growth and development of electronic commerce and virtual items and currency may prompt calls for more stringent consumer protection laws that may impose additional burdens or limitations on operations of companies such as ours conducting business through the Internet and mobile devices. The adoption and enforcement of legislation that restricts the marketing, content, business model, or sales of our products in countries in which we do business may harm the sales of our products, as the products we are able to offer to our customers and the size of the potential market for our products may be limited. We may be required to modify certain product development processes or products or alter our marketing strategies to comply with regulations, which could be costly or delay the release of our products. The laws and regulations affecting our products vary by territory and may be inconsistent with one another,

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imposing conflicting or uncertain restrictions. Failure to comply with any applicable legislation may also result in government-imposed fines or other penalties, as well as harm to our reputation. Moreover, the public dialogue concerning interactive entertainment may have an adverse impact on our reputation and consumers' willingness to purchase our products. Because the King Acquisition has significantly increased our user population, it may subject us to laws and regulations in additional jurisdictions and exacerbate the potential adverse impact on our business.

        Although we have structured and operate our skill tournaments with applicable laws in mind, including any applicable laws relating to gambling, and believe that playing these games does not constitute gambling, our skill tournaments could in the future become subject to gambling-related rules and regulations and expose us to civil and criminal penalties. We also sometimes offer consumers of our online and casual games various types of contests and promotional opportunities. We are subject to laws in a number of jurisdictions concerning the operation and offering of such activities and games, many of which are still evolving and could be interpreted in ways that could harm our business. Further, some of our online games and other services include random digital item mechanics, which may become subject to regulations in various jurisdictions. If these were to occur, we might be required to seek licenses, authorizations, or approvals from relevant regulators, the granting of which may be dependent on us meeting certain capital and other requirements, and we may be subject to additional regulation and oversight, such as reporting to regulators, all of which could significantly increase our operating costs. Changes in current laws or regulations or the imposition of new laws and regulations in the United States, Europe, or elsewhere regarding these activities may lessen the growth of casual game services and impair our business.

Change in government regulations relating to the Internet could negatively impact our business.

        We rely on our consumers' access to significant levels of Internet bandwidth for the sale and digital delivery of our content and the functionality of our games with online features. Changes in laws or regulations that adversely affect the growth, popularity or use of the Internet, including laws impacting "net neutrality," could decrease the demand for our products and services or increase our cost of doing business. Although certain jurisdictions have implemented laws and regulations intended to prevent Internet service providers from discriminating against particular types of legal traffic on their networks, other jurisdictions may lack such laws and regulations or repeal existing laws or regulations. For example, on December 14, 2017, the Federal Communications Commission voted to repeal net neutrality regulations in the U.S. Given uncertainty around these rules, including changing interpretations, amendments, or repeal, coupled with the potentially significant political and economic power of local Internet service providers and the relatively significant level of Internet bandwidth access our products and services require, we could experience discriminatory or anti-competitive practices that could impede our growth, cause us to incur additional expenses, or otherwise negatively impact our business.

The laws and regulations concerning data privacy are continually evolving. Failure to comply with these laws and regulations could harm our business.

        Consumers play certain of our games online using third-party platforms and networks, through online social platforms, and on mobile devices. We collect and store information about our consumers of these games—both personally identifying and non-personally identifying information. We are subject to laws from a variety of jurisdictions regarding privacy and the protection of this information. For example, the E.U. has traditionally taken a broader view than the United States and certain other jurisdictions as to what is considered personal information and has imposed greater obligations under data privacy regulations. The U.S. Children's Online Privacy Protection Act ("COPPA") also regulates the collection, use, and disclosure of personal information from children under 13 years of age. Failure

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to comply with COPPA may increase our costs, subject us to expensive and distracting government investigations, and result in substantial fines.

        Data privacy protection laws are rapidly changing and likely will continue to do so for the foreseeable future, which could impact our approach to operating and marketing our games. For example, the E.U.'s General Data Protection Regulation (the "GDPR"), which will come into effect in May 2018, imposes a range of new compliance obligations for us and other companies with European users, and increases financial penalties for noncompliance significantly. Regulators have not yet issued clear guidance for many of these new compliance obligations. The U.S. government, including the Federal Trade Commission and the Department of Commerce, is continuing to review the need for greater regulation over the collection of personal information and information about consumer behavior on the Internet and on mobile devices, and the E.U. has proposed reforms to its existing data protection legal framework, including the GDPR. Various government and consumer agencies worldwide have also called for new regulation and changes in industry practices. In addition, in some cases, we are dependent upon our platform providers to solicit, collect and provide us with information regarding our consumers that is necessary for compliance with these various types of regulations.

        Player interaction with our games is subject to our privacy policies, end user license agreements ("EULAs"), and terms of service. If we fail to comply with our posted privacy policies, EULAs, or terms of service, or if we fail to comply with existing privacy-related or data protection laws and regulations, it could result in proceedings or litigation against us by governmental authorities or others, which could result in fines or judgments against us, damage our reputation, impact our financial condition and harm our business. If regulators, the media, or consumers raise any concerns about our privacy and data protection or consumer protection practices, even if unfounded, this could also result in fines or judgments against us, damage our reputation, negatively impact our financial condition, and damage our business.

We depend on servers to operate our games with online features and our proprietary online gaming service. If we were to lose server functionality for any reason, our business may not be ablenegatively impacted.

        Our business relies on the continuous operation of servers, some of which are owned and operated by third parties. Although we strive to adequately adjustmaintain more than sufficient server capacity, and provide for active redundancy in the event of limited hardware failure, any broad-based catastrophic server malfunction, a significant service-disrupting attack or intrusion by hackers that circumvents security measures, a failure of disaster recovery service or the failure of a company on which we are relying for server capacity to provide that capacity for whatever reason would likely degrade or interrupt the functionality of our cost structuregames with online features, and could prevent the operation of such games altogether, any of which could result in the loss of sales for, or in, such games. This risk is particularly pronounced with respect to the mobile games published by King, which rely on a timely fashionsmall number of third-party owned data centers located in responseone city, or with respect to a sudden decrease in demand.the functioning of our proprietary online gaming service, Blizzard Battle.net, the disruption of which could prevent Blizzard from delivering content digitally or render all of Blizzard's games, as well asDestiny 2 PC content, unavailable.

        We also rely on networks operated by third parties, such as the PlayStation Network, Xbox Live and Steam, for the sale and digital delivery of downloadable console and PC game content and the functionality of our games with online features. Similarly, we rely on the continued operation of the Apple App Store, the Google Play Store, and Facebook for the sale of virtual currency for our free-to-play games. An extended interruption to any of these services could adversely affect our ability to sell and distribute our digital products and operate our games with online features, negatively impacting our business.

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        Further, insufficient server capacity could also negatively impact our business. Conversely, if we overestimate the amount of server capacity required by our business, we may incur additional operating costs.

We rely on complex information technology systems and networks to operate our business. Any significant data breach or system or network disruption could negatively impact our business.

        In the eventcourse of our day-to-day business, we and third parties operating on our behalf create, store, and/or use commercially sensitive information, such as the source code and game assets for our interactive entertainment software products and confidential information with respect to our customers, consumers, and employees. A malicious intrusion by hackers or other breach of the systems on which such source code and assets, account information (including personally identifiable information) and other sensitive data (including credit card information maintained in a significant decline in demandproprietary database) is stored could lead to piracy of our software, fraudulent activity, disclosure or misappropriation of, or access to, our customers', consumers' or employees' personally identifiable information or our own sensitive business data. We have implemented programs intended to secure our data and systems and prevent unauthorized access to, or loss of, sensitive data. However, because these attacks may remain undetected for oneprolonged periods of time and the techniques used by criminal hackers and other third parties to breach systems change frequently, we may be unable to anticipate these techniques or moreimplement adequate preventative measures. A data intrusion into a server for a game with online features or for our proprietary online gaming service could also disrupt the operation of such game or platform. If we are subject to data security breaches, or a security-related incident that materially disrupts the availability of our products and services, we may have a loss in sales or subscriptions or be forced to pay damages or incur other costs, including from the implementation of additional security measures, or suffer reputational damage. Additionally, while we maintain insurance policies, they may be insufficient to reimburse us for all losses or all types of claims that may be caused by data breaches or system or network disruptions. Moreover, if there were a public perception that our data protection measures are inadequate, whether or not be able to reduce personnel or make other changesthe case, it could result in reputational damage and potential harm to our business relationships or the public perception of our business model. In addition, such data security breaches may subject us to legal claims or proceedings, including regulatory investigations and actions, especially if there is loss, disclosure, or misappropriation of, or access to, our customers' credit card or other sensitive or personally identifiable information.

Our reported financial results could be significantly impacted by changes in financial accounting standards or by the application of existing or future accounting standards to our business as it evolves.

        Our reported financial results are impacted by the accounting policies promulgated by the SEC and national accounting standards bodies and the methods, estimates and judgments that we use in applying our accounting policies. Policies affecting revenue recognition have affected, and could further significantly affect, the way we report revenues related to our products and services. We recognize a majority of the revenues from bundled sales (i.e., video games that include an online service component) on a deferred basis over an estimated service period for such games. In addition, we defer the cost structure without disruptingof revenues of those products. Further, as we increase our operations or incurring costs. Further,downloadable content and add new features to our online services, our estimate of the service period may change and we may notcould be ablerequired to implement such actions in a timely manner, if at all, to offset an immediate shortfall inrecognize revenues, and profit. Moreover, cost-reduction actions may decreasedefer related costs, over a shorter or longer period of time. As we enhance, expand and diversify our employee moralebusiness and resultproduct offerings, the application of existing or future financial accounting standards, particularly those relating to the way we account for revenues and taxes, could have a significant impact on our reported net revenues, net income and earnings per share under accounting principles generally accepted in the failure to execute upon our business plan due to the lossUnited States in any given period.

Table of employees or impact our ability to retain or recruit key employees. In addition, any such action may involve the risk that our senior management's attention will be excessively diverted from our other operations.Contents

Provisions in our corporate documents and Delaware state law could delay or prevent a change of control.

        Our Amended and Restated Bylaws contain a provision regulating the ability of shareholders to bring matters for action before annual and special meetings. The regulations on shareholder action could make it more difficult for any person seeking to acquire control of the Company to obtain shareholder approval of actions that would support this effort. In addition, our Third Amended and Restated Certificate of Incorporation authorizes the issuance of so-called "blank check" preferred stock. This ability of our Board of Directors to issue and fix the rights and preferences of preferred stock could effectively dilute the interests of any person seeking control or otherwise make it more difficult to obtain control.

We have a number of large shareholders who may sell a large volume of our stock, which could causeHistorically, our stock price to decrease.has been highly volatile.

        We have a numberThe trading price of large shareholders,our common stock has been, and could continue to be, subject to wide fluctuations in response to many factors, including ASAC. The salefor example, but without limitation:

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quarter-to-quarter variations in the results of a substantial numberour operations;



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the announcement of sharesnew products;



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the announcement of lower prices on competing products;



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product development or release schedules;



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general conditions in the computer, software, entertainment, media or electronics industries, or in the worldwide economy;



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announcements of developments in the overall worldwide market for interactive entertainment, including announcements of industry sales data;



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the timing of the introduction of new platforms and delays in the actual release of new platforms;



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hardware manufacturers' announcements of price changes for hardware platforms;



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consumer acceptance of hardware platforms;



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consumer spending trends;



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the outcome of lawsuits or regulatory investigations in which we are, or may become, involved;



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changes in earnings estimates or buy/sell recommendations by analysts;



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sales or acquisitions of common stock by ASACour directors or any other large shareholder within a short period of time could causeexecutive management; and



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investor perceptions and expectations regarding our stock price to decrease,products, plans and make it more difficult for us to raise funds through future offerings of sharesstrategic position, and those of our common stock.

competitors and customers.

Catastrophic events may disrupt our business.

        Our corporate headquarters and our primary corporate disaster center are located in the Los Angeles, California area and our primary corporate disaster recovery data center is in Las Vegas, Nevada, each of which is near a major earthquake fault. A major earthquake or other catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems, or otherwise prevents us from conducting our normal business operations, could require significant expenditures to resume operations and have a material adverse effect onnegatively impact our business. While we maintain insurance coverage for some of these events, the potential liabilities associated with such events could exceed the insurance coverage we maintain. Further, our system redundancy may be ineffective or inadequate and our disaster recovery planning may not be sufficient for all eventualities.

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Any such event could also limit the ability of retailers, distributors or our other customers to sell or distribute our products.

If general economic conditions decline, demand for our products could decline.

        Purchases of our products and services involve discretionary spending on the part of consumers. Consumers are generally more willing to make discretionary purchases, including purchases of products and services like ours, during periods in which favorable economic conditions prevail. As a result, our products are sensitive to general economic conditions and economic cycles. A reduction or shift in domestic or international consumer spending could result in an increase in our selling and promotional expenses, in an effort to offset that reduction, and could have a material adverse effect onnegatively impact our business.

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The uncertainty of worldwide economic conditions makes budgeting and forecasting very difficult.

        We are unable to predict worldwide economic conditions, and all of the effects those conditions may have on our business. In particular, the uncertainty of future worldwide economic conditions subjects our forecasts to heightened risks and uncertainties.

Item 1B.    UNRESOLVED STAFF COMMENTS

        None.

Item 2.    PROPERTIES

        Our principal corporate and administrative offices are located at 3100 Ocean Park Boulevard, Santa Monica, California. Other significant leased facilities include: our Blizzard offices located in Irvine, California and our North America distribution warehouse located in Fresno, California.

The following is a summary of the principal leased offices we maintained as of December 31, 2015:

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Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Overview

        Activision Blizzard, Inc. is a leading global developer and publisher of interactive entertainment. The terms "Activision Blizzard," the "Company," "we," "us,"entertainment content and "our" are used to refer collectively to Activision Blizzard, Inc.services. We develop and its subsidiaries.distribute content and services on video game consoles, PC, and mobile devices. We also operate esports events and leagues and create film and television content based on our games.

The Business Combination and Share Repurchase

        Activision, Inc. was originally incorporated in California in 1979 and was reincorporated in Delaware in December 1992.

        Activision Blizzard is the result of the 2008 business combination ("Business Combination") by and among the Company (then known as 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. As a result of the consummation of the Business Combination, Activision, Inc. was renamed Activision Blizzard, Inc. and Vivendi became a majority shareholder of Activision Blizzard. Activision Blizzard is a public company traded on the NASDAQ under the ticker symbol "ATVI."

        On October 11, 2013, we repurchased approximately 429 million shares of our common stock, pursuant to a stock purchase agreement (the "Stock Purchase Agreement") we entered into with Vivendi and ASAC II LP ("ASAC"), an exempted limited partnership established under the laws of the Cayman Islands, acting by its general partner, ASAC II LLC. Pursuant to the terms of the Stock Purchase Agreement, we acquired all of the capital stock of Amber Holding Subsidiary Co., a Delaware corporation and wholly-owned subsidiary of Vivendi ("New VH"), which was the direct owner of approximately 429 million shares of our common stock, for a cash payment of $5.83 billion, or $13.60 per share, before taking into account the benefit to the Company of certain tax attributes of New VH assumed in the transaction (collectively, the "Purchase Transaction"). Refer to Note 11 of the Notes to the Consolidated Financial Statements for information regarding the financing of the Purchase Transaction.

        Immediately following the completion of the Purchase Transaction, ASAC purchased from Vivendi 172 million shares of our common stock, pursuant to the Stock Purchase Agreement, for a cash payment of $2.34 billion, or $13.60 per share (the "Private Sale"). Robert A. Kotick, our Chief Executive Officer, and Brian G. Kelly, Chairman of our Board of Directors, are affiliates of ASAC II LLC.

        On May 28, 2014, Vivendi sold approximately 41 million shares, or approximately 50% of its then-current holdings, of our common stock in a registered public offering. Vivendi received proceeds of approximately $850 million from that sale; we did not receive any proceeds.

        As of December 31, 2015, we had approximately 734 million shares of common stock issued and outstanding. At that date, (i) Vivendi held 41 million shares, or approximately 6% of the outstanding shares of our common stock, (ii) ASAC held 172 million shares, or approximately 23% of the outstanding shares of our common stock, and (iii) our other stockholders held approximately 71% of the outstanding shares of our common stock.

        On January 13, 2016, Vivendi sold all of their remaining shares of our common stock. We did not receive any proceeds.

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The King Acquisition

        On November 2, 2015, we and King Digital Entertainment plc, a leading interactive entertainment company for the mobile world incorporated under the laws of Ireland ("King"), entered into a Transaction Agreement (the "Transaction Agreement") under the terms of which we would acquire King (the "King Acquisition") and King would become a wholly-owned subsidiary of the Company.        On February 23, 2016, we completed the King Acquisition under the termsfor an aggregate purchase price of approximately $5.8 billion, as further described in Note 20 of the Transaction Agreement. We transferred $5.9 billion in considerationnotes to the existingconsolidated financial statements. Our consolidated financial statements include the operations of King shareholderscommencing on February 23, 2016.

Reportable Segments

        As part of the continued implementation of our esports strategy, we instituted changes to our internal organization and share-based award holders.

        The Company made this acquisition because it believesreporting structure such that the addition of King's highly-complementary mobileMLG business will position the Companynow operates as a global leader in interactive entertainment across mobile, console, and PC platforms, and positionsdivision of Blizzard. As such, commencing with the company for future growth. The combined company hassecond quarter of 2017, MLG, which was previously a world-class interactive entertainment portfolio of top-performing franchises.

        As the closingseparate operating segment, is now a component of the King Acquisition occurred subsequent to December 31, 2015, our financial results as of, andBlizzard operating segment. MLG is responsible for the year ended December 31, 2015, do not containoperations of the results of King.

Reportable SegmentsOverwatch League, along with other esports events, and will also continue to serve as a multi-platform network for other Activision Blizzard esports content.

        Based upon our organizational structure, we conduct our business through twothree reportable operating segments,segments: Activision, Publishing, Inc.Blizzard, and Blizzard Entertainment, Inc. Previously, we reported "Distribution" as a reportable segment. In the current period, this was no longer deemed a separate reportable segment and is included in "Other", along with our recently announced media networks and film and television studio businesses.King.

(i)    Activision Publishing, Inc.

        Activision Publishing, Inc. ("Activision") is a leading internationalglobal developer and publisher of interactive software products and content.entertainment content, particularly for the console platform. Activision primarily delivers content to a broad range of gamers, ranging from children to adults, and from core gamers to mass-market consumers to "value" buyers seeking budget-priced software, in a variety of geographies. Activision develops games based on internally-developed properties, including games in the Call of Duty® and Skylanders® franchises, and to a lesser extent, based on licensed intellectual properties. Additionally, we have established a long-term alliance with Bungie to publish its game universe,Destiny. Activision sells games through both retail and digital online channels.channels, including full-game and in-game sales, as well as by licensing software to third-party or related-party companies that distribute Activision currently offers games that operate on the Microsoft Corporation ("Microsoft") Xbox One ("Xbox One") and Xbox 360 ("Xbox 360"), Nintendo Co. Ltd. ("Nintendo") Wii U ("Wii U") and Wii ("Wii"), and Sony Computer Entertainment, Inc. ("Sony") PlayStation 4 ("PS4") and PlayStation 3 ("PS3") console systems (Xbox One, Wii U, and PS4 are collectively referred to as "next-generation"; Xbox 360, Wii, and PS3 are collectively referred to as "prior-generation"); the personal computer ("PC"); the Nintendo 3DS, Nintendo Dual Screen, and Sony PlayStation Vita handheld game systems; and mobile and tablet devices.

(ii) Blizzard Entertainment, Inc.

        Blizzard Entertainment, Inc. ("Blizzard") is a leader in online PC gaming, including 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. Blizzard alsoproducts. Activision develops, markets, and sells role-playing actionproducts based on our internally developed intellectual properties, as well as some licensed properties.

(ii)   Blizzard

        Blizzard is a leading global developer and strategy gamespublisher of interactive software products and entertainment content, particularly for the PC console, mobileplatform. Blizzard primarily delivers content through retail and tablet platforms,digital channels, including games in the multiple-award winning Diablo®, StarCraft®, Hearthstone®: Heroes of Warcraft™subscriptions, full-game, and Heroes of the Storm™ franchises. In addition,in-game sales, as well as by licensing software to third-party or related-party companies that distribute Blizzard products. Blizzard also maintains a proprietary online gaming service, Battle.net®,Blizzard Battle.net, which facilitates digital distribution of Blizzard content, along with Activision'sDestiny 2 content, online social connectivity, and the creation of user-generated content. As noted above, Blizzard also includes the activities of our MLG business, which is responsible for the operations of the Overwatch League, along with other esports events, and will also continue to serve as a multi-platform network for other Activision Blizzard esports content.

(iii)  King

        King is a leading global developer and publisher of interactive entertainment content digital distribution and online social connectivity across all Blizzard games. Blizzardservices, particularly on mobile platforms, such as Google's Android and Apple's iOS. King also distributes its

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productscontent and generates revenues worldwide through various means, including: subscriptions; sales of prepaid subscription cards;services on the PC platform, primarily via Facebook. King's games are free to play, however, players can acquire in-game purchases and services; retail sales of physical "boxed" products; online download sales of PC products; purchases and downloads via third-party console, mobile and tablet platforms; and licensing of software to third-partyitems, either with virtual currency the players purchase or related party companies that distribute Blizzard products.directly using real currency.

(iii) Other

        We also engage in other business opportunitiesbusinesses that include:do not represent reportable segments, including:

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The Activision Blizzard Media Networks ("Media Networks")the Studios business, announced in 2015 which builds on our efforts in competitive gaming and the growing eSports industry.



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The Activision Blizzard Studios ("Studios") business announced in 2015 which is devoted to creating original film and television content based on the company'sour extensive library of iconicglobally recognized intellectual properties; and globally-recognized intellectual properties.



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The Activision Blizzardthe Distribution ("Distribution") business, which consists of operations in Europe that provide warehousing, logistical,logistics, and sales distribution services to third-party publishers of interactive entertainment software, our own publishing operations, and manufacturers of interactive entertainment hardware.

Business Results and Highlights

        In 2015, Activision Blizzard's Financial Results

        The Company's 2017 financial highlights include:

•

consolidated net revenues were $4.7increased 6% to $7.0 billion and consolidated operating income wasdecreased 7% to $1.3 billion, as compared to consolidated net revenues of $4.4$6.6 billion and consolidated operating income of $1.2$1.4 billion in 2014. We generated 2016;



•

revenues from digital online channels increased 13% to $5.5 billion, or 78% of consolidated net revenues, as compared to $4.9 billion, or 74% of consolidated net revenues, in 2016;



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operating margin was 18.7%, as compared to 21.4% in 2016;



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cash flows from operating activities of approximately $1.2$2.21 billion, in 2015,an increase of 3%, as compared to $1.3$2.16 billion in 2014.

        Consolidated net income was $892 million in 2015, as compared to $835 million in 2014. Our diluted earnings per common share was $1.19 in 2015, as compared to $1.13 in 2014.

Product Release Highlights

        Games and digital downloadable content released, among others, during the year ended December 31, 2015 included:

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Call of Duty: Advanced Warfare Havoc (digital downloadable content)2016;



•

Callconsolidated net income decreased 72% to $273 million, as compared to $966 million in 2016, primarily driven by the impact of Duty: Advanced Warfare Ascendance (digital downloadable content)significant discrete tax-related impacts, including incremental income tax expense due to the impacts from the U.S. Tax Reform Act, as discussed in "Consolidated Results" below;



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Callconsolidated net income included $113 million of Duty: Advanced Warfare Supremacy (digital downloadable content)excess tax benefits from share-based payments, as compared to $81 million in 2016; and



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Calldiluted earnings per common share decreased 72% to $0.36, as compared to $1.28 in 2016, primarily driven by incremental income tax expense due to the impacts from the U.S. Tax Reform Act.

        Since certain of Duty: Advanced Warfare Reckoning (digital downloadable content)



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Callour games are hosted online or include online functionality that represents an essential component of Duty: Black Ops III



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Destiny Expansion II: Housegameplay and, as a result, a more-than-inconsequential separate deliverable, we initially defer the software-related revenues from the sale of Wolves



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Destiny Expansion III: The Taken King



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Guitar Hero® Live



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Hearthstone: Heroesthese games and recognize the attributable revenues over the relevant estimated service periods, which are generally less than a year. Net revenues and operating income for the year ended December 31, 2017, include a net effect of Warcraft—Blackrock Mountain™



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Hearthstone: Heroes$139 million and $71 million, respectively, from the deferrals of Warcraft—The Grand Tournament™



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Hearthstone: Heroesnet revenues and related cost of Warcraft—League of Explorers™



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Heroes of the Storm

        We also completed the sale of 12 teams for the Overwatch League, the first major global professional esports league with an expected release date to other platforms of March 3, 2016.city-based teams. The first preseason matches occurred in December 2017 and the inaugural regular season started in January 2018.

International OperationsSales

        International sales are a fundamental part of our business. Net revenues from international sales accounted for approximately 48%, 50%, and 47% of our total consolidated net revenues for the years ended December 31, 2015, 2014, and 2013, respectively. In addition to our United States ("U.S.") operations, we maintain significant operations in Australia, Canada, China, France, Germany, Ireland, Italy, the Netherlands, South Korea, Spain, Sweden and the United Kingdom ("U.K."). An important element of our international strategy is to develop content that is specifically directed toward local cultures and customs. Net revenues from international sales accounted for approximately 55%, 55%, and 52% of our total consolidated net revenues for the years ended December 31, 2017, 2016, and 2015, respectively. The majority of our net revenues from foreign countries are generated by consumers in Australia, Canada, China, France, Germany, Italy, Japan, South Korea, Spain, Sweden, and the United Kingdom. Our international business is subject to risks typical of an international business, including, but not limited to, foreign currency exchange rate volatility and changes in local economies. Accordingly, our future results could be materially and adversely affected by changes in foreign currency exchange rates and changes in local economies.economies

Operating Metrics

        The following operating metrics are key performance indicators that we use to evaluate our business.

Monthly Active Users

        We monitor monthly active users ("MAUs") as a key measure of the overall size of our user base. MAUs are the number of individuals who accessed a particular game in a given month. We calculate average MAUs in a period by adding the total number of MAUs in each of the months in a given period and dividing that total by the number of months in the period. An individual who accesses two of our games would be counted as two users. In addition, due to technical limitations, for Activision and King, an individual who accesses the same game on two platforms or devices in the relevant period would be counted as two users. For Blizzard, an individual who accesses the same game on two platforms or devices in the relevant period would generally be counted as a single user.

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        The number of MAUs for a given period can be significantly impacted by the timing of new content releases, since new releases may cause a temporary surge in MAUs. Accordingly, although we believe that overall trending in the number of MAUs can be a meaningful performance metric, period-to-period fluctuations may not be indicative of longer-term trends. The following table details our average MAUs on a sequential quarterly basis for each of our reportable segments (amounts in millions):

        Average MAUs for the quarter ended December 31, 2017 were comparable to the quarter ended September 30, 2017. The decrease in King's and Blizzard's average MAUs is partially offset by an increase in Activision's average MAUs driven by the Call of Duty franchise due to the launch ofCall of Duty: WWII in November 2017.

        Average MAUs decreased by 62 million, or 14%, for the quarter ended December 31, 2017, as compared to the quarter ended December 31, 2016. The decrease in King's average MAUs is due to decreases across King's franchises that are largely attributable to less engaged users leaving the network and maturity of titles.

Net Bookings

        We monitor net bookings as a key operating metric in evaluating the performance of our business. Net bookings is defined as the net amount of products and services sold digitally or sold-in physically in the period, and includes license fees, merchandise, and publisher incentives, among others. Net bookings were as follows (amounts in millions):

2017 vs. 2016

        The increase in net bookings for 2017, as compared to 2016, was primarily due to:

•

higher net bookings from King titles, as 2017 includes King net bookings for the full year, while 2016 only included King net bookings for the partial period following the King Closing Date, as well as higher net bookings from the Candy Crush franchise, due to in-game events and features;



•

higher net bookings from the Destiny franchise, driven by the release ofDestiny 2 in September 2017;



•

higher net bookings fromCall of Duty: WWII, which was released in November 2017, as compared toCall of Duty: Infinite Warfare (which, when referred to herein, is inclusive ofCall of Duty: Modern Warfare Remastered), the comparable 2016 title;



•

higher net bookings from the continued strength ofCall of Duty: Black Ops III, as compared to prior catalog releases, driven by the downloadable content pack,Zombies Chronicles, which was released in May 2017, and the continued strength of microtransactions; and

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•

net bookings fromCrash Bandicoot N. Sane Trilogy, which was released in June 2017.

        The increase was partially offset by:

•

lower net bookings fromCall of Duty: Infinite Warfare, as compared to the performance ofCall of Duty: Black Ops III, the comparable 2015 title;



•

lower net bookings fromOverwatch, which was released in May 2016;



•

lower net bookings fromWorld of Warcraft, driven by the release ofWorld of Warcraft: Legion™ in August 2016, with no comparable release in 2017; and



•

lower net bookings from the Skylanders® franchise, due to the release ofSkylanders Imaginators in October 2016, with no comparable release in 2017.

2016 vs. 2015

        The increase in net bookings for 2016, as compared to 2015, was primarily due to:

•

new net bookings from King titles following the King Closing Date, primarily driven by the Candy Crush franchise;



•

net bookings fromOverwatch, which was released in May 2016;



•

higher net bookings from digital content associated withCall of Duty: Black Ops III, which was released in November 2015, as compared toCall of Duty: Advanced Warfare, the comparable 2014 title; and



•

higher net bookings fromWorld of Warcraft, driven by the release ofWorld of Warcraft: Legion in August 2016, with no comparable release in 2015.

        The increase was partially offset by:

•

lower net bookings fromCall of Duty: Infinite Warfare, which was released in November 2016, as compared toCall of Duty: Black Ops III, the comparable 2015 title;



•

lower net bookings from the Destiny franchise, as there were two expansion packs in 2015—House of Wolves andThe Taken King—but only one in 2016—Rise of Iron;



•

lower net bookings fromSkylanders Imaginators, which was released in October 2016, as compared toSkylanders Superchargers, the comparable 2015 title, as well as lower net bookings from standalone toys and accessories from the Skylanders franchise in 2016; and



•

lower net bookings fromGuitar Hero^® Live, which was released in 2015, with no comparable release in 2016.

Management's Overview of Business Trends

Digital Revenues

        We provide our products through both retailInteractive Entertainment and digital distribution channels. Many of our video games that are available through retailers as physical "boxed" software products are also available digitally (from our websites and from websites and digital distribution channels owned by third parties). In addition, we offer players digital downloadable content as add-ons to our products (e.g.Mobile Gaming Growth, new multi-player content packs or in-game microtransactions), generally for a one-time fee. We also offer subscription-based services and other value-added services forWorld of Warcraft, all of which are digitally delivered and hosted by Battle.net.

        We currently define sales via digital online channels as revenues from digitally distributed subscriptions, licensing royalties, value-added services, downloadable content, microtransactions, and products. This definition may differ from that used by our competitors or other companies.

        According to Activision Blizzard internal estimates, digital gaming revenues forOur business participates in the global interactive entertainment industry in 2015, increased by approximately 20% as compared to 2014. The primary driversindustry. Games have become an increasingly popular form of the increase in digital gaming revenues were increases in microtransactions and consumer purchases of full games via digital channels. In addition to increasing microtransactions within free-to-play games, the increase includes microtransactions within purchased game software, as publishers offer increasingly new opportunities for monetization within their games to extend and enlarge the monetization cycle. Digital revenues are an important part of our business,entertainment, and we continueestimate the total industry has grown, on average, 18% over the last three years. The industry continues to focusbenefit from additional players entering the market as interactive entertainment becomes more common place across age groups and as more developing regions gain access to this form of entertainment.

        Further, the wide adoption of smart phones globally and the free-to-play business model on those platforms has increased the total addressable market for gaming significantly by introducing gaming to new age groups and develop products, such as downloadable content, that cannew regions and allowing gaming to occur more widely outside the home. Mobile gaming is now estimated to be delivered via digital channels. The amount of our digital revenues in any period may fluctuate depending, in part, on the timinglarger than console and nature of our specific product releases. Our sales of digital downloadable content are driven in part by sales of,PC gaming and engagement by players in, our retail products. As such, lower revenues in ourcontinues to grow at a

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retail distribution channelssignificant rate. King is a leading developer of mobile and free-to-play games and our other business units have mobile efforts underway that present the opportunity for us to expand the reach of, and drive additional player investment from, our franchises.

Opportunities to Expand Franchises Outside of Games

        Our fans spend significant time investing in one year may impact our revenuesfranchises through digital online channels in the subsequent year.

        For the year ended December 31, 2015, net revenues through digital online channels increased by $605 million, as compared to 2014, and represented 54%purchases of our total consolidated net revenues,game content, whether through purchases of full games or downloadable content or via microtransactions. Given the passion our players have for our franchises, we believe there are emerging opportunities to drive additional engagement and investment in our franchises outside of games. These opportunities include esports, film and television, and consumer products. Our efforts to build these adjacent opportunities are still relatively nascent, but we view them as comparedpotentially significant sources of future revenues.

        As part of our efforts to 43% in 2014. On a non-GAAP basis (which excludestake advantage of the impactesports opportunity, during 2017 we completed the sale of deferred revenues), net revenues through digital online channels12 teams for the year endedOverwatch League. The Overwatch League is the first major global professional esports league with city-based teams. The first preseason matches occurred in December 31, 2015 increased by $430 million, as compared to 2014,2017 and represented 57% of our total non-GAAP net revenues, as compared to 46%the inaugural regular season started in 2014.

        Please refer to the reconciliation between GAAP and non-GAAP financial measures later in this document for further discussions of retail and digital online channels.January 2018.

Console Platform Transition

        In November 2013, Sony released the PS4 and Microsoft released the Xbox One, their respective next-generation game consoles and entertainment systems. According to The NPD Group and GfK Chart-Track in North America and Europe, as of December 31, 2015, the combined installed base of PS4 and Xbox One hardware was approximately 43 million units, representing growth of approximately 82% over the combined installed base of approximately 24 million units as of December 31, 2014. While the combined installed base of PS3 and Xbox 360 hardware was approximately 124 million units as of December 31, 2015, at the comparable point in their release cycle, the prior-generation platforms had only 28 million units installed.

        When new console platforms are announced or introduced into the market, consumers reduce their purchases of game console software products for prior-generation console platforms in anticipation of new platforms becoming available. During these periods, sales of the game console software products we publish slow or even decline until the new platforms introduced achieve wide consumer acceptance, which we believe had largely occurred with respect to the next-generation platforms by the end of 2015. We believe that for 2016, the sales impact from the console transition will not be a meaningful driver of the business.

        During platform transitions, we simultaneously incur costs to develop and market new titles for prior-generation video game platforms and to develop and market products for next-generation platforms. We continually monitor console hardware sales and manage our product delivery on each of the prior- and next-generation platforms in a manner we believe to be most effective to maximize our revenue opportunities and achieve the desired return on our investments in product development.

Concentration of Top TitlesSales Among the Most Popular Franchises

        The concentration of retail revenues among key titles has continued as a trend in the overall interactive softwareentertainment industry. According to The NPD Group, the top 10 titles accounted for 33%36% of the retail sales in the U.S. interactive entertainment industry in 2015.2017. Similarly, a significant portion of our revenues has historically been derived from video games based on a few popular franchises and these video games arewere responsible for a disproportionately high percentage of our profits. For example, the Call of Duty, Candy Crush, World of Warcraft, Skylanders, and DestinyOverwatch franchises, combinedcollectively, accounted for 71%, 72%, and 80%66% of our consolidated net revenues for the years ended December 31, 2015, 2014, and 2013, respectively, revenues—and a significantly higher percentage of our operating income. As a result, successful competition against theseincome—for 2017.

        The top titles can significantly impact our performance. Notably in 2015, the toysindustry are also becoming more consistent as players and revenues concentrate more heavily in established franchises. Of the top 10 console franchises in 2017, all 10 are from established franchises. Similarly, according to life category became more competitive with a new entrant competing directly with usU.S rankings for the Apple App Store and other incumbents.Google Play store per App Annie Intelligence as of December 2017, the top 10 mobile games have an average tenure of 22 months.

        WeIn addition to investing in and developing sequels and content for our top titles, we are continually exploring additional investmentsways to expand those franchises. Further, while there is no guarantee of success, we invest in existingnew properties in an effort to develop future top franchises. In 2014, we releasedHearthstone and future franchises. DuringDestiny, in 2015, we releasedHeroes of the Storm, as well asCall of Duty Onlineand in China. In the fourth quarter of 2015,

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2016, we releasedOverwatch into closed beta with an anticipated game release. Additionally, to diversify our portfolio of key franchises and increase our presence in spring of 2016. There is no guarantee these investments will result in an established franchise.