Amazon.com 2001 Annual Report Download - page 20

Our Strategic Alliances Subject Us to a Number of Risks
Beginning in 1999, we offered services to other e-commerce companies including permitting third parties to
offer products or services on our Web site, and promotional services such as advertising placements and
customer referrals. We may enter into similar transactions in the future. Beginning with our strategic alliance
with Toysrus.com in 2000, we began expanding our range of services. We now offer a variety of services to third
parties, including offering consumer products sold by us through Syndicated Stores; allowing third parties to
utilize our technology services such as search, browse and personalization; and powering third-party Web-sites,
providing fulfillment services, or both. In exchange for the services we provide under these agreements, we
receive cash and/or equity securities of these companies (additional benefits may include Web site traffic). The
amount of compensation we receive under certain of these agreements is dependent on the volume of sales made
by the other company. In some cases, such as our agreement with drugstore.com, we have also made separate
investments in the other company by making a cash payment in exchange for equity securities of that company.
As part of this program, we may in the future make additional investments in companies with which we have
already formed strategic alliances or companies with which we form new strategic alliances or similar
arrangements. To the extent we have received equity securities as compensation, fluctuations in the value of such
securities will affect our ultimate realization of amounts we have received as compensation for services.
We hold several investments in third parties, primarily investments in companies with which we have
formed strategic alliances, that are accounted for using the equity method. Under the equity method, we are
required to record our ownership percentage of the income or loss of these companies as income or loss for us.
We record these amounts generally one month in arrears for private companies and three months in arrears for
public companies. The losses we are required to record under the equity method with respect to a particular
investment are limited to the carrying value of that investment. As of December 31, 2001, the carrying amount of
several of our equity-method investees has been reduced to zero. The only remaining investees with carrying
amounts are privately-held companies. The companies in which we have equity method investments are engaged
in the Internet and e-commerce industries, are likely to experience large losses for the foreseeable future and may
or may not be ultimately successful. Accordingly, we expect to record additional equity method losses in the
future. Our investments in equity securities that are not accounted for under the equity method are included in
“Marketable securities” and “Other equity investments” on our balance sheets.
We regularly review all of our investments in public and private companies for other-than-temporary
declines in fair value. When we determine that the decline in fair value of an investment below our accounting
basis is other-than-temporary, we reduce the carrying value of the securities we hold and record a loss in the
amount of any such decline. During 2001, we determined that the declines in value of several of these
investments were other-than-temporary, and we recognized losses totaling $44 million to record these
investments at their then current fair value. Several of these companies have declared bankruptcy or liquidated.
We had net unrealized gains of $1 million on available-for-sale equity securities included in accumulated
other comprehensive loss as of December 31, 2001, and have recorded equity-method losses of $30 million for
the year ended December 31, 2001. In recent quarters, companies in the Internet and e-commerce industries have
experienced significant difficulties, including difficulties in raising capital to fund expansion or to continue
operations. We may conclude in future quarters that the fair values of other of these investments have
experienced an other-than-temporary decline. As of December 31, 2001, our recorded basis in equity securities
was $41 million, including $13 million classified as “Marketable securities,” $10 million classified as
“Investments in equity-method investees,” and $18 million classified as “Other equity investments.” In addition,
if companies with which we have formed strategic alliances experience such difficulties, we may not receive or
fully realize the consideration owed to us and the value of our investment may become worthless. As our
strategic alliances and similar agreements expire or otherwise terminate, we may be unable to renew or replace
these agreements on terms that are as favorable to us, or at all.
During 2000 and 2001, we amended several of our agreements with certain of the companies with which we
have formed strategic alliances that reduced future cash proceeds to be received by us, shortened the term of our
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