Amazon.com 2001 Annual Report Download - page 46

position. The sale of additional equity or convertible debt securities could result in additional dilution to our
stockholders. In addition, we will, from time to time, consider the acquisition of or investment in complementary
businesses, products, services and technologies, and the repurchase and retirement of debt, which might affect
our liquidity requirements or cause us to issue additional equity or debt securities. There can be no assurance that
financing will be available in amounts or on terms acceptable to us, if at all.
Strategic Alliances
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 which
the other company makes. 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.
For equity securities of public companies, we generally determine fair value based on the quoted market
price at the time we enter into the underlying commercial agreement, and adjust such market price appropriately
if significant restrictions on marketability exist. Because an observable market price does not exist for equity
securities of private companies, our estimates of fair value of such securities are more subjective than for the
securities of public companies. For significant transactions involving equity securities in private companies, we
obtain and consider independent, third-party valuations where appropriate. Such valuations use a variety of
methodologies to estimate fair value, including comparing the security with securities of publicly traded
companies in similar lines of business, applying price multiples to estimated future operating results for the
private company, and utilizing estimated discounted cash flows for that company. These valuations also reduce
the otherwise fair value by a factor that is intended to account for restrictions on control and marketability where
appropriate. Using these valuations and other information available to us, such as our knowledge of the industry
and knowledge of specific information about the investee, we determine the estimated fair value of the securities
received.
The fair value of these securities, less the net amount of cash we paid for them, is then recorded as unearned
revenue. Our recorded unearned revenue resulting from these transactions and any additional proceeds received
under the arrangements is recognized as revenue over the terms (generally, one to three years) of the commercial
agreements with these companies. Pursuant to EITF Issue No. 00-8, “Accounting by a Grantee for an Equity
Instrument to Be Received in Conjunction with Providing Goods or Services,” we do not adjust unearned
revenue to give effect to either an increase or decrease in value of the equity securities subsequent to their initial
measurement (to the extent that such securities are either not subject to vesting or forfeiture or, if subject to
vesting or forfeiture, were not received or modified after March 16, 2000). Therefore, the value of equity
securities recorded as unearned revenue could decline in value significantly after the initial measurement is
made. We have in the past, and may in the future, experience losses with respect to investments in strategic
companies that are not equity-method investees as a result of either liquidation of such investments at a loss or
provision for an other-than-temporary decline in the fair value of these investments. See “Other gains (losses),
net.” In addition, we have in the past, and may in the future, amend our agreements with certain of the companies
with which we have strategic alliances to reduce future cash proceeds to be received by us, shorten the term of
our commercial agreements, or both. Although these amendments did not affect the amount of unearned revenue
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