Amazon.com 2002 Annual Report Download - page 32

We periodically provide incentive oÅers to our customers to encourage purchases. Such oÅers include
percentage discounts oÅ current purchases (""current discount oÅers''), oÅers for future discounts subject
to a minimum current purchase (""inducement oÅers'') and other similar oÅers. Current discount oÅers,
when accepted by our customers, are treated as a reduction to the purchase price of the related transaction
and are presented as a net amount in ""Net sales.'' Inducement oÅers, when accepted by our customers,
are treated as a reduction to purchase price based on estimated redemption rates. Redemption rates are
estimated using our historical experience for similar inducement oÅers.
Commissions received through our Amazon Marketplace and Merchants@ programs and amounts
earned through our Merchant.com program are recorded as net amounts since we are acting as an agent.
Amounts earned are recognized as net sales when the item is sold by the third-party seller and our
collectibility is reasonably assured. We record an allowance for estimated refunds on such commissions
using historical experience.
We earn revenues from services primarily by entering into business-to-business commercial
agreements, including providing our technology services such as search, browse and personalization;
permitting other businesses and individuals to oÅer products or services through our Web sites; and
powering third-party Web sites, either with or without providing accompanying fulÑllment services. These
commercial agreements also include miscellaneous marketing and promotional agreements. As compensa-
tion for the services we provide under these agreements, we generally receive cash. In the past, we have
accepted as compensation under these arrangements equity securities, or a combination of equity securities
and cash. Generally, the fair value of the equity consideration received is measured when the agreement is
executed, but to the extent that the equity consideration is subject to forfeiture or vesting provisions and
no signiÑcant performance commitment exists upon execution of the agreement, the fair value of the
equity consideration and corresponding revenue is determined as of the date that the forfeiture provision
lapses or as the vesting provision lapses. Subsequent to initial measurement of fair value, appreciation or
decline in the fair value of such securities will aÅect our ultimate realization of equity securities received
as compensation; however, any such change does not aÅect the amount of revenue to be recognized over
the term of the agreement. We generally recognize revenue from these marketing and promotional services
(including revenues associated with non-refundable advance payments) on a straight-line basis over the
period during which we perform services under these agreements, commencing at the launch date of the
service. If we receive non-refundable advance payments, such amounts are deferred for revenue recognition
purposes until service commences.
Included in Services segment revenues are equity-based service revenues of $13 million, $27 million
and $79 million for 2002, 2001 and 2000, respectively.
We have in the past, and may in the future, amend our agreements with certain of the companies
with which we have commercial agreements to modify future cash proceeds to be received by us, modify
the service term of our commercial agreements, or both. Although these amendments generally do not
aÅect the amount of unearned revenue previously recorded by us (if any), the timing of future revenue
recognition changes to correspond with the terms of amended agreements. These amendments or future
amendments will aÅect the timing and amount of revenues recognized in connection with these
commercial agreements. To the extent we believe any such amendments cause or may cause the
compensation to be received under an agreement to no longer be Ñxed or determinable, we limit our
revenue recognition to amounts received, excluding any future amounts not deemed Ñxed or determinable.
As future amounts are subsequently received, such amounts are incorporated into our revenue recognition
over the remaining term of the agreement.
Fair Value of Equity Securities Received as Compensation Under Commercial Agreements
For equity securities of public companies received as compensation under commercial agreements, 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 signiÑcant 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
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