Amazon.com 2004 Annual Report Download - page 47

expense. Marketing costs increased in absolute terms in 2004 corresponding with revenue growth as we utilized
variable online marketing channels such as our Associates and Syndicated Stores programs, sponsored search, and
other variable marketing initiatives. While costs associated with free shipping are not included in marketing
expense, we view free shipping as an effective worldwide marketing tool, and intend to continue offering it
indefinitely.
(3) Technology and Content
Our spending in technology and content has increased as we are adding computer scientists and software
engineers to continue to enhance the customer experience on our websites and those websites powered by us and
to improve our process efficiency. Additionally, we continue to invest in several areas of technology, including
seller platform; A9.com, our wholly-owned subsidiary focused on search technology on www.A9.com,
www.amazon.com,and other Amazon sites; web services; and digital initiatives. During 2004, 2003, and 2002 we
capitalized $44 million, $30 million, and $25 million of costs associated with development of internal-use
software, which is offset by amortization of previously capitalized amounts of $30 million, $24 million, and $26
million. We intend to continue investing in these and other initiatives and expect absolute dollars spent in
technology and content to increase over time as we continue to add computer scientists and software engineers to
our staff. A significant majority of these costs are incurred in the United States and most of them are allocated to
our North America segment.
(4) General and Administrative
The increase in spending in general and administrative is primarily due to increases in professional fees and
litigation costs. We expect absolute dollars spent in general and administrative to increase over time.
On an annual basis in 2004, each category of direct segment operating expenses has either declined or
remained flat with 2003 as a percentage of net sales. However, for the fourth quarter of 2004 expenses for
“Marketing” and “Technology and content” as a percentage of net sales increased in comparison to same period
in 2003, and this trend may continue.
Stock-Based Compensation
On October 13, 2004, the Financial Accounting Standards Board reached a consensus on the effective date
for SFAS No. 123R (SFAS 123R), Share-Based Payment.SFAS 123R requires us to measure compensation cost
for all outstanding unvested share-based awards at fair value beginning on July 1, 2005, however we will early-
adopt the provisions of SFAS 123R with an implementation date of January 1, 2005. The adoption of this
standard will not affect the stock-based compensation associated with our restricted stock and restricted stock
units which are already recorded at fair value on the date of grant and recognized over the service period, but will
result in the recognition of stock-based compensation in future periods for remaining unvested stock options as of
the effective date. As of the implementation date of this standard, we will no longer have employee stock awards
subject to variable accounting treatment. We estimate that stock-based compensation for 2005 will be
$115 million. See also Item 8 of Part II, “Financial Statements—Note 1—Description of Business and
Accounting Policies–Stock-based Compensation” for our SFAS No. 123 pro forma disclosures using fair value
accounting treatment.
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