Amazon.com 2004 Annual Report Download - page 69

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Vendor Agreements
We have agreements to receive cash consideration from certain of our vendors, including rebates and
cooperative marketing reimbursements. We generally presume amounts received from our vendors are a
reduction of the prices we pay for their products and, therefore, we reflect such amounts as either a reduction of
“Cost of sales” on our consolidated statements of operations, or, if the product inventory is still on hand at the
reporting date, it is reflected as a reduction of “Inventories” on our consolidated balance sheets. Vendor rebates
are typically dependent upon reaching minimum purchase thresholds. We evaluate the likelihood of reaching
purchase thresholds using past experience and current year forecasts. When rebates can be reasonably estimated,
we record a portion of the rebate as we make progress towards the purchase threshold.
When we receive direct reimbursements for costs incurred by us in advertising the vendor’s product or
service, the amount we receive is recorded as an offset to “Marketing” on our consolidated statements of
operations.
Fulfillment
Fulfillment costs represent those costs incurred in operating and staffing our fulfillment and customer
service centers, including costs attributable to buying, receiving, inspecting, and warehousing inventories;
picking, packaging, and preparing customer orders for shipment; credit card fees and bad debt costs, including
costs associated with our guarantee for certain third-party seller transactions; and responding to inquiries from
customers. Fulfillment costs also include amounts paid to third-parties that assist us in fulfillment and customer
service operations. Certain of our fulfillment-related costs that are incurred on behalf of other businesses, such as
Toysrus.com, Inc. and Target Corporation, are classified as cost of sales rather than fulfillment.
Marketing
Marketing costs consist of primarily online advertising, including through our Associates and Syndicated
Stores programs, sponsored search, portal advertising, e-mail campaigns, and other initiatives. We pay
commissions to participants in our Associates program when their customer referrals result in product sales and
classify such costs as “Marketing” on our consolidated statements of operations.
We also participate in cooperative advertising arrangements with certain of our vendors, and other third
parties. To the extent co-operative marketing reimbursements decline in future periods, we may incur additional
expenses to continue certain promotions or elect to reduce or discontinue them.
Marketing expenses also consist of public relations expenditures; payroll and related expenses for personnel
engaged in marketing, business development, and selling activities; and to a lesser extent, traditional advertising
such as newspaper inserts.
Advertising and other promotional costs, which consist primarily of online advertising, are expensed as
incurred, and were $141 million, $109 million, and $114 million in 2004, 2003, and 2002. Prepaid advertising
costs were not significant at December 31, 2004 and 2003.
Technology and Content
Technology and content expenses consist principally of payroll and related expenses for employees involved
in development of our websites, including application development, editorial content, merchandising selection,
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