Classmates.com 2005 Annual Report Download - page 84

Company ensures that a binding contract is in place, such as a standard insertion order or a fully executed customer-specific agreement. The
Company assesses whether performance criteria have been met and whether the fees are fixed or determinable based on a reconciliation of the
performance criteria and the payment terms associated with the transaction. The reconciliation of the performance criteria generally includes a
comparison of internally tracked performance data to the contractual performance obligation and to third-party or customer performance data in
circumstances where that data is available. Probability of collection is assessed based on a number of factors, including past transaction history
with the customer and the creditworthiness of the customer. If it is determined that collection is not reasonably assured, revenue is not
recognized until collection becomes reasonably assured, which is generally upon receipt of cash.
Cost of Billable Services— With respect to Internet access services, cost of billable services includes direct costs of billable services and
Internet access costs that have been allocated to billable services based on the aggregate hourly usage of pay accounts as a percentage of total
hours used by active accounts. Direct costs consist of costs related to providing technical support, customer billing and billing support to pay
accounts. Allocated costs consist primarily of telecommunications and data center costs, personnel and overhead-related costs associated with
operating the Company’s network and data centers, and depreciation of network computers and equipment. The Company allocates costs
associated with Web hosting and online photos between billable services and free services based on estimated bandwidth used by pay Web-
hosting and online photo accounts relative to estimated bandwidth used by free Web-hosting and online photo accounts. Costs associated with
the Company’s social networking services are allocated based on the number of Web site visits by pay accounts relative to the total number of
visits. Costs associated with our VoIP telephony service primarily include telecommunications costs and costs for license fees, customer support
and depreciation.
Cost of Free Services— With respect to Internet access services, cost of free services includes direct costs incurred in providing certain
technical and customer support services to free access accounts as well as costs that have been allocated to free services based on the aggregate
hourly usage of free access accounts as a percentage of total hours used by the Company’s active access accounts. Allocated costs consist
primarily of telecommunications and data center costs, personnel and overhead-related costs associated with operating the Company’s network
and data centers, and depreciation of network computers and equipment. The Company allocates costs associated with Web hosting and online
photos between pay services and free services based on estimated bandwidth used by free Web-hosting and online photo accounts. Costs
associated with the Company’s social-networking services are allocated based on the number of Web site visits by free accounts relative to the
total number of visits.
Sales and Marketing— Sales and marketing expenses include advertising and promotion expenses, fees paid to distribution partners to
acquire new pay and free accounts, personnel-
related expenses for sales and marketing personnel and telemarketing costs incurred to acquire pay
accounts, retain pay accounts and up-sell pay accounts to additional services, such as the Company’s accelerator services. The Company has
expended significant amounts on sales and marketing, including national branding campaigns comprised of television, Internet, sponsorships,
radio, print and outdoor advertising and on retail and other performance-based distribution relationships. Marketing and advertising costs to
promote the Company’s products and services are expensed in the period incurred. Advertising and promotion expenses include media, agency
and promotion expenses. Media production costs are expensed the first time the advertisement is run. Media and agency costs are expensed over
the period the advertising runs. Advertising and promotion expense for the years ended December 31, 2005 and 2004, the six months ended
December 31, 2003 and the year ended June 30, 2003 was $159.5 million, $147.1 million, $57.6 million and $67.7 million, respectively. At
December 31, 2005 and 2004, $3.6 million and $4.3 million, respectively, of prepaid advertising and promotion expense was included in other
current assets.
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