Vonage 2010 Annual Report Download - page 64

V
O
NA
G
EH
O
LDIN
GS CO
RP
.
N
OTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(
In thousands, except per share amounts
)
W
ea
l
so prov
id
ere
b
ates to customers w
h
o purc
h
as
e
t
heir customer equipment from retailers and satisf
y
mini
-
mum service
p
eriod re
q
uirements. These rebates in exces
s
o
f
ac
tiv
a
ti
o
nf
ees a
r
e
r
eco
r
ded as a
r
educ
ti
o
n
o
fr
e
v
e
n
ues
over the service
p
eriod based u
p
on the estimated number
of customers that will ultimately earn and claim the rebates.
F
rom t
i
me to t
i
me we
h
ave generate
d
revenue
b
y
charging a fee for activating service, although we do not
currently or expect to charge an activation fee to custom
-
ers. In these instances when no activation fee is bein
g
col
-
l
ected, no customer ac
q
uisition costs are deferred
.
C
ustomer activation fees when collected, alon
g
with the
r
elated incremental direct customer ac
q
uisition amounts fo
r
customer e
q
ui
p
ment in the direct channel and
f
or rebate
s
and retailer commissions in the retail channel, u
p
to but no
t
exceedin
g
the activation
f
ee, are de
f
erred and amortize
d
over the estimated avera
g
e customer li
f
e. The amortization
o
f
de
f
erred customer e
q
ui
p
ment is recorded to direct cos
t
o
fg
oods sold. The amortization o
f
de
f
erred rebates i
s
r
ecorded as a reduction o
f
telephony services revenues
.
T
h
ea
m
o
rtiz
a
ti
o
n
of defe
rr
ed
r
e
t
a
il
e
r
co
mmi
ss
i
o
n
s
i
s
r
ecorded as marketin
g
expense. We estimate customer li
fe
b
y analyzin
g
historical trends and applyin
g
those trends t
o
f
uture periods. This customer li
f
e is solely used to amortize
de
f
erred activation
f
ees collected, alon
g
with the relate
d
i
ncremental customer ac
q
uisition costs. The customer li
fe
was 48 months in 2008, 44 months in 2009, and 38 month
s
i
n 2010. For 2011, the customer li
f
e will remain at 3
8
months based on consistent historical trends. The im
p
act
o
f
these chan
g
es to the customer li
f
e was not material t
o
t
he consolidated results o
f
o
p
erations.
In the United States, we char
g
ere
g
ulatory recovery
f
ees on a monthly basis to de
f
ray the costs associated wit
h
r
e
g
ulatory compliance and related liti
g
ation, E-911 com
-
p
liance, and to cover taxes that we are char
g
ed by the
s
u
pp
liers o
f
telecommunications services. In addition, w
e
char
g
e customers Federal Universal Service Fund (“USF”
)
fees. We reco
g
nize revenue on a
g
ross basis for USF and
re
l
a
t
ed fees
.W
e
r
eco
r
d
th
ese fees as
r
e
v
e
n
ue
wh
e
n
b
ill
ed.
All o
t
he
rt
a
x
es a
r
e
r
eco
r
ded o
n
a
n
e
t
basis
.
In addition, we char
g
e a disconnect
f
ee
f
or customers
who terminate their service
p
lan within the
f
irst twelv
e
m
o
nth
sofse
rvi
ce
.Di
sco
nn
ec
t
fees a
r
e
r
eco
r
ded as
r
e
v-
enue and are reco
g
nized at the time the customer termi-
nates service. Be
g
innin
g
in September 2010, we eliminate
d
t
h
ed
i
sco
nn
ec
t
fee fo
rn
e
w
cus
t
o
m
e
r
s.
Customer Equipment and Shipping Revenu
e
C
ustomer equipment and shipping revenues consist of
r
evenues from sales of customer e
q
ui
p
ment to wholesaler
s
or directl
y
to customers for replacement devices, or fo
r
up
g
radin
g
their device at the time of customer si
g
n-up fo
r
which we char
g
e an additional fee. In addition, customer
equipment and shippin
g
revenues include the fees that
customers are char
g
ed for shippin
g
their customer equip
-
ment to them.
C
ustomer equipment and shippin
g
revenue
s
i
nclude sales to our retailers, who subsequently resell thi
s
customer e
q
ui
p
ment to customers. Revenues were reduced
for payments to retailers and rebates to customers, wh
o
p
urchased their customer equipment throu
g
h these
r
etailers, to the extent o
f
customer equipment and shippin
g
r
evenues. In addition, we char
g
e an equipment recovery
f
e
e
f
or customers who terminate their service
p
lan within the
f
irst twelve months o
f
service. Equipment recovery
f
ees ar
e
r
ecorded as revenue and are reco
g
nized at the time th
e
customer terminates service. Be
g
innin
g
in September 2010
,
we eliminated the equipment recovery
f
ees
f
or ne
w
cus
t
o
m
e
r
s
.
Direct Cost of Telephony Service
s
Direct cost of telephon
y
services consists primaril
y
o
f
direct costs that we pa
y
to third parties in order to provid
e
t
elephony services. These costs include access and inter
-
connection char
g
es that we pay to other telephone compa-
nies to terminate domestic and international
p
hone calls o
n
t
he
p
ublic switched tele
p
hone network. In addition, these
costs include the cost to lease
p
hone numbers, to co-locate
i
n other tele
p
hone com
p
anies’
f
acilities, to
p
rovide enhance
d
emer
g
ency dialin
g
capabilities to transmit 911 calls, and to
p
rovide local number portability. These costs also includ
e
t
axes that we pay on telecommunications services
f
rom our
s
uppliers or are imposed by
g
overnment a
g
encies such as
Federal USF and royalties for use of third parties’ intellectual
p
roperty. These costs do not include indirect costs such as
depreciation and amortization, payroll, and facilities costs. Our
p
resentation o
f
direct cost o
f
telephony services may not b
e
com
p
arable to other similar com
p
anies.
Direct Cost of Goods Sol
d
Direct cost of goods sold consists primarily of costs
t
hat we incur when a customer si
g
ns up for our service.
T
hese costs include the cost of customer e
q
ui
p
ment for
customers who subscribe throu
g
h the direct sales channel
i
n excess of activation fees. In addition, these costs include
t
he amortization of deferred customer e
q
ui
p
ment, the cost
of shippin
g
and handlin
g
for customer equipment, the
i
nstallation manual that accom
p
anies the customer e
q
ui
p
-
ment, and the cost o
f
certain
p
romotions
.
Development Expense
s
C
osts for research, includin
g
predevelopment effort
s
p
rior to establishin
g
technolo
g
ical feasibility of software
ex
p
ected to be marketed, are ex
p
ensed as incurred.
Development costs are capitalized when technolo
g
ica
l
feasibility has been established and anticipated future rev-
enues support the recoverability of the capitalized amounts.
C
apitalization stops when the product is available for
g
en
-
eral release to customers. Due to the short time
p
eriod
b
etween achievin
g
technolo
g
ical
f
easibility and product
r
elease and the insi
g
ni
f
icant amount o
f
costs incurred dur
-
i
n
g
such periods, we have not capitalized any so
f
twar
e
develo
p
ment, and have ex
p
ensed these costs as incurred
.
T
hese costs would be included in sellin
g
,
g
eneral an
d
administrative ex
p
ense.
F
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