eBay 2003 Annual Report Download - page 29

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infrastructure. The consistency of costs of net revenues as a percentage of net revenues was primarily due
to the oÅsetting impacts of PayPal's higher structural costs relating to payment processing and eBay's cost
savings as site operations costs grew at a slower rate than net revenues. Payment processing costs, which
consist of credit card interchange fees, bank charges, and other processing charges increased by
approximately $50.4 million in 2002. The increase in aggregate customer support and site operations costs
totaled $18.6 million in 2002.
Operating Expenses
Sales and Marketing
Percent Percent
2001 Change 2002 Change 2003
(in thousands, except percent changes)
Sales and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $253,474 38% $349,650 62% $567,565
As a percentage of net revenues ÏÏÏÏÏÏ 34% 29% 26%
Sales and marketing expenses consist primarily of advertising, tradeshow and other promotional costs,
employee compensation for our category development and marketing staÅ, certain trust and safety
programs and certain corporate overhead allocations.
Sales and marketing expenses increased in absolute dollars in 2003, but decreased as a percentage of
total net revenues due to the continued cost leverage in our business and the acquisition of PayPal, which
presently has a signiÑcantly lower sales and marketing requirement. Growth in advertising and marketing
costs as well as employee-related costs comprised the majority of the increases in absolute dollars.
Combined advertising and marketing costs increased $155.2 million in 2003. This increase was primarily
the result of our marketing programs directed towards our Internet marketing and national television
advertising campaigns as well as several category-focused print campaigns. Employee-related costs
increased by $34.0 million in 2003 as we continued to expand our international operations. Sales and
marketing expenses are expected to increase in absolute dollars, and to remain generally comparable as a
percentage of net revenues during 2004. In addition, our 2004 online marketing expenses will likely
increase because of increases in the volume of, and rates for, online advertising that we expect to purchase
in order to attract new customers and increase the activity on our websites.
The increase in sales and marketing expense in 2002, was primarily the result of year-over-year
increases in advertising costs of $54.7 million, referral fees paid to marketing partners of $12.6 million and
other aggregate expenses related to trade shows and professional fees of $10.5 million.
Product Development
Percent Percent
2001 Change 2002 Change 2003
(in thousands, except percent changes)
Product development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $75,288 39% $104,636 52% $159,315
As a percentage of net revenues ÏÏÏÏÏÏÏ 10% 9% 7%
Product development expenses consist primarily of employee compensation, payments to outside
contractors, depreciation on equipment used for development and certain corporate overhead allocations.
Product development expenses are net of required capitalization of major site and other product
development eÅorts, including the development of our ""V3'' platform architecture, global billing, seller
tools and payment gateway projects. These capitalized costs totaled $38.5 million in 2003, $15.5 million in
2002 and $6.7 million in 2001, and are reÖected as a cost of net revenues when amortized in future
periods. We anticipate that we will continue to devote signiÑcant resources to product development in the
future as we add new features and functionality to the eBay and PayPal platforms.
27