Amazon.com 2000 Annual Report Download - page 50

co-branded sections of the Amazon.com Web site and by other promotional services, such as advertising
placements and customer referrals. Generally, the fair value of consideration received, whether in cash, equity
securities, or a combination thereof, is measured at the commencement of the service term, and any subsequent
appreciation or decline in the fair value of the securities received does not impact the amount of revenue
recognized over the term of the agreement. The Company generally recognizes revenue from these services on
a straight-line basis over the period during which the Company performs services under these agreements.
Subsequent appreciation or decline in the fair value of equity securities received in connection with services
agreements is accounted for in accordance with the Company’s Investment policies, as described in
‘‘Investments.’’ For securities received from public companies, the Company generally determines fair value
based on the quoted market price at the time the Company enters into the underlying agreement, and adjusts
such market price appropriately if significant restrictions on marketability exist. As an observable market price
does not exist for equity securities of private companies, estimates of fair value of such securities are more
subjective than for securities of public companies. For significant transactions involving equity securities in
private companies, the Company obtains and considers independent, third party valuations where appropriate.
Such valuations use a variety of methodologies to estimate fair value, including comparing the security with
securities of publicly traded companies in similar lines of business, applying price multiples to estimated future
operating results for the private company, and then also estimating discounted cash flows for that company.
These valuations also reduce the fair value to account for restrictions on control and marketability where
appropriate. Using these valuations and other information available to the Company, such as the Company’s
knowledge of the industry and knowledge of specific information about the investee, the Company determines
the estimated fair value of the securities received. To the extent that equity securities received or modified after
March 16, 2000 are subject to forfeiture or vesting provisions and no significant performance commitment
exists upon signing of the agreements, the fair value of the securities is determined as of the date the respective
forfeiture or vesting provisions lapse.
Revenue is recognized over the period in which the service is performed (generally one to three years).
During the years ended December 31, 2000 and 1999, the Company recorded $167 million and $9 million,
respectively, of service revenue from strategic partners. Service revenues for the year ended December 31,
2000 included sales of inventory, at cost, to Toysrus.com of $29 million. For the year ended December 31,
2000, service revenue recognized during the period consisted of consideration, either received during the period
or amortized from previously unearned revenue, in the form of $88 million of cash, $73 million of equity
securities of public companies and $6 million of equity securities of private companies.
Cost of Sales
Cost of sales consists of the purchase price of products sold, inbound and outbound shipping charges,
packaging supplies and costs associated with service revenues and marketplace business. Outbound shipping
charges and the cost of tangible supplies used to package products for shipment to customers totaled
$340 million, $227 million, and $76 million in 2000, 1999, and 1998, respectively.
Marketing and Fulfillment
Marketing costs include advertising, public relations, and other promotional costs including payroll and
related expenses for personnel engaged in marketing activities. Such costs are expensed as incurred, except for
advance payments under marketing-related contracts, which are deferred and recognized on a straight-line basis
over the life of the underlying contract. The prepaid marketing balance was $6 million and $5 million as of
December 31, 2000 and 1999. For the years ended December 31, 2000, 1999, and 1998, the Company incurred
marketing expense of $180 million, $176 million, and $67 million, respectively, which includes advertising
expenses of $130 million, $141 million and $54 million for the same periods.
AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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