Amazon.com 2005 Annual Report Download - page 45

Information about operating expenses with and without stock-based compensation was as follows (in
millions):
Year ended December 31, 2005 Year ended December 31, 2004 Year ended December 31, 2003
As
Reported
Stock-Based
Compensation Net
As
Reported
Stock-Based
Compensation Net
As
Reported
Stock-Based
Compensation Net
Operating Expenses:
Fulfillment ................... $ 745 $(16) $ 729 $ 601 $ (10) $ 591 $495 $ (18) $477
Marketing ................... 198 (6) 192 162 (4) 158 128 (5) 123
Technology and content ........ 451 (45) 406 283 (32) 251 257 (50) 207
General and administrative ...... 166 (20) 146 124 (12) 112 104 (15) 89
Other operating expense ........ 47 — 47 (8) — (8) 3 — 3
Total operating expenses .... $1,607 $ (87) $1,520 $1,162 $ (58) $1,104 $987 $ (88) $899
Year-over-year Percentage Growth:
Fulfillment ................... 24% 23% 21% 24% 22% 22%
Marketing ................... 22 22 27 29 (1) (2)
Technology and content ........ 59 62 10 21 2 (4)
General and administrative ...... 34 30 20 27 8 12
Percent of Net Sales:
Fulfillment ................... 8.8% 8.6% 8.7% 8.5% 9.4% 9.1%
Marketing ................... 2.3 2.3 2.3 2.3 2.4 2.3
Technology and content ........ 5.3 4.8 4.1 3.6 4.9 3.9
General and administrative ...... 1.9 1.7 1.8 1.6 2.0 1.7
See Item 8 of Part I, “Financial Statements and Supplementary Data—Note 1—Description of Business and
Accounting Policies—Stock-Based Compensation.”
Fulfillment
The increase in fulfillment costs in absolute dollars during 2005 in comparison with the prior years relates to
variable costs corresponding with sales volume and inventory levels; our mix of product sales; payment
processing and related transaction costs, including mix of payment methods and costs from our guarantee for
certain third-party seller transactions; and costs from expanding fulfillment capacity. Fulfillment includes stock-
based compensation of $16 million, $10 million, and $18 million for 2005, 2004, and 2003.
Fulfillment costs as a percentage of net sales may vary due to several factors, such as payment processing
and related transaction costs, including those from our guarantee for certain third-party seller transactions, our
level of productivity and accuracy, changes in volume of units received and fulfilled, the extent we utilize
fulfillment services provided by third parties, and our ability to reduce customer service contacts per unit by
implementing improvements in our operations and enhancements to our customer self-service features. The mix
of product sales affects fulfillment costs per shipment based on variations in shape and weight of products we
sell. Additionally, because payment processing costs associated with third-party seller transactions are based on
the gross purchase price of underlying transactions, and payment processing and related transaction costs and our
A to Z Guarantee costs associated with these transactions are higher as a percentage of revenue versus our retail
sales, our increasing third-party sales have higher fulfillment costs as a percent of net sales.
We expanded our fulfillment capacity in 2005 and 2004 through gains in efficiencies as well as increases in
leased warehouse space. We plan to continue expanding our world-wide fulfillment capacity in order to meet
anticipated shipment volumes from sales of our own products as well as sales by third parties where we provide the
fulfillment. We expect absolute amounts spent in fulfillment and fulfillment-related cost of sales to increase over time.
Marketing
We direct customers to our websites primarily through a number of targeted online marketing channels,
such as our Associates and Syndicated Stores programs, sponsored search, portal advertising, e-mail campaigns,
37