Amazon.com 2005 Annual Report Download - page 46

and other initiatives. Our marketing expenses are largely variable, based on growth in sales and changes in rates.
To the extent there is increased or decreased competition for these traffic sources, or to the extent our mix of
these channels shifts, we would expect to see a corresponding change in our marketing expense. Marketing
includes stock-based compensation of $6 million, $4 million, and $5 million for 2005, 2004, and 2003.
Marketing costs increased in absolute terms in 2005 compared to 2004 and 2003. These increases
correspond with revenue growth as we utilized variable online marketing channels, such as our Associates
program, sponsored search, and other variable marketing initiatives.
While costs associated with free shipping are not included in marketing expense, we view free shipping
offers as an effective worldwide marketing tool, and intend to continue offering them indefinitely. We expect
absolute amounts spent in marketing to increase over time.
Technology and Content
We significantly increased our spending in technology and content in 2005, which corresponds with our
focus on several technology initiatives. We have added a significant number of computer scientists and software
engineers to our staff so that we can continue to enhance the customer experience on our websites and those
websites powered by us, improve our process efficiency, and invest in several areas of technology including
seller platforms, search, web services, and digital initiatives. We believe these initiatives that we are funding are
important to our longer-term success. See Item 7 of Part II, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Overview” for a discussion of how management views the competitive
landscape and importance of innovation. We intend to continue investing in areas of technology and content as
we continue to add computer scientists and software engineers to our staff, and expect absolute amounts spent in
technology and content to increase over time. Technology and content includes stock-based compensation of $45
million, $32 million, and $50 million for 2005, 2004, and 2003.
For the years ended 2005, 2004, and 2003, we capitalized $90 million (including $11 million of stock-based
compensation), $44 million, and $30 million of costs associated with internal-use software and website
development, which are partially offset by amortization of previously capitalized amounts of $50 million, $30
million, and $24 million. Fixed assets associated with capitalized internal-use software, content, and website
development, net of accumulated depreciation, were $87 million and $47 million at December 31, 2005 and
2004. Capitalized internal-use software is amortized over a useful life of two years.
A significant majority of our technology costs are incurred in the U.S. and most of them are allocated to our
North America segment.
General and Administrative
The increase in spending in general and administrative in 2005 compared to 2004 and 2003 is primarily due
to increases in payroll and related expenses, professional fees, and legal costs, offset by a $12 million credit in
2005 for actual and expected reimbursement by an insurer of certain legal costs previously incurred by us.
General and administrative includes stock-based compensation of $20 million, $12 million, and $15 million for
2005, 2004, and 2003. We expect absolute amounts spent in general and administrative to increase over time.
Stock-Based Compensation
Prior to January 1, 2005, we accounted for stock-based awards under the intrinsic value method, which
followed the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. The intrinsic value method of accounting resulted in compensation
expense for restricted stock and restricted stock units at their estimated fair value on date of grant based on the
number of shares granted and the quoted price of our common stock, and for stock options to the extent option
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