Amazon.com 2006 Annual Report Download - page 65

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
inquiries from customers. Fulfillment costs also include amounts paid to third-parties that assist us in fulfillment
and customer service operations. Certain of our fulfillment-related costs that are incurred on behalf of other
businesses, such as Target Corporation, are classified as cost of sales rather than fulfillment.
Marketing
Marketing costs consist primarily of online advertising, including through our Associates program,
sponsored search, portal advertising, e-mail campaigns, and other initiatives. We pay commissions to participants
in our Associates program when their customer referrals result in product sales and classify such costs as
“Marketing” on our consolidated statements of operations.
We also participate in cooperative advertising arrangements with certain of our vendors, and other third
parties. To the extent co-operative marketing reimbursements decline in future periods, we may incur additional
expenses to continue certain promotions or elect to reduce or discontinue them.
Marketing expenses also consist of public relations expenditures; payroll and related expenses for personnel
engaged in marketing, business development, and selling activities; and to a lesser extent, traditional advertising
such as newspaper inserts.
Advertising and other promotional costs, which consist primarily of online advertising, are expensed as
incurred, and were $226 million, $168 million, and $141 million in 2006, 2005, and 2004. Prepaid advertising
costs were not significant at December 31, 2006 and 2005.
Technology and Content
Technology and content expenses consist principally of payroll and related expenses for employees involved
in, application development, category expansion, editorial content, buying, merchandising selection, and systems
support, as well as costs associated with the systems and telecommunications infrastructure.
Technology and content costs are expensed as incurred, except for certain costs relating to the development
of internal-use software and website development, including software used to upgrade and enhance our websites
and processes supporting our business, which are capitalized and amortized over two years.
General and Administrative
General and administrative expenses consist of payroll and related expenses for employees involved in
general corporate functions, including accounting, finance, tax, legal, and human relations, among others; costs
associated with use by these functions of facilities and equipment, such as depreciation expense and rent;
professional fees and litigation costs; and other general corporate costs.
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 Accounting Principles Board (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 exercise prices were set below market prices on the date of grant. Also, to the extent
stock awards were subject to an exchange offer, other modifications, or performance criteria, such awards were
subject to variable accounting treatment. To the extent stock awards were forfeited prior to vesting, the
corresponding previously recognized expense was reversed as an offset to operating expenses.
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