Amazon.com 2007 Annual Report Download - page 64

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
customer service centers on behalf of other businesses. Shipping charges to receive products from our suppliers
are included in our inventory, and recognized as “Cost of sales” upon sale of products to our customers. Payment
processing and related transaction costs, including those associated with seller transactions, are classified in
“Fulfillment” on our consolidated statements of operations.
Vendor Agreements
We have agreements to receive cash consideration from certain of our vendors, including rebates and
cooperative marketing reimbursements. We generally presume amounts received from our vendors are a
reduction of the prices we pay for their products and, therefore, we reflect such amounts as either a reduction of
“Cost of sales” on our consolidated statements of operations, or, if the product inventory is still on hand, as a
reduction of the carrying value of inventory. Vendor rebates are typically dependent upon reaching minimum
purchase thresholds. We evaluate the likelihood of reaching purchase thresholds using past experience and
current year forecasts. When volume rebates can be reasonably estimated, we record a portion of the rebate as we
make progress towards the purchase threshold.
When we receive direct reimbursements for costs incurred by us in advertising the vendor’s product or
service, the amount we receive is recorded as an offset to “Marketing” on our consolidated statements of
operations.
Fulfillment
Fulfillment costs represent those costs incurred in operating and staffing our fulfillment and customer
service centers, including costs attributable to buying, receiving, inspecting, and warehousing inventories;
picking, packaging, and preparing customer orders for shipment; payment processing and related transaction
costs, including costs associated with our guarantee for certain seller transactions; and responding to 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 $306 million, $226 million, and $168 million in 2007, 2006, and 2005. Prepaid advertising
costs were not significant at December 31, 2007 and 2006.
56