Expedia 2011 Annual Report Download - page 90

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Marketing Promotions
We periodically provide incentive offers to our customers to encourage booking of travel products and
services. Generally, our incentive offers are as follows:
Current Discount Offers. These promotions include dollar off discounts to be applied against current
purchases. We record the discounts as reduction in revenue at the date we record the corresponding revenue
transaction.
Inducement Offers. These promotions include discounts granted at the time of a current purchase to be
applied against a future qualifying purchase. We treat inducement offers as a reduction to revenue based on
estimated future redemption rates. We allocate the discount amount between the current purchase and the
potential future purchase based on our expected relative value of the transactions. We estimate our redemption
rates using our historical experience for similar inducement offers.
Concession Offers. These promotions include discounts to be applied against a future purchase to maintain
customer satisfaction. Upon issuance, we record these concession offers as a reduction to revenue based on
estimated future redemption rates. We estimate our redemption rates using our historical experience for
concession offers.
Loyalty and Points Based Offers. We offer certain internally administered traveler loyalty programs to our
customers, such as our Hotels.com Welcome Rewards®program and our Expedia.com Expedia Rewardstm.
Welcome Rewards offers travelers one free night at any Hotels.com partner property after that traveler stays 10
nights, subject to certain restrictions. Expedia Rewards enables participating travelers to earn points on all hotel,
flight, package and activities made on Expedia.com. As travelers accumulate points towards free travel products,
we record a liability for the estimated future cost of redemptions. We determine the future redemption obligation
based on factors that require significant judgment including: (i) the estimated cost of travel products to be
redeemed, and (ii) an estimated redemption rate based on the overall accumulation and usage of points towards
free travel products, which is determined through current and historical trends as well as statistical modeling
techniques.
Advertising Expense
We incur advertising expense consisting of offline costs, including television and radio advertising, and
online advertising expense to promote our brands. We expense the production costs associated with
advertisements in the period in which the advertisement first takes place. We expense the costs of
communicating the advertisement (e.g., television airtime) as incurred each time the advertisement is shown. For
the years ended December 31, 2011, 2010 and 2009, our advertising expense was $796 million, $694 million,
and $622 million, including amounts paid to TripAdvisor that were previously eliminated in consolidation. For
further information, see Note 4 — Discontinued Operations. As of December 31, 2011 and 2010, we had
$11 million and $14 million of prepaid marketing expenses included in prepaid expenses and other current assets.
Stock-Based Compensation
We measure and amortize the fair value of stock options and restricted stock units (“RSUs”) as follows:
Stock Options. We measure the value of stock options issued or modified, including unvested options
assumed in acquisitions, on the grant date (or modification or acquisition dates, if applicable) at fair value, using
the Black-Scholes option valuation model. The Black-Scholes model incorporates various assumptions including
expected volatility, expected term and risk-free interest rates. The expected volatility is based on historical
volatility of our common stock and other relevant factors. We base our expected term assumptions on our
historical experience and on the terms and conditions of the stock awards granted to employees. We amortize the
fair value, net of estimated forfeitures, over the remaining vesting term on a straight-line basis. The majority of
our stock options vest over four years.
F-15