America Online 2009 Annual Report Download - page 52

Table of Contents
customer service costs and, historically, employee and related costs for our operated customer support call centers, as well as costs associated with customer
billing and collections, personnel and related overhead costs, depreciation and amortization of certain capitalized software and certain asset impairments.
Selling, general and administrative expenses consist primarily of marketing costs associated with subscriber acquisition marketing efforts and payments
to marketing partners for domestic AOL-brand access subscribers, personnel costs and facility costs related to our corporate and business support functions,
depreciation on property and equipment used in our corporate and business support functions, consulting fees, bad debt expense and legal fees.
Our costs of revenues and selling, general and administrative expenses declined significantly for the periods presented, driven by cost reduction
initiatives we have undertaken as a result of the strategic focus on advertising. The decisions made in connection with these cost reduction initiatives included
ceasing to actively market our subscription access service, closing and outsourcing our customer support and call center functions, entering into variable
network cost agreements as opposed to fixed cost agreements to reduce costs in response to the declining access subscriber base, reducing headcount through
restructuring actions taken during the periods presented and leveraging non-United States personnel in a cost-effective manner.
Costs of Revenues
Costs of revenues decreased 17% to $1,898.5 million for the year ended December 31, 2009, as compared to $2,278.4 million for the year ended
December 31, 2008. The primary drivers of the decrease in costs of revenues were decreases in TAC, network-related costs, product development and certain
other costs of revenues (as discussed further below). TAC decreased 17% to $567.8 million for the year ended December 31, 2009, as compared to $687.0
million for the year ended December 31, 2008, due to the decrease in advertising revenues on the Third Party Network and, to a lesser extent, declines in
product distribution costs related to an amendment to a product distribution agreement in the third quarter of 2008. Network-related costs declined by $85.2
million for the year ended December 31, 2009 due to declines in narrowband network and other network-related costs related to cost reduction initiatives
undertaken in response to the decline in domestic AOL-brand access subscribers. Product development costs declined by $65.6 million for the year ended
December 31, 2009 due to reduced headcount and reduced product development efforts. Other costs of revenues declines for the year ended December 31,
2009 as compared to the year ended December 31, 2008 included declines in outside services costs of $47.4 million as a result of reduced consulting, lower
outsourced call center expenses and the transition to internally developed ad serving technology beginning in the first quarter of 2009. Depreciation and
amortization expense declined by $41.3 million, which includes declines in depreciation of capitalized software associated with our subscription access
service. We also had declines in customer billing and collection costs of $27.6 million for the year ended December 31, 2009 due to the decline in domestic
AOL-brand access subscribers. Partially offsetting the decreases described above was an increase of $48.4 million in personnel costs for the year ended
December 31, 2009, resulting from the decision not to pay most annual bonuses for 2008.
Costs of revenues as a percentage of revenues were 58% and 55% for the years ended December 31, 2009 and 2008, respectively. While we undertook
a number of cost reduction initiatives in response to the decline in revenues, the increase in costs of revenues as a percentage of revenues was partially driven
by the decision not to pay most annual bonuses for 2008. The remaining increase was a result of declines in our subscription revenues and advertising
revenues exceeding the decline in costs to deliver such revenues.
Costs of revenues decreased 14% to $2,278.4 million for the year ended December 31, 2008, as compared to $2,652.6 million for the year ended
December 31, 2007. The sale of our German access service business in the first quarter of 2007 contributed $78 million of the decrease. Excluding that
decline, the primary drivers of the decrease in costs of revenues were a decrease in network-related costs, product development and certain other costs of
revenues. Network-related costs declined by $149 million, which included declines in narrowband network costs of $56 million due to the decline in access
service subscribers, a decrease in personnel and related overhead costs to support the network of $43 million resulting from reduced headcount, declines in
depreciation expense associated with network equipment of $29 million and other declines of $26 million related to the decline in access service subscribers.
Product development expenses declined $32 million due to a decrease in
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