America Online 2010 Annual Report Download - page 52

Table of Contents
AOL INC.
PART II—ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
generally TAC, which consists of costs incurred through arrangements in which we acquire third-party online advertising inventory for resale and
arrangements whereby partners distribute our free products or services or otherwise direct traffic to AOL Properties. TAC arrangements have a number of
different economic structures, the most common of which are: payments based on a cost-per-thousand impressions or based on a percentage of the ultimate
advertising revenues generated from the advertising inventory acquired for resale, payments for direct traffic delivered to AOL Properties priced on a per click
basis (e.g., search engine marketing fees) and payments to partners in exchange for distributing our products to their users (e.g., agreements with computer
manufacturers to distribute our toolbar or a co-branded web portal on computers shipped to end users). These arrangements can be on a fixed-fee basis (which
often carry reciprocal performance guarantees by the counterparty), on a variable basis or, in some cases, a combination of the two.
Costs of revenues decreased $472.6 million for the year ended December 31, 2010 as compared to the year ended December 31, 2009. The primary
drivers of the decrease in costs of revenues were decreases in TAC, personnel costs and network-related costs. TAC decreased by $269.1 million for the year
ended December 31, 2010 as compared to the year ended December 31, 2009. TAC was impacted by the decrease in advertising revenues, which drove a
decline of $165.4 million primarily due to lower variable revenue share payments to our publishing partners for the year ended December 31, 2010 as
compared to the year ended December 31, 2009. In addition, there were declines from a significant product distribution agreement, whereby payments
previously were based on the number of personal computers shipped. Under the agreement, which was amended in the first quarter of 2010, new distributions
have ceased and payments are now based on a percentage of the advertising revenue we earn on the associated co-branded website. As a result, TAC
associated with this agreement declined by $94.1 million for the year ended December 31, 2010 as compared to the year ended December 31, 2009. Personnel
costs, including salaries and bonuses, declined by $103.5 million for the year ended December 31, 2010 as compared to the year ended December 31, 2009,
due to reduced headcount as a result of our 2009 restructuring initiatives. The declines related to our restructuring initiatives were partially offset by an
increase of $33.2 million related to the impact of hiring new employees in areas of strategic focus and an increase of $23.4 million as we had lower
capitalization of personnel costs in 2010 due to fewer product development projects qualifying for capitalization. Network-related costs declined by $76.4
million for the year ended December 31, 2010 as compared to the year ended December 31, 2009, due to declines in depreciation expense on network
equipment due to a higher percentage of in-service assets being fully depreciated and declines in narrowband network and other network-related costs,
partially due to terminated and renegotiated maintenance agreements and the decline in domestic AOL-brand access subscribers. Costs of revenues also
included a decrease in non-network depreciation and amortization of $20.3 million and a decrease in asset impairment charges of $4.1 million related to $10.3
million recorded in 2009, partially offset by an impairment charge of $6.2 million recorded in the third quarter of 2010. This charge was related to the
writedown of Pacific Corporate Park assets in connection with the sale of the property. Additionally, the decreases discussed above were partially offset by
increased content costs of $16.3 million mainly related to Patch.
Costs of revenues decreased $379.9 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008. TAC decreased
by $119.1 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008 due to the decrease in advertising revenues 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 $84.4 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008, 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 $65.5 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008,
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
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