Yahoo 2013 Annual Report Download - page 49

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(3) The net cost reimbursements from Microsoft pursuant to the Search Agreement are primarily included in
global operating costs. Operating costs and expenses consist of cost of revenue—TAC; cost of revenue—
other; sales and marketing, product development; general and administrative; amortization of intangible
assets; and restructuring charges, net. Cost of revenue—other consists of bandwidth costs and other expenses
associated with the production and usage of Yahoo Properties, including amortization of acquired intellectual
property rights and developed technology.
Revenue
We generate revenue principally from display and search advertising on Yahoo Properties and Affiliate sites,
with the majority of our revenue coming from advertising on Yahoo Properties. Our margins on revenue from
Yahoo Properties advertising are higher than our margins on revenue from display and search advertising on
Affiliate sites as we pay TAC to our Affiliates. Additionally, we generate revenue from other sources including
listings-based services, facilitating commercial transactions, royalties, and consumer and business fee-based
services.
With the significant platform shift to mobile devices, including smartphones and tablets, we have increased our
strategic focus on mobile products and mobile ad formats. We have hired engineering and technical talent to help
us accelerate our efforts in mobile development, and introduced new mobile apps and refreshed the user
experience on mobile across a number of Yahoo Properties, including News, Sports and Finance. We are seeing
an increase in the number of our daily and monthly mobile users as a result of these product improvements. The
monetization of these mobile products is driven primarily through advertisements and we are committed to
continuing to develop and deliver innovative ad formats on mobile. While we see a significant opportunity for
monetization on mobile, during 2013 and at present our revenue from mobile is not material.
Display Revenue
Display revenue is generated from the display of graphical and non-graphical advertisements (“display
advertising”). We earn revenue from guaranteed or “premium” display advertising by delivering advertisements
according to advertisers’ specified criteria, such as number of impressions during a fixed period on a specific
placement. Also, we earn revenue from non-guaranteed or “non-premium” display advertising by delivering
advertisements on a preemptible basis.
We recognize revenue from display advertising on Yahoo Properties and Affiliate sites as impressions are
delivered. Impressions are delivered when a sold advertisement appears in pages viewed by users. Arrangements
for these services generally have terms of up to one year. For display advertising on Affiliate sites, we pay TAC
to Affiliates for the revenue generated from the display of these advertisements on the Affiliate sites. The display
revenue derived from these arrangements that involve traffic supplied by Affiliates is reported on a gross basis
(before deducting the TAC paid to Affiliates) as we are the primary obligor to the advertisers who are the
customers of the display advertising service.
Display revenue for the year ended December 31, 2013 decreased by 9 percent, compared to 2012. This decrease
was primarily attributable to a decline in number of ads that we sold on a premium basis on Yahoo Properties in
the Americas region.
Display revenue for the year ended December 31, 2012 decreased by 1 percent, compared to 2011. This decrease
can be attributed to a decline in display revenue on Yahoo Properties in the EMEA region.
Search Revenue
Search revenue is generated from clicks on text-based links to advertisers’ Websites that appear primarily on
search results pages (“search advertising”). We recognize revenue from search advertising on Yahoo Properties
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