Yahoo 2015 Annual Report Download - page 104

sites. Search revenue is recognized based on Paid Clicks. A Paid Click occurs when an end-user clicks
on a sponsored listing on Yahoo Properties and Affiliate sites for which an advertiser pays on a per
click basis. The Company also sells search traffic to certain customers where it does not have a direct
relationship with the advertiser, in which case revenue is also recognized based on Paid Clicks. In the
Company’s Search Agreement with Microsoft, the Company agreed to request paid search results
from Microsoft for 51 percent of search queries originating from desktop computers accessing Yahoo
Properties and Affiliate sites (the “Volume Commitment”). There is no such Volume Commitment for
traffic generated on mobile devices.
Previously under the Search Agreement, the Company was entitled to receive a percentage of the
revenue (the “Revenue Share Rate”) generated from Microsoft’s services on Yahoo Properties and on
Affiliate sites after deduction of the Affiliate sites’ share of revenue and certain Microsoft costs. The
Revenue Share Rate was 88 percent for the first five years of the Search Agreement and then
increased to 90 percent on February 23, 2015. Pursuant to the Eleventh Amendment to the Search
Agreement, the Revenue Share Rate increased to 93 percent, but Microsoft now receives its 7
percent revenue share before deduction of the Affiliate site’s share of revenue. The Affiliate site’s
share of revenue is deducted from the Company’s 93 percent Revenue Share Rate. As the Company
is not the primary obligor in the arrangement with the advertisers and publishers, the amounts paid
to Affiliates are recorded as a reduction of revenue. See Note 19—“Search Agreement with Microsoft
Corporation” for a description of the Search Agreement with Microsoft.
The Company recognizes search revenue generated from mobile ads served through Yahoo Gemini
to Yahoo Properties and Affiliate sites. The search revenue generated from mobile ads served
through Yahoo Gemini that involve traffic supplied by Affiliates is reported gross of the TAC paid to
Affiliates (reported as cost of revenue—TAC) as the Company performs the search service for
advertisers. Accordingly, the Company is considered the primary obligor to the advertisers who are
the customers of the search advertising service. In October 2015, Yahoo reached an agreement with
Google that provides Yahoo with additional flexibility to choose among suppliers of search results
and ads. Google’s offerings complement the search services provided by Microsoft and Yahoo Gemini
(Yahoo’s marketplace for search and native advertising). The Company also generates search
revenue from a revenue sharing arrangement with Yahoo Japan for search technology and services
and records the related revenue as reported.
The Company recognizes revenue from display advertising on Yahoo Properties and Affiliate sites as
impressions of or clicks on display advertisements are delivered. Impressions are delivered when a
sold advertisement appears in pages viewed by users. Clicks are delivered when a user clicks on a
native advertisement. Arrangements for these services generally have terms of up to one year and in
some cases the terms may be up to three years. For display advertising on Affiliate sites, the
Company pays Affiliates from the revenue generated from the display of these advertisements on the
Affiliate sites. Traffic acquisition costs (“TAC”) are payments made to Affiliates and payments made
to companies that direct consumer and business traffic to Yahoo Properties. The display revenue
derived from these arrangements that involve traffic supplied by Affiliates is reported gross of the
TAC paid to Affiliates (reported as cost of revenue—TAC) when the Company is the primary obligor
to the advertisers who are the customers of the display advertising service.
From time-to-time, the Company may offer customized display advertising solutions to advertisers.
These customized display advertising solutions combine the Company’s standard display advertising
with customized content, customer insights, and campaign analysis which are separate units of
accounting. Due to the unique nature of these products, the Company may not be able to establish
selling prices based on historical stand-alone sales or third-party evidence; therefore, the Company
may use its best estimate to establish selling prices. The Company establishes best estimates within a
range of selling prices considering multiple factors including, but not limited to, class of advertiser,
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