eBay 2007 Annual Report Download - page 65

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Cost of Net Revenues
2005 2006 2007
(In thousands, except percentages)
Cost of net revenues . ............................. $818,104 $1,256,792 $1,762,972
As a percentage of net revenues ..................... 18.0% 21.1% 23.0%
Cost of net revenues consists primarily of costs associated with payment processing, customer support and site
operations, and Skype telecommunications costs. Significant cost components include bank transaction fees, credit
card interchange, assessments, other payment processing costs, employee compensation, contractor costs, facilities
costs for our customer support and site operations, depreciation of equipment, amortization of capitalized product
development costs and amortization of acquired developed technology.
The increase in cost of net revenues of $506.2 million during 2007 was due primarily to an increase in payment
processing costs, Skype telecommunication costs, customer support and site operations costs. Payment processing
costs increased approximately $200.1 million, or 40%, in 2007 compared to the prior year due primarily to the 33%
increase in PayPal’s net TPV, an increase in the proportion of customer transactions funded with credit cards, which
have higher associated processing costs, and increased Marketplaces transaction activity. Skype telecommunica-
tions costs increased by $86.2 million, or 64%, in 2007 compared to the prior year due to the increase of SkypeOut
minutes. Aggregate customer support and site operations costs increased approximately $153.1 million, or 26%, in
2007 compared to the prior year due to the development and expansion of our customer support and site operations
infrastructure to support our growth in transaction volume as demonstrated through the increases in both GMVand
net TPV. Cost of net revenues increased as a percentage of net revenues primarily as a result of the growth of our
lower gross margin businesses, particularly PayPal and Skype.
The increase in cost of net revenues of $438.7 million during 2006 was due primarily to an increase in payment
processing costs, Skype telecommunication costs, the development and expansion of our customer support and site
operations infrastructure, and the effect of stock-based compensation expense related to equity awards and
employee stock purchases under FAS 123(R). Payment processing costs increased approximately $114.5 million,
or 30%, in 2006 compared to the prior year, due primarily to the 37% increase in PayPal’s net TPV and increases in
the proportion of customer transactions funded with credit cards. Skype telecommunications costs increased by
$105.5 million in 2006 compared to the prior year due to the inclusion of a full year of Skype’s costs. Aggregate
customer support and site operations costs (including stock-based compensation) increased approximately
$202.8 million, or 52%, in 2006 compared to the prior year, due primarily to expanding our global site and
support infrastructure. Stock-based compensation expense of $33.0 million was included in cost of revenues in 2006
compared to $1.9 million in 2005. Stock-based compensation expense increased due to our implementation of
FAS 123(R) at the beginning of 2006.
Costs of net revenues are expected to increase in total and as a percentage of net revenues during 2008 due
primarily to growth in PayPal and Skype, each of which is growing faster and has a lower gross margin than
Marketplaces.
Sales and Marketing
2005 2006 2007
(in thousands, except percentages)
Salesandmarketing............................. $1,185,929 $1,619,857 $1,925,393
As a percentage of net revenues .................... 26.1% 27.1% 25.1%
Sales and marketing expenses consist primarily of advertising costs, marketing programs and employee
compensation for sales and marketing staff.
Sales and marketing expenses increased in total due to our continued investment in retaining and growing our
active user base. We direct customers to our websites primarily through a number of online marketing channels such
as sponsored search, portal advertising, email campaigns and other initiatives. Our marketing expenses are largely
variable, based on growth in sales and changes in rates. Growth in advertising and marketing costs, as well as
employee-related costs, comprised the majority of the increases. Combined advertising and marketing costs
55