February14,2001EXPEDIAINC(EXPE)QuarterlyReport(SECform10-Q)Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperationsTheinformationcontainedinthissectionhasbeenderivedfromourunauditedconsolidatedfinancialstatementsandshouldbereadtogetherwithourunauditedconsolidatedfinancialstatementsandrelatednotesincludedelsewhereinthis10-Q.Thediscussioncontainsforward-lookingstatementsthatinvolverisksanduncertainties.Ouractualresultsmaydiffermateriallyfromthoseexpressedorimpliedintheseforward-lookingstatementsasaresultofvariousfactors,includingthosesetforthunderthesectionentitled"RiskFactors"inourRegistrationStatementonFormS-1(SECFileNo.333-40934)filedonJuly21,2000.OverviewPriortoOctober1,1999,weconductedbusinessasanoperatingunitofMicrosoft.OurstatementsofoperationsandbalancesheetswerederivedfromthehistoricbooksandrecordsofMicrosoftandincludedcostallocationsfromMicrosoft.WebelievethattheallocatedamountsarereasonableandreflectiveoftheCompany'sproportionateshareofsuchexpensesandarenotmateriallydifferentfromthosethatwouldhavebeenincurredonastand-alonebasis.OnOctober1,1999,theeffectivedateofthecontributionagreement,MicrosoftcontributedassetsinexchangeforcommonstockofExpedia,Inc.Fromthatdateforward,ourbooksandrecordshavebeenmaintainedseparatelyfromMicrosoft's.Ouragencyrevenuesarederivedfromairlinetickettransactionsandhotelandcarrentalreservations.Airlinetickettransactionsmakeupthesubstantialmajorityoftheserevenues.Thisrevenuerepresentsbothcommissionsandfeesrelatedtothesaleofairlinetickets.AirlineticketcommissionsaredeterminedbyindividualairlinesandbilledandcollectedthroughtheAirlineReportingCorporation,anindustry-administeredclearinghouse.Asiscustomaryinthetravelindustry,travelsuppliersarenotobligatedtopayanyspecifiedcommissionrateforbookingsmadethroughourwebsites.Werecognizetransactionrevenuesonairtransactionswhenthereservationismadeandsecuredbyacreditcard.Werecognizetransactionrevenuesonhotel,cruiseandcarrentalreservationseitheronreceiptofcommissionsoronnotificationofentitlementbyathirdparty.DuringthequarterendedDecember31,2000,webegantoearnExpressFeerevenueswherewechargecustomersforprocessinganddeliveringapaperticketviaexpressmailiftheychoosenottohaveanelectronicticket.Theserevenuesarerecordedasagencyrevenues.Ourmerchantrevenueisderivedfromtransactionswherewearethemerchantofrecordanddeterminetheticketpriceorroomrate.Agreementswithhotelsforblocksofroomsthatwesellgeneratethemajorityofourtotalmerchantrevenues.HotelPriceMatcherandFlightPriceMatchergeneratetheremainderofthemerchantrevenue.Forallmerchanttransactionstherevenueandrelatedcostofsalesarerecordedatgrossamounts.Ifthereservationisnon-cancellable,revenueisrecordedwhenthereservationismade.Otherwise,revenueisdeferreduntiltheactualflightorstayoccurs.ManagementhasmadethedecisiontoterminatetheHotelPriceMatcherprograminFebruary2001.DuringthethreeandsixmonthperiodsendedDecember31,2000,revenuefromthisproductwas$56,000and$244,000,respectively.InDecember2000,weintroducedtheExpediaPackagesbusiness.Thisproductenablescustomerstocustomizetheirtripbyselectingtheiritinerary,airlineandhotelofchoiceallforonepackagedprice.TheExpediaPackagesconsistofacombinationofagencyandmerchantrevenues.Additionally,wederiverevenuesfromthesalesofadvertisementsonourwebsitesandlistingrevenuesfromourVacationSpotwebsite.Werecognizeadvertisingrevenueseither...
