| INFOSPACE INC ITEM 1A Risk Factors FACTORS AFFECTING OUR OPERATING RESULTS, BUSINESS PROSPECTS AND MARKET PRICE OF STOCK RISKS RELATED TO OUR BUSINESS A substantial portion of our revenues is dependent on our relationships with a small number of distribution partners who distribute our products and services, the loss of which would have a material adverse effect on our financial results |
| We rely on our relationships with distribution partners, including mobile operators, Web portals and software application providers, for distribution of our products and services |
| We generated approximately 46prca of our total revenues through relationships with our top five distribution partners for the year ended December 31, 2005 |
| We cannot assure you that these relationships will continue or result in benefits to us that outweigh the cost of the relationships |
| One of our biggest challenges is providing our distribution partners with relevant products and services at competitive prices in rapidly evolving markets |
| In particular, our mobile operator distribution partners, including our largest distribution partner which represented approximately 28prca of our total company revenues in 2005, may seek financial or competitive advantages by licensing content directly from our content providers, such as record labels, thereby reducing or eliminating the need for our products and services related to such content |
| In addition, other distribution partners may create their own products and services or also seek to license products and services from others that compete with or replace the products and services that we provide |
| Also, many of our search distribution partners are developing companies with limited operating histories and evolving business models that may prove unsuccessful even if our products and services are relevant and our prices competitive |
| If we are not able to maintain our relationships with these distribution partners, our financial results would be materially adversely affected |
| Our mobile operator distribution partner agreements generally come up for renewal on an annual basis, and our agreements with most of our online search and directory distribution partners come up for renewal in 2006 and 2007 |
| Such agreements may be terminated or may not be renewed or replaced on favorable terms, which could adversely impact our financial results |
| In particular, we are experiencing pricing pressure in our mobile business, and competition is increasing for consumer traffic in the search and directory markets |
| We anticipate that the cost of our content for our mobile products and services and the cost of our revenue sharing arrangements with our search distribution partners will increase as revenues grow and may increase on a relative basis compared to revenues to the extent that there are changes to existing arrangements or we enter into new arrangements on less favorable terms |
| Failure by us or our distribution partners to comply with the requirements imposed by our content providers relating to the distribution of content may require us to modify, terminate or not enter into certain distribution relationships, may cause the content provider to terminate its agreement with us, and may expose us to liability |
| If our search distribution partners or we fail to meet the requirements and guidelines promulgated by our major search content providers, we may not be able to continue to provide content to such distribution partners, we may be liable to such content providers for certain damages they may suffer, and the content provider may terminate its agreement with us |
| Certain of our search content providers have notified us that we were not in compliance with respect to our use of their content or the redistribution of their content by our distribution partners |
| We have been able to cure such breaches, however, there can be no assurance that if we breach our agreements in the future, we will be able to cure the breach |
| Our agreements with some of our major content providers give such content providers the ability to terminate their agreements with us immediately in the case of certain breaches, regardless of whether such breaches could be cured |
| Additionally, agreements with our search content providers may be amended from time to time by both parties or may be subject to different interpretation by either party, which may require the rights we grant to our search distribution partners to be modified to comply with such amendments or interpretations |
| The agreements 11 ______________________________________________________________________ [36]Table of Contents with our search distribution partners generally provide that we may modify the rights we grant to them to avoid being in conflict with the agreements with our search content providers |
| For example, recent changes by some of our search content providers such as Yahoo! |
| and Google to their approval processes and guidelines with respect to downloadable applications through which content is provided to end users have resulted in some of our search distribution partners changing the manner in which they distribute their downloadable applications to end users to meet the new approval processes and guidelines |
| Other distribution partners have not been able to meet the new guidelines, and as a result we no longer provide the applicable content or any content, as the case may be, to such distribution partners or certain of their downloadable applications |
| Also, our search content providers have approval processes with respect to the redistribution of their content by our distribution partners |
| Some of our distribution partners that redistribute such content have not complied with such approval processes, and we no longer provide the applicable content to such partners or such partners no longer redistribute the content |
| If our search content providers impose additional restrictions, some of our distribution partners may be required to make changes to the manner in which they distribute their downloadable applications or may be required to cease redistributing the content |
| If such distribution partners are unable to meet the new restrictions, we may need to terminate our agreement with such distribution partners or no longer provide the applicable content to such partners |
| The loss or reduction of content that we can make available to our distribution partners, as well as the termination of distribution or content provider agreements, for the reasons stated above, could have a material adverse effect on our financial results |
| A substantial portion of our revenues is attributable to a small number of customers, the loss of any one of which would harm our financial results |
| We derive a substantial portion of our revenues from a small number of customers |
| We expect that this concentration will continue in the foreseeable future |
| and Google each accounted for more than 10prca of our revenues in 2005 |
| Our principal agreements with these customers expire in 2006, 2008 and 2009, respectively |
| Also, some of these customers are competitors of each other, and the way we do business with one of them may not be acceptable to one or some of their competitors with whom we also do business, which may result in such competitors not renewing their agreements with us on favorable terms |
| If we lose any of these customers, are unable to renew the contracts on favorable terms, or any of these customers are unwilling to pay us amounts that they owe us, or dispute amounts they owe us or have paid to us, our financial results would materially suffer |
| Additionally, under certain of these agreements, we are required to generate a minimum amount of revenue |
| If we do not reach these minimums we may be required to compensate our partners for the difference between the guarantee and the shortfall |
| If such shortfall is substantial, it could have a material adverse effect on our financial results |
| Our strategic direction is evolving, which could negatively affect our future results |
| Since inception, our business model has evolved and is likely to continue to evolve as we refine our product offerings and market focus |
| Since 2003, we have focused on our search and directory and mobile products and services |
| We continue to evaluate opportunities in a rapidly evolving market |
| We plan to leverage our intellectual capital and core competencies to focus more on mobile applications, products and services |
| As part of this plan, in early 2006, we realigned our operations to a functional organization structure, eliminating the separate business units of Mobile and Search & Directory, and plan to expand our mobile media offerings, leverage our search and directory technology and applications for mobile devices, and expand our distribution channels |
| These changes to our business may not prove successful in the short or long term and may negatively impact our financial results |
| In addition, we have in the past and may in the future find it advisable to streamline operations and reduce expenses, including, without limitation, such measures as reductions in the workforce, reductions in discretionary spending, reductions in capital expenditures as well as other steps to reduce expenses |
| Effecting any such 12 ______________________________________________________________________ [37]Table of Contents restructuring would likely place significant strains on management and our operational, financial, employee and other resources |
| In addition, any such restructuring could impair our development, marketing, sales and customer support efforts or alter our product development plans |
| We have a history of incurring net losses, we may incur net losses in the future, and we may not be able to sustain profitability on a quarterly or annual basis |
| We have incurred net losses on an annual basis from our inception through December 31, 2003 |
| As of December 31, 2005, we had an accumulated deficit of dlra1dtta0 billion |
| We may incur net losses in the future including from the impairment of goodwill or other intangible assets, losses from acquisitions, restructuring charges or stock option expensing |
| Also, we expect to increase our operating expenditures to fund certain initiatives including new products and services and new distribution channels, such as a mobile direct to consumer business |
| We must therefore generate revenues sufficient to offset these expenses in order for us to be profitable |
| While we achieved profitability in each of our last ten fiscal quarters and on an annual basis for the fiscal years ended December 31, 2005 and 2004, we may not be able to sustain profitability on a quarterly or annual basis |
| Our financial results are likely to continue to fluctuate, which could cause our stock price to be volatile or decline |
| Our financial results have varied on a quarterly basis and are likely to fluctuate in the future |
| These fluctuations could cause our stock price to be volatile or decline |
| Several factors could cause our quarterly results to fluctuate materially, including: • the loss, termination or reduction in scope of key distribution or content relationships; • variable demand for our products and services, including seasonal fluctuations, rapidly evolving technologies and markets and consumer preferences; • the impact on revenues or profitability of changes in pricing for our products and services; • increased costs related to investments for new initiatives, including new products and services and new distribution channels, such as a mobile direct to consumer channel; • the results from shifts in the mix of products and services we provide; • the effects of acquisitions by us, our customers or our distribution partners; • increases in the costs or availability of content for or distribution of our products; • the adoption of new laws, rules or regulations, or new court rulings, regarding intellectual property that may adversely affect our ability to continue to acquire content and distribute our products and services, or the ability of our content providers or distribution partners to continue to provide us with their content or distribute our products and services; • impairment in the value of long-lived assets or the value of acquired assets, including goodwill, core technology and acquired contracts and relationships; • the effect of changes in accounting principles or in our accounting treatment of revenue or expense matters; • litigation expense; • the adoption of new regulations or accounting standards, including the new accounting standard that requires us to expense the fair value of our employee stock options beginning in 2006; and • the foreign currency effects from transactions denominated in currencies other than the US dollar |
| For these reasons, among others, you should not rely on period-to-period comparisons of our financial results to forecast our future performance |
| Furthermore, our fluctuating operating results may fall below the expectations of securities analysts or investors, which could cause the trading price of our stock to decline |
| 13 ______________________________________________________________________ [38]Table of Contents We operate in new and rapidly evolving markets, and our business model continues to evolve, which makes it difficult to evaluate our future prospects |
| Our potential for future profitability must be considered in the light of the risks, uncertainties, and difficulties encountered by companies that are in new and rapidly evolving markets and continuing to innovate with new and unproven technologies or services, as well as undergoing significant change |
| Our search, directory and mobile businesses are in young industries that have undergone rapid and dramatic changes in their short history |
| In addition to the other risks we describe in this section, some of these risks relate to our potential inability to: • retain and expand our existing mobile operator arrangements or expand into new distribution channels; • attract and retain distribution partners for our search and directory products; • attract and retain content partners; • manage our growth, control expenditures and align costs with revenues; and • respond quickly and appropriately to competitive developments, including: • rapid technological change; • alternatives to access the Internet or mobile devices; • changes in customer requirements; • new products introduced into our markets by our competitors; and • regulatory changes affecting the industries we operate in or the markets we serve both in the United States and foreign countries |
| If we do not effectively address the risks we face, we may not sustain profitability |
| We depend on third parties for content, and the loss of access to or increased cost of this content could cause us to reduce our product offerings to customers and could negatively impact our financial results |
| We currently create only a relatively small portion of our content |
| In most cases, we acquire rights to content from numerous third-party content providers, and our future success is highly dependent upon our ability to maintain relationships with these content providers and enter into new relationships with other content providers |
| We typically license content under arrangements that require us to pay usage or fixed monthly fees for the use of the content or require us to pay under a revenue-sharing arrangement |
| Further, our musical composition and other media licenses for the creation of mobile content consisting of ringtones generally require royalty payments on a “most favored nation” basis, which requires us to pay the highest royalty paid to any licensor to all such licensors |
| In the future, some of our content providers may not give us access to important content or may increase the royalties, fees or percentages that they charge us for their content, which could have a negative impact on our net earnings |
| If we fail to enter into or maintain satisfactory arrangements with content providers, our ability to provide a variety of products and services to our customers could be severely limited, thus harming our operating results |
| Additionally, our content license and royalty fees will increase to the extent that our revenues related to such products and services increase and may increase as a percent of revenues as a result of price competition and carrier demand for our products and services and the mix of our product sales |
| Our financial and operating results will suffer if we are unsuccessful at integrating acquired technologies and businesses |
| We have acquired a number of technologies and businesses in the past and may engage in further acquisitions in the future |
| Acquisitions may involve use of cash, potentially dilutive issuances of stock, the potential incurrence of debt and contingent liabilities or amortization expenses related to certain intangible assets |
| 14 ______________________________________________________________________ [39]Table of Contents In the past, our financial results have suffered significantly due to impairment charges of goodwill and other intangible assets related to prior acquisitions |
| Acquisitions also involve numerous risks which could materially and adversely affect our results of operations or stock price, including: • difficulties in assimilating the operations, products, technology, information systems and personnel of acquired companies which result in unanticipated costs, delays or allocation of resources; • difficulties in acquiring foreign companies, including risks related to integrating operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries; • the dilutive effect on earnings per share as a result of incurring operating losses and the amortization of acquired intangible assets for the acquired business; • diverting management’s attention from other business concerns; • impairing relationships with our customers or those of the acquired companies, or breaching a significant or material contract due to the consummation of the acquisition; • impairing relationships with our employees or those of the acquired companies; • failing to achieve the anticipated benefits of the acquisitions in a timely manner; and • adverse outcome of litigation matters assumed in or arising out of the acquisitions |
| The success of the operations of companies that we have acquired will often depend on the continued efforts of the management and key employees of those acquired companies |
| Accordingly, we have typically attempted to retain key employees and members of existing management of acquired companies under the overall supervision of our senior management |
| We have, however, not always been successful in these attempts at retention |
| Failure to retain key employees of an acquired company may make it more difficult to integrate or manage the business of the acquired company, may reduce the anticipated benefits of the acquisition by increasing costs, causing delays, or otherwise and may expose us to additional competition from companies these employees may join or form |
| Our stock price has been and is likely to continue to be highly volatile |
| The trading price of our common stock has been highly volatile |
| Since we began trading on December 15, 1998, our stock price has ranged from dlra3dtta70 to dlra1cmam385dtta00 (as adjusted for stock splits) |
| On February 17, 2006, the closing price of our common stock was dlra23dtta41 |
| Our stock price could decline or be subject to wide fluctuations in response to factors such as the other risks discussed in this section and the following, among others: • actual or anticipated variations in quarterly and annual results of operations; • announcements of significant acquisitions, dispositions, changes in material contracts or other business developments by us, our customers, distribution partners or competitors; • conditions or trends in the search, directory or mobile products and services markets; • announcements of technological innovations, new products or services, or new customer or partner relationships by us or our competitors; • changes in financial estimates or recommendations by securities analysts; • disclosures of any material weaknesses in internal control over financial reporting; • the adoption of new regulations or accounting standards, including the new accounting standard that requires us to expense the fair value of our employee stock options beginning in 2006; and • announcements or publicity relating to litigation and similar matters |
| In addition, the stock market in general, and the Nasdaq National Market and the market for Internet and technology company securities in particular, have experienced extreme price and volume fluctuations |
| These 15 ______________________________________________________________________ [40]Table of Contents broad market and industry factors and general economic conditions may materially and adversely affect our stock price |
| Our stock has been subject to such price and volume fluctuations in the recent past |
| Often, class action litigation has been instituted against companies after periods of volatility in the overall market and the price of such companies’ stock |
| If such litigation were to be instituted against us, even if we were to prevail, it could result in substantial cost and diversion of management’s attention and resources |
| Our search and directory products and services may expose us to claims relating to how the content was obtained or distributed |
| Our search and directory services link users, either directly through our Web sites or indirectly through the Web properties of our distribution partners, to third party Web pages and content in response to search queries |
| These services could expose us to legal liability from claims relating to such third-party content and sites, the manner in which these services are distributed by us or our distribution partners, or how the content provided by our third-party content providers was obtained or provided by our content providers |
| Such claims could include the following: infringement of copyright, trademark, trade secret or other proprietary rights; violation of privacy and publicity rights; unfair competition; defamation; providing false or misleading information; obscenity; and illegal gambling |
| Regardless of the legal merits of any such claims, they could result in costly litigation, be time consuming to defend and divert management’s attention and resources |
| If there were a determination that we had violated third-party rights or applicable law, we could incur substantial monetary liability, be required to enter into costly royalty or licensing arrangements (if available), or be required to change our business practices |
| Implementing measures to reduce our exposure to such claims could require us to expend substantial resources and limit the attractiveness of our products and services to our customers |
| Recently, there have been legal actions brought or threatened against distributors of downloadable applications deemed to be “adware” or “spyware |
| ” Additionally, certain bills are pending and some laws have been passed in certain jurisdictions setting forth requirements that must be met before a downloadable application is downloaded to an end user’s computer |
| We partner with some distribution partners that provide adware to their users if the partners adhere to our strict guidelines requiring them, among other things, to disclose to the user what the adware does and to obtain the consent of the user before the application is downloaded |
| The adware must also be easy to uninstall |
| We also review the application the partner proposes to use before we distribute our results to them |
| We also have the right to audit our partners, and if we find that they are not following our guidelines, we can terminate our agreement with them or cease providing content to that downloadable application |
| Some partners have not been able to meet the new guidelines imposed by us or some of our content providers, and we no longer provide the applicable content or any content, as the case may be, to such partners or certain of their downloadable applications |
| We work closely with some of our major content providers to try to identify potential distribution partners that do not meet our guidelines or are in breach of our distribution agreements and we work with our distribution partners to ensure they deliver quality traffic |
| However, there can be no assurance that the measures we implement to reduce our exposure to claims that certain ways in which the content is distributed violate legal requirements will be successful |
| Our efforts to increase our presence in markets outside the United States may be unsuccessful and could result in losses |
| We plan to expand our mobile and search offerings internationally, particularly in Europe |
| We have limited experience in marketing and operating our products and services in international markets, and we may not be able to successfully execute our business model in these markets |
| Our success in these markets will be directly linked to the success of relationships with our distribution and content partners and other third parties |
| As the international markets in which we operate continue to grow, competition in these markets will intensify |
| Local companies may have a substantial competitive advantage because of their greater understanding 16 ______________________________________________________________________ [41]Table of Contents of and focus on the local markets |
| Some of our domestic competitors who have substantially greater resources than we do may be able to more quickly and comprehensively develop and grow in the international markets |
| International expansion may also require significant financial investment including, among other things, the expense of developing localized products, the costs of acquiring foreign companies and the integration of such companies with our operations, expenditure of resources in developing distribution and content relationships and the increased costs of supporting remote operations |
| Although our revenues from our European offerings have increased in absolute dollars, they have remained relatively the same as a percentage of our overall revenues |
| Other risks of doing business in international markets include the increased risks and burdens of complying with different legal and regulatory standards, difficulties in managing and staffing foreign operations, limitations on the repatriation of funds and fluctuations of foreign exchange rates, varying levels of Internet technology adoption and infrastructure, and ability to enforce our contracts in foreign jurisdictions |
| In addition, our success in international expansion could be limited by barriers to international expansion such as tariffs, adverse tax consequences, and technology export controls |
| If we cannot manage these risks effectively, the costs of doing business in some international markets may be prohibitive or our costs may increase disproportionately to our revenues |
| We have implemented anti-takeover provisions that could make it more difficult to acquire us |
| Our certificate of incorporation, bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors, even if the transaction would be beneficial to our stockholders |
| Provisions of our charter documents which could have an anti-takeover effect include: • the classification of our board of directors into three groups so that directors serve staggered three-year terms, which may make it difficult for a potential acquirer to gain control of our board of directors; • the ability to authorize the issuance of shares of undesignated preferred stock without a vote of stockholders; • a prohibition on stockholder action by written consent; and • limitations on stockholders’ ability to call special stockholder meetings |
| On July 19, 2002, our board of directors adopted a stockholder rights plan, pursuant to which we declared and paid a dividend of one right for each share of common stock held by stockholders of record as of August 9, 2002 |
| Unless redeemed by us prior to the time the rights are exercised, upon the occurrence of certain events, the rights will entitle the holders to receive shares of our preferred stock, or shares of an acquiring entity |
| The issuance of the rights would make the acquisition of InfoSpace more expensive to the acquirer and could delay or discourage third parties from acquiring InfoSpace without the approval of our board of directors |
| Our systems could fail or become unavailable, which could harm our reputation, result in a loss of current and potential customers and cause us to breach agreements with our partners |
| Our success depends, in part, on the performance, reliability and availability of our services |
| We have data centers in Seattle and Bellevue, Washington; Los Angeles, California; Waltham, Massachusetts; Papendrecht, The Netherlands; and Hamburg, Germany |
| Although we have completed our disaster and redundancy planning for certain of our business critical systems so that some are now redundant across two physical locations, we have not yet completed our disaster recovery and redundancy planning for others |
| Our systems and operations could be damaged or interrupted by fire, flood, power loss, telecommunications failure, Internet breakdown, break-in, earthquake or similar events |
| We would face significant damage as a result of these events, and our business interruption insurance may not be adequate to compensate us for all the losses that may occur |
| In addition, our systems use sophisticated software that may contain bugs that could interrupt service |
| For these reasons, we may be unable to develop or successfully manage the infrastructure necessary to meet current or future demands for reliability and scalability of our systems |
| 17 ______________________________________________________________________ [42]Table of Contents If the volume of traffic to our products and services increases substantially, we must respond in a timely fashion by expanding our systems, which may entail upgrading our technology and network infrastructure |
| Due to the number of our customers and the products and services that we offer, we could experience periodic capacity constraints which may cause temporary unanticipated system disruptions, slower response times and lower levels of customer service |
| Our business could be harmed if we are unable to accurately project the rate or timing of increases, if any, in the use of our products and application services or expand and upgrade our systems and infrastructure to accommodate these increases in a timely manner |
| Furthermore, we have entered into service level agreements with most of our mobile operator customers and certain other customers |
| These agreements generally call for specific system up times and 24/7 support and include penalties for non-performance |
| We may be unable to fulfill these commitments, which could subject us to penalties under those agreements, harm our reputation and result in the loss of customers and distribution partners |
| The security measures we have implemented to secure information we collect and store may be breached, which could cause us to breach agreements with our partners and expose us to potential investigation and penalties by authorities and potential claims by persons whose information was disclosed |
| We take reasonable steps to protect the security, integrity and confidentiality of the information we collect and store but there is no guarantee that inadvertent or unauthorized disclosure will not occur or that third parties will not gain unauthorized access despite our efforts |
| If such unauthorized disclosure or access does occur, we may be required to notify persons whose information was disclosed or accessed under existing and proposed laws |
| We also may be subject to claims of breach of contract for such disclosure, investigation and penalties by regulatory authorities and potential claims by persons whose information was disclosed |
| We may be subject to liability for our use or distribution of information that we gather or receive from third parties |
| We obtain content and commerce information from third parties |
| This could subject us to legal liability for such things as defamation, negligence, intellectual property infringement, violation of privacy or publicity rights and product or service liability, among others |
| Laws or regulations of certain jurisdictions may also deem some content illegal, which may expose us to legal liability as well |
| We also gather personal information from users in order to provide personalized services |
| Gathering and processing this personal information may subject us to legal liability for, among other things, negligence, defamation, invasion of privacy or product or service liability |
| We are also subject to laws and regulations, both in the United States and abroad, regarding the collection and use of end user information |
| If we do not comply with these laws and regulations, we may be exposed to legal liability |
| Many of the agreements by which we obtain content do not contain indemnity provisions in favor of us |
| Even if a given contract does contain indemnity provisions, these provisions may not cover a particular claim or type of claim or the party giving the indemnity may not have the financial resources to cover the claim |
| Our insurance coverage may be inadequate to cover fully the amounts or types of claims that might be made against us |
| Any liability that we incur as a result of content we receive from third parties could harm our financial results |
| If others claim that our products infringe their intellectual property rights, we may be forced to seek expensive licenses, reengineer our products, engage in expensive and time-consuming litigation or stop marketing and licensing our products |
| We attempt to avoid infringing known proprietary rights of third parties in our product development efforts |
| However, we do not regularly conduct patent searches to determine whether the technology used in our products infringes patents held by third parties |
| Patent searches generally return only a fraction of the issued patents that may be deemed relevant to a particular product or service |
| It is therefore nearly impossible to determine, with any level of certainty, whether a particular product or service may be construed as infringing a US or foreign patent |
| Because patent applications in the United States are not publicly disclosed until the patent is issued, applications 18 ______________________________________________________________________ [43]Table of Contents may have been filed by third parties that relate to our products |
| In addition, other companies, as well as research and academic institutions, have conducted research for many years in the search and directory and mobile and wireless technology fields, and this research could lead to the filing of further patent applications |
| In addition to patent claims, third parties may make claims against us alleging infringement of copyrights, trademark rights, trade secret rights or other proprietary rights, or alleging unfair competition or violations of privacy or publicity rights |
| In some cases, the ownership or scope of an entity’s or person’s rights is unclear and may also change over time |
| If we were to discover that our products violated or potentially violated third-party proprietary rights, we might be required to obtain licenses that are costly or contain terms unfavorable to us, or expend substantial resources to reengineer those products so that they would not violate such third party rights |
| Any reengineering effort may not be successful, and we cannot be certain that any such licenses would be available on commercially reasonable terms |
| Any third-party infringement claims against us could result in costly litigation and be time consuming to defend, divert management’s attention and resources, cause product and service delays or require us to enter into royalty and licensing agreements |
| If we fail to detect invalid click activity, we could lose the confidence of advertisers and of our content providers, which would cause our business to suffer |
| Most of our revenues from our search and directory business are based on the number of paid “clicks” on commercial search results served on our own Web sites or our distribution partners’ Web properties |
| Generally, each time a user clicks on a commercial search result, the content provider that provided the commercial search result receives a fee from the advertiser who paid for such commercial click and the content provider pays us a portion of that fee |
| If the click originated from one of our distribution partners’ Web properties, we share a portion of the fee we receive with such partner |
| This model exposes us to the risk of invalid click activity |
| Such invalid click activity occurs, for example, when a person or automated click generation program clicks on a commercial search result to generate fees for the Web property displaying the commercial search result rather than to view the Web page underlying the commercial search result or when a competitor of the advertiser clicks on the advertiser’s search result to increase the advertising expense of the advertiser |
| When such invalid click activity is detected, content providers may refund the fee paid by the advertiser for such invalid clicks |
| When such invalid click activity is detected as coming from one of our distribution partners’ Web properties or our own Web sites, our content providers may refund the fees paid by the advertisers for such invalid clicks, which in turn reduces the amount of fees the content provider pays us |
| If we or our content providers are unable to effectively detect and stop invalid click activity, advertisers may see a reduced return on their advertising investment with the content provider because such invalid clicks will not lead to potential revenue for such advertisers, which could lead such advertisers to reduce or terminate their investment in such ads |
| This could lead to a loss of advertisers and revenue to our content providers and consequently to fewer fees paid to us |
| Additionally, if we are unable to detect and stop invalid click activity that may originate from our own Web sites or the Web properties of our distribution partners, our content providers may impose restrictions on our ability to provide their commercial search results on our own Web sites or to our current and future distribution partners, which could have a materially negative impact on our financial results |
| Although we and our content providers have in place certain systems to assist with the detection of invalid clicks, these systems may not detect all such invalid click activity |
| We rely heavily on our technology, but we may be unable to adequately or cost-effectively protect or enforce our intellectual property rights, thus weakening our competitive position and negatively impacting our financial results |
| To protect our rights in our products and technology, we rely on a combination of copyright and trademark laws, patents, trade secrets, and confidentiality agreements with employees and third parties and protective contractual provisions |
| We also rely on the law pertaining to trademarks and domain names to protect the value of our corporate brands and reputation |
| Despite our efforts to protect our proprietary rights, unauthorized parties 19 ______________________________________________________________________ [44]Table of Contents may copy aspects of our products or services or obtain and use information that we regard as proprietary, or infringe our trademarks |
| In addition, it is possible that others could independently develop substantially equivalent intellectual property |
| If we do not effectively protect our intellectual property, we could lose our competitive position |
| Effectively policing the unauthorized use of our products and trademarks is time-consuming and costly, and there can be no assurance that the steps taken by us will prevent misappropriation of our technology or trademarks |
| Our intellectual property may be subject to even greater risk in foreign jurisdictions, as protection is not sought or obtained in every country in which our services are available |
| Also, the laws of many countries do not protect proprietary rights to the same extent as the laws of the United States |
| If we cannot adequately protect our intellectual property, our competitive position in markets abroad may suffer |
| If we are unable to retain our key employees, we may not be able to successfully manage our business |
| Our business and operations are substantially dependent on the performance of our executive officers and key employees, who are employed on an at-will basis |
| If we lose the services of one or more of our executive officers or key employees and are unable to recruit and retain a suitable successor(s), we may not be able to successfully manage our business or achieve our business objectives |
| Unless we are able to hire, retain and motivate highly qualified employees, we will be unable to execute our business strategy |
| Our future success depends on our ability to identify, attract, hire, retain and motivate highly skilled technical, managerial, sales and marketing, and corporate development personnel |
| Our services and the industries to which we provide our services are relatively new |
| Qualified personnel with experience relevant to our business are scarce and competition to recruit them is intense |
| If we fail to successfully hire and retain a sufficient number of highly qualified employees, we may have difficulties in supporting our customers or expanding our business |
| Additional realignments of resources, reductions in workforce or other future operational decisions could create an unstable work environment and may have a negative effect on our ability to retain and motivate employees |
| In light of current market and regulatory conditions, the value of stock options granted to employees may cease to provide sufficient incentive to our employees |
| Like many technology companies, we use stock options to recruit technology professionals and senior level employees |
| Our stock options, which typically vest over a four-year period, are one of the means by which we motivate long-term employee performance |
| Recent changes in accounting treatment of options requiring us to expense the fair value of our employee stock options beginning in 2006 may make it difficult or overly expensive for us to issue stock options to our employees in the future |
| We also face a significant challenge in retaining our employees if the value of these stock options is either not substantial enough or so substantial that the employees leave after their stock options have vested |
| If our stock price does not increase significantly above the prices of our options, or option programs become impracticable, we may need to issue new options or other equity incentives or increase other forms of compensation to motivate and retain our employees |
| We may undertake or seek stockholder approval to undertake programs to retain our employees, which may be viewed as dilutive to our stockholders or may increase our compensation costs |
| Additionally, there can be no assurance that any such programs we undertake will be successful in motivating and retaining our employees |
| RISKS RELATED TO THE INDUSTRIES IN WHICH WE OPERATE Intense competition in the mobile, search, and directory markets could prevent us from increasing distribution of our services in those markets or cause us to lose market share |
| Our current business model depends on distribution of our products and services into the wireless and search and directory markets, which are extremely competitive and rapidly changing |
| Many of our competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, more developed infrastructures, greater name recognition or more established relationships in the 20 ______________________________________________________________________ [45]Table of Contents industry than we have |
| Our competitors may be able to adopt more aggressive pricing policies, develop and expand their service offerings more rapidly, adapt to new or emerging technologies and changes in customer requirements more quickly, take advantage of acquisitions and other opportunities more readily, achieve greater economies of scale, and devote greater resources to the marketing and sale of their services than we can |
| Because of these competitive factors and due to our relatively small size and financial resources, we may be unable to compete successfully |
| Some of the companies we compete with are currently customers of ours, the loss of which could harm our business |
| Many of our customers have established relationships with some of our competitors |
| If these competitors develop products and services that compete with ours, we could lose market share and our revenues could decrease |
| Additionally, our financial results could be adversely affected as well if our distribution partners create their own products and services that compete or replace the products and services we provide |
| Consolidation in the industries in which we operate could lead to increased competition and loss of customers |
| The Internet industry (including the search and directory segments) and the wireless industry have experienced substantial consolidation |
| We expect this consolidation to continue |
| These acquisitions could adversely affect our business and results of operations in a number of ways, including the following: • our distribution partners could acquire or be acquired by one of our competitors and terminate their relationship with us; • our distribution partners could merge with each other, which could reduce our ability to negotiate favorable terms; • competitors could improve their competitive positions through strategic acquisitions; and • companies from whom we acquire content could acquire or be acquired by one of our competitors and stop licensing content to us, or gain additional negotiating leverage in their relationships with us |
| Security breaches may pose risks to the uninterrupted operation of our systems |
| Our networks may be vulnerable to unauthorized access by hackers or others, computer viruses and other disruptive problems |
| Someone who is able to circumvent security measures could misappropriate our proprietary information or cause interruptions in our operations |
| Subscribers to some of our services are required to provide information in order to utilize the service that may be considered to be personally identifiable or private information |
| Unauthorized access to, and abuse of, this information could subject us to a risk of loss or litigation and liability |
| We may need to expend significant capital or other resources protecting against the threat of security breaches or alleviating problems caused by breaches |
| Although we intend to continue to implement and improve our security measures, persons may be able to circumvent the measures that we implement in the future |
| Eliminating computer viruses and alleviating other security problems may require interruptions, delays or cessation of service to users accessing our services, any of which could harm our business |
| Governmental regulation and the application of existing laws may slow business growth, increase our costs of doing business and create potential liability |
| The growth and development of the Internet and wireless communication have led to new laws and regulations, as well as the application of existing laws to wireless communications and the Internet |
| Application of these laws can be unclear |
| The costs of complying or failure to comply with these laws and regulations could limit our ability to operate in our markets, expose us to compliance costs and substantial liability and result in costly and time-consuming litigation |
| 21 ______________________________________________________________________ [46]Table of Contents Several federal or state laws could impact our business |
| Federal laws include those designed to restrict the online distribution of certain materials deemed harmful to children and impose additional restrictions or obligations for online services when dealing with minors |
| Such legislation may impose significant additional costs on our business or subject us to additional liabilities |
| The application to advertising in our industries of existing laws regulating or requiring licenses for certain businesses can be unclear |
| Such regulated businesses may include, for example, gambling; distribution of pharmaceuticals, alcohol, tobacco or firearms; or insurance, securities brokerage and legal services |
| Additionally, certain bills are pending and some laws have been passed in certain jurisdictions setting forth requirements that must be met before a downloadable application is downloaded to an end user’s computer |
| We post our privacy policies and practices concerning the use and disclosure of user data |
| Any failure by us to comply with our posted privacy policies, Federal Trade Commission (the “FTC”) requirements or other privacy-related laws and regulations could result in proceedings by the FTC or others which could potentially have an adverse effect on our business, results of operations and financial condition |
| In this regard, there are a large number of legislative proposals before the United States Congress and various state legislative bodies regarding privacy issues related to our business |
| It is not possible to predict whether or when such legislation may be adopted, and certain proposals, if adopted, could materially and adversely affect our business through a decrease in user registrations and revenues |
| This could be caused by, among other possible provisions, the required use of disclaimers or other requirements before users can utilize our services |
| The FTC has recommended to search engine providers that paid-ranking search results be delineated from non-paid results |
| To the extent that the FTC may in the future issue specific requirements regarding the nature of such delineation, which would require modifications to the presentation of search results, revenue from the affected search engines could be negatively impacted |
| Due to the nature of the Internet, it is possible that the governments of states and foreign countries might attempt to regulate Internet transmissions or institute proceedings for violations of their laws |
| Any such developments (or developments stemming from enactment or modification of other laws) could increase the costs of regulatory compliance for us or force us to change our business practices |
| We rely on the infrastructure of the Internet and of wireless networks, over which we have no control and the failure of which could substantially undermine our operations |
| Our success depends, in large part, on other companies maintaining the Internet system infrastructure and mobile operators who distribute our mobile content and services to maintain their proprietary wireless networks |
| In particular, with respect to the Internet, we rely on other companies to maintain a reliable network backbone that provides adequate speed, data capacity and security and to develop products that enable reliable Internet access and services |
| With respect to wireless networks, we depend on mobile operators to maintain their wireless networks so as to provide adequate speed, data capacity and security and that enable reliable mobile access to our products and services |
| As the Internet and usage of mobile services continues to experience growth in the number of users, frequency of use and amount of data transmitted, the Internet system infrastructure and the wireless networks of mobile operators may be unable to support the demands placed on them, and the Internet’s and mobile operators’ networks performance or reliability may suffer as a result of this continued growth |
| Some of the companies that we rely upon to maintain network infrastructure may lack sufficient capital to support their long-term operations |
| The failure of the internet infrastructure or wireless networks would substantially undermine our operations and may have a material adverse effect on our financial results |