Description

Tarantula Corporation

Tarantula Corporation (“Tarantula”) owns and operates various Web sites, including a social

networking Web site and a Web site search engine. Tarantula is a nonpublic U.S.-based company

with headquarters in San Jose, CA, and it earns most of its revenue through advertising. Tarantula

not only manages the advertisement space on its own Web sites, but it also assists other Web site

owners with filling their ad space.

To generate revenue, Tarantula enters into agreements with various third-party advertisers (the

“advertisers” or the “customers”) whereby Tarantula agrees to place advertisers’ ads on Web sites

owned by Tarantula. Tarantula can also place these ads on Web sites owned by its network

partners (the “partners”), for which it has agreements to do so (see discussion below). Tarantula

gives the advertisers a list of Web sites to choose from; the advertisers specify which Web sites

are suitable to reach their intended demographic. If the desired advertising space is not available,

the advertiser and Tarantula must agree on an alternative Web site. The advertisers are not made

aware of who owns the partner Web sites, and the fees charged to each advertiser are from

Tarantula’s standard list prices, which are specified in the agreement between the advertiser and

Tarantula.

Tarantula offers the advertisers the option to have their ad displayed on a home page or linked to

key search words. The pricing structure differs depending on which type of advertising is

selected. For example, Tarantula will charge a fee each time an ad (also known as an impression)

is displayed. Alternatively, if an advertiser selects its ad to be linked to key search words,

Tarantula will charge a fee only when an end user clicks on the linked ad. The advertisers are

invoiced the month after their ads are displayed, and payments are submitted directly to

Tarantula.

To offer the advertisers a choice of Web sites on which to display their ads, Tarantula enters into

agreements with the partners that own other Web sites. This expanded offering allows Tarantula

to potentially increase its revenue from the advertisers; however, it comes with a cost to

Tarantula. The partners charge a fee to Tarantula for use of their Web site ad spaces. The fee

structure allows the partners to receive a minimum base fee that is equal to the cost to maintain

the ad space (as predetermined on a quarterly basis) and up to 51 percent of the adjusted gross

advertising revenue earned monthly. As defined in the agreement, the adjusted gross advertising

revenue is equal to the amounts invoiced to the advertiser less chargebacks, credits, bad debt,

refunds, and certain out-of-pocket expenses, including agency commissions and fees, sales

commissions and fees, and creative services; however, the amount beyond the base fee is paid to

the partner only after it is collected by Tarantula from the advertiser. The advertisers are not a

party to any agreement with the partners; advertisers only have an agreement with Tarantula.

Tarantula is solely responsible for fulfilling its contracts with the advertisers. Therefore, if

suitable advertising space is not available on a partner’s Web site or if the partner does not

believe the ad is suitable for its Web site, Tarantula and the advertiser will agree on an alternative

Web site.

Tarantula’s agreement with the partners also specifies the space, size, and location on the

partner’s Web site that must be available for ads. During the term of the agreement, the partner is

also required to keep Tarantula’s network footer at the bottom of its home page because Tarantula

is paying for the base fee. Since the advertisers are charged a fee either (1) for each time a user

clicks their ad on a partner’s Web site or (2) each time an ad is displayed, the partners are

required to install and use the tracking software provided by Tarantula. This tracking software is

given to the partner at no charge, and it gives Tarantula monthly usage reports; Tarantula uses

these reports to determine the invoice for the customer.