Management’s Discussion and Analysis of Financial Condition and Results of Operations continued 2017 Compared to 2016 Cost of Services Cost of services includes the following costs directly attributable to a service: salaries and wages, benefits, materials and supplies, content costs, contracted services, network access and transport costs, customer provisioning costs, computer systems support, and costs to support our outsourcing contracts and technical facilities. Aggregate customer care costs, which include billing and service provisioning, are allocated between Cost of services and Selling, general and administrative expense. Cost of services increased during 2017 primarily due to an increase in expenses as a result of the acquisition of Yahoo’s operating business, an increase in content costs associated with continued programming license fee increases and an increase in access costs as a result of the acquisition of XO Holdings’ wireline business (XO) at our Wireline segment. These increases were partially offset by the completion of the Access Line Sale on April 1, 2016, the Data Center Sale on May 1, 2017 and other insignificant transactions (see “Operating Results From Divested Businesses”), the fact that we did not incur incremental costs in 2017 as a result of the union work stoppage that commenced on April 13, 2016 and ended on June 1, 2016 (2016 Work Stoppage), and by a decline in net pension and postretirement benefit costs at our Wireline segment primarily driven by collective bargaining agreements ratified in June 2016. Wireless Cost of Equipment Wireless cost of equipment slightly decreased during 2017, primarily as a result of a decline in the number of smartphone and internet units sold, substantially offset by a shift to higher priced units in the mix of devices sold. Selling, General and Administrative Expense Selling, general and administrative expense includes: salaries and wages and benefits not directly attributable to a service or product, bad debt charges, taxes other than income taxes, advertising and sales commission costs, customer billing, call center and information technology costs, regulatory fees, professional service fees, and rent and utilities for administrative space. Also included is a portion of the aggregate customer care costs as discussed in “Cost of Services” above. Selling, general and administrative expense decreased during 2017 primarily due to a decrease in severance, pension and benefit charges, an increase in the net gain on sale of divested businesses (see “Special Items”), a decline at our Wireless segment in sales commission expense, employee related costs, bad debt expense, non-income taxes and advertising expense, and a decrease due to the Access Line Sale on April 1, 2016 and the Data Center Sale on May 1, 2017, and other insignificant transactions (see “Operating Results From Divested Businesses”). These decreases were partially offset by an increase in expenses as a result of the acquisition of Yahoo’s operating business on June 13, 2017, acquisition and integration charges primarily in connection with the acquisition of Yahoo’s operating business, product realignment charges (see “Special Items”) and an increase in expenses as a result of the acquisition of XO. Depreciation and Amortization Expense Depreciation and amortization expense increased during 2017 primarily due to the acquisitions of Yahoo’s operating business and XO. 2016 Compared to 2015 Cost of Services Cost of services decreased during 2016 primarily due to the completion of the Access Line Sale on April 1, 2016 (see “Operating Results from Divested Businesses”), as well as a decline in net pension and postretirement benefit cost in our Wireline segment. Partially offsetting this decrease was an increase in costs as a result of the acquisition of AOL on June 23, 2015, the launch of our mobile video application in the third quarter of 2015 and incremental costs incurred as a result of the 2016 Work Stoppage. Wireless Cost of Equipment Wireless cost of equipment decreased during 2016 primarily as a result of a 4.6% decline in the number of smartphone units sold, partially offset by an increase in the average cost per unit for smartphones. Selling, General and Administrative Expense Selling, general and administrative expense increased during 2016 primarily due to severance, pension and benefit charges recorded in 2016 as compared to severance, pension and benefit credits recorded in 2015 (see “Special Items”), an increase in costs as a result of the acquisition of AOL on June 23, 2015, and the launch of our mobile video application in the third quarter of 2015. These increases were partially offset by a gain on the Access Line Sale (see “Special Items”), a decline in costs as a result of the completion of the Access Line Sale on April 1, 2016 (see “Operating Results from Divested Businesses”), as well as declines in sales commission expense at our Wireless segment and declines in employee costs at our Wireline segment. 2017 Annual Report | Verizon Communications Inc. and Subsidiaries 13