Subdomains are considered to be third level - a domain is second level (down a level from its main TLD - .com, .org, etc), and a subdomain is on level below its domain. An example of a subdomain is http://sports.yahoo.com - here, sports is a subdomain of yahoo.com

Subdomains are used as a way of building the main brand, but also designating the content to be separate. In the beforementioned case of Yahoo.com, subdomains such as movies., sports., finance., etc, are used to designate topical sections on the main Yahoo.com domain.