Google 2007 Annual Report Download - page 59

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While international revenues in each of the periods presented accounted for less than half of our total revenues, more
than half of our user traffic during these periods came from outside the U.S. Although we expect to continue to make
investments in international markets, they may not result in an increase in our international revenues as a percentage of
total revenues in 2008 or thereafter. See Note 14 of Notes to Consolidated Financial Statements included in Item 8 of this
Annual Report on Form 10-K for additional information about geographic areas.
Costs and Expenses
Cost of Revenues. Cost of revenues consists primarily of traffic acquisition costs. Traffic acquisition costs consist of
amounts ultimately paid to our Google Network members under AdSense arrangements and to certain other partners
(our “distribution partners”) who distribute our toolbar and other products (collectively referred to as “access points”) or
otherwise direct search queries to our web site (collectively referred to as “distribution arrangements”). These amounts
are primarily based on the revenue share arrangements with our Google Network members and distribution partners.
Certain distribution arrangements require us to pay our partners based on a fee per access point delivered and not
exclusively—or at all—based on revenue share. We recognize fees under these arrangements over the estimated useful
lives of the access points (two years) to the extent we can reasonably estimate those lives or based on any contractual
revenue share, if greater. Otherwise, the fees are expensed as incurred.
In addition, certain AdSense agreements obligate us to make guaranteed minimum revenue share payments to
Google Network members based on their achieving defined performance terms, such as number of search queries or
advertisements displayed. To the extent we expect revenues generated under such an arrangement to exceed the
guaranteed minimum revenue share payments, we recognize traffic acquisition costs on a contractual revenue share or on
a basis proportionate to forecasted revenues, whichever is greater. Otherwise, we recognize the guaranteed revenue share
payments as traffic acquisition costs on a straight-line basis over the term of the related agreements. In addition,
concurrent with the commencement of a small number of AdSense and other agreements, we have purchased certain
items from, or provided other consideration to, our Google Network members and partners. We have determined that
certain of these amounts are prepaid traffic acquisition costs and are amortized on a straight-line basis over the terms of
the related agreements.
Cost of revenues also includes the expenses associated with the operation of our data centers, including depreciation,
labor, energy and bandwidth costs, credit card and other transaction fees related to processing customer transactions as
well as content acquisition costs. We have entered into arrangements with certain content providers under which we
distribute or license their video and other content. In a number of these arrangements we display ads on the pages of our
web sites and our Google Network members’ web sites from which the content is viewed and share most of the fees these
ads generate with the content providers and the Google Network members. To the extent we are obligated to make
guaranteed minimum revenue share or other payments to our content providers, we recognize content acquisition costs
equal to the greater of the following three amounts: the contractual revenue share amount, if any, based on the number of
times the content is displayed, or on a straight-line basis over the terms of the agreements. The following tables present
our cost of revenues and cost of revenues as a percentage of revenues, and our traffic acquisition costs and traffic
acquisition costs as a percentage of advertising revenues for the periods presented (dollars in millions):
Year Ended December 31, Three Months Ended
2005 2006 2007 September 30,
2007 December 31,
2007
(unaudited)
Cost of revenues ............................... $2,577.1 $4,225.0 $6,649.1 $1,662.6 $1,955.8
Cost of revenues as a percentage of revenues ........ 42.0% 39.8% 40.1% 39.3% 40.5%
Year Ended December 31, Three Months Ended
2005 2006 2007 September 30,
2007 December 31,
2007
(unaudited)
Traffic acquisition costs ........................ $2,114.9 $3,308.8 $4,933.9 $1,221.1 $1,439.8
Traffic acquisition costs as a percentage of advertising
revenues .................................. 34.9% 31.5% 30.1% 29.1% 30.3%
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