Google 2007 Annual Report Download - page 85

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Google Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We also generate fees from the sale and license of our Search Appliance, which includes hardware, software and 12 to
24 months of post-contract support. We recognize revenue in accordance with Statement of Position 97-2, Software
Revenue Recognition, as amended. As the elements are not sold separately, sufficient vendor- specific objective evidence
does not exist for the allocation of revenue. As a result, the entire fee is recognized ratably over the term of the post-
contract support arrangement.
Deferred revenue is recorded when payments are received in advance of our performance in the underlying
agreement on the accompanying Consolidated Balance Sheets.
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 charged to expense 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,
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 basis
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. Traffic acquisition costs were $2,114.9 million, $3,308.8 million and $4,933.9 million in 2005,
2006 and 2007.
Prepaid revenue share and distribution fees are included in prepaid revenue share, expenses and other assets on the
accompanying Consolidated Balance Sheets.
In addition, cost of revenues includes the expenses associated with the operation of our data centers, including
depreciation, labor, energy and bandwidth costs, as well as credit card and other transaction fees related to processing
customer transactions including Google Checkout 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.
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