Google 2008 Annual Report Download - page 62

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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 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. These fees may be paid in advance or in arrears and are non-refundable but are subject
to adjustment based on the achievement of the defined performance terms. In addition, the arrangements are
terminable at will, although under the terms of certain contracts we or our Google Network members may be
subject to penalties in the event of early termination. To the extent we expect revenues generated under 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. For other AdSense agreements under which we only pay on a
contractual revenue share basis, we recognize the revenue share obligations as traffic acquisition costs at the
same time the related revenue is recognized. Also, 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.
In addition, 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. The fees are non-refundable. Further, the
arrangements are terminable at will, although under the terms of certain contracts, we or our distribution partners
may be subject to penalties in the event of early termination. 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 and
they are longer than one year, or based on any contractual revenue share, if greater. Otherwise, the fees are
charged to expense as incurred. The estimated useful life of the access points is based on the historical average
period of time they generate traffic and revenue.
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, amortization of acquired intangible assets 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, an amount that is based on
the number of times the content is displayed, or an amount calculated 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
2006 2007 2008 September 30,
2008 December 31,
2008
(unaudited)
Cost of revenues .................................... $4,225.0 $6,649.1 $8,621.5 $2,173.4 $2,190.0
Cost of revenues as a percentage of revenues .......... 39.8% 40.1% 39.6% 39.2% 38.4%
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