Google 2008 Annual Report Download - page 64

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We expect cost of revenues to continue to increase in dollars and may increase as a percentage of revenues
in 2009 and in future periods, primarily as a result of forecasted increases in traffic acquisition costs, data center
costs, credit card and other transaction fees, content acquisition and other costs. Traffic acquisition costs as a
percentage of advertising revenues may fluctuate in the future based on a number of factors, including the
following:
• The relative growth rates of revenues from our web sites and from our Google Network members’ web
sites.
• Whether we are able to enter into more AdSense arrangements that provide for lower revenue share
obligations or whether increased competition for arrangements with existing and potential Google
Network members results in less favorable revenue share arrangements, including arrangements with
guaranteed minimum payments.
• Whether we are able to continue to improve the monetization of traffic on our web sites and our Google
Network members’ web sites, particularly with those members to whom we have guaranteed minimum
revenue share payments.
• The relative growth rates of expenses associated with distribution arrangements and the related revenues
generated, including whether we share with certain existing and new distribution partners proportionately
more of the aggregate advertising fees that we earn from paid clicks derived from search queries these
partners direct to our web sites.
Research and Development.
The following table presents our research and development expenses, and research and development
expenses as a percentage of our 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)
Research and development expenses ........... $1,228.6 $2,120.0 $2,793.2 $704.6 $733.3
Research and development expenses as a
percentage of revenues .................... 11.6% 12.8% 12.8% 12.7% 12.9%
Research and development expenses consist primarily of compensation and related costs for personnel
responsible for the research and development of new products and services, as well as significant improvements
to existing products and services. We expense research and development costs as they are incurred.
Research and development expenses increased $28.7 million from the three months ended September 30,
2008 to the three months ended December 31, 2008. This increase was primarily due to an increase in certain
labor and facilities related costs of $23.4 million and an increase in stock-based compensation expense of $12.8
million. These increases were partially offset by a decrease in consulting costs of $14.7 million.
Research and development expenses increased $673.2 million from the year ended December 31, 2007 to
the year ended December 31, 2008. This increase was primarily due to an increase in labor and facilities related
costs of $387.1 million as a result of a 25% increase in research and development headcount. In addition, there
was an increase in stock-based compensation expense of $162.6 million.
Research and development expenses increased $891.4 million from the year ended December 31, 2006 to
the year ended December 31, 2007. This increase was primarily due to an increase in labor and facilities related
costs of $708.0 million as a result of a 57% increase in research and development headcount, including an
increase in stock-based compensation expense of $282.3 million. In addition, there was an increase in
depreciation and related expenses of $72.3 million due to our increased capital expenditures.
48