Google 2009 Annual Report Download - page 62

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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 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 we
recognize the related revenue. 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, these
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 (approximately 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, we
expense the fees as incurred. The estimated useful life of the access points is based on the historical average
period of time they generate traffic and revenues.
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, and 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: 1) the contractual revenue share amount, if any, 2) an amount that is based
on the number of times the content is displayed, or 3) 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,
2007 2008 2009
Cost of revenues ........................................................ $6,649.1 $8,621.5 $8,844.1
Cost of revenues as a percentage of revenues .............................. 40.1% 39.6% 37.4%
Year Ended December 31,
2007 2008 2009
Traffic acquisition costs related to AdSense arrangements ................. $4,543.0 $5,284.3 $5,265.6
Traffic acquisition costs related to distribution arrangements ............... 390.9 654.7 903.8
Total traffic acquisition costs ............................................ $4,933.9 $5,939.0 $ 6,169.4
Traffic acquisition costs as a percentage of advertising revenues ............ 30.1% 28.1% 27.0%
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