Google 2009 Annual Report Download - page 63

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Cost of revenues increased $222.6 million from 2008 to 2009. The increase was primarily related to an
increase in traffic acquisition costs of $249.1 million from our distribution arrangements as a result of more
distribution fees paid and more traffic directed to our web sites. This was partially offset by a decrease in traffic
acquisition costs of $18.7 million from our AdSense arrangements primarily as a result of more revenue realized
from Google Network members to whom we paid less revenue share. The decrease in traffic acquisition costs as a
percentage of advertising revenues was primarily due to an increase in the proportion of advertising revenues from
our web sites compared to our Google Network members’ web sites, as well as more revenue realized from Google
Network members to whom we paid less revenue share.
Cost of revenues increased $1,972.4 million from 2007 to 2008. The increase was primarily related to an
increase in traffic acquisition costs of $1,005.1 million primarily resulting from more advertiser fees generated
through our AdSense program. The increase was also related to an increase of $675.2 million in data center costs
primarily resulting from the depreciation of additional information technology assets and data center buildings as
well as additional labor required to manage the data centers. In addition, there was an increase in the amortization
of developed technology of $133.0 million resulting primarily from our DoubleClick acquisition, and an increase in
expenses related to acquiring content on our web sites of $106.0 million. The decrease in traffic acquisition costs
as a percentage of advertising revenues was primarily due to an increase in the proportion of advertising revenues
coming from our web sites rather than from our Google Network members’ web sites.
We expect cost of revenues will increase in dollar amount and may increase as a percentage of revenues in
2010 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, including the costs of the mobile
phones that we sell. 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,
2007 2008 2009
Research and development expenses ..................................... $2,120.0 $2,793.2 $2,843.0
Research and development expenses as a percentage of revenues ........... 12.8% 12.8% 12.0%
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.
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