Google 2009 Annual Report Download - page 85

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Google Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 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. These 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, 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 revenues. Further, we review the access points for impairment by
distribution partner, type, and geography, and we have not made any impairment to date.
Prepaid revenue share and distribution fees are included in prepaid revenue share, expenses, and other assets
on the accompanying Consolidated Balance Sheets.
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 including Google Checkout 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: 1) the contractual revenue share
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