Google 2012 Annual Report Download - page 36

30 GOOGLE INC. |Form10-K
PART II
ITEM7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations
Costs and Expenses
Cost of Revenues
Cost of revenues consists primarily of tra c acquisition costs. Tra c 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 website
(collectively referred to as distribution arrangements). These amounts are primarily based on the revenue share and fi xed fee
arrangements with our Google Network Members and distribution partners.
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 tra c 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, 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 websites from which the content is viewed and share most of the fees these ads generate with the content
providers. We also license content on the pages of our web sites from which the content is sold and share most of the fees these
sales generate with content providers. To the extent we are obligated to make guaranteed minimum revenue share payments
to our content providers, we recognize as content acquisition costs the contractual revenue share amount or on a straight-line
basis, whichever is greater, over the terms of the agreements.
In addition, cost of revenues includes manufacturing and inventory-related costs from our Motorola Mobile business.
The following tables present our cost of revenues and cost of revenues as a percentage of revenues by business, and our tra c
acquisition costs, and tra c acquisition costs as a percentage of advertising revenues in the Google business, for the periods
presented (dollars in millions):
Year Ended December31,
2010 2011 2012
Cost of revenues—Google (advertising and other) $10,417 $13,188 $17,176
Cost of revenues—Motorola Mobile (hardware and other) 0 0 3,458
Cost of revenues—Google (advertising and other) as a percentage
ofGooglerevenues 35.5% 34.8% 37.3%
Cost of revenues—Motorola Mobile (hardware and other) as a percentage
ofMotorola Mobile revenues 0 0 83.6%
Year Ended December31,
2010 2011 2012
Tra c acquisition costs related to AdSense arrangements $6,162 $7,294 $ 8,791
Tra c acquisition costs related to distribution arrangements 1,155 1,517 2,165
Total tra c acquisition costs $7,317 $8,811 $10,956
Tra c acquisition costs as a percentage of advertising revenues 25.9% 24.1% 25.1%
Cost of revenues increased $7,446million from 2011 to 2012. The increase was primarily related to the inclusion of manufacturing
and inventory-related costs from our Motorola Mobile business of $3,458million. Additionally, there was an increase in tra c
acquisition costs of $2,145million resulting from more advertiser fees generated through our AdSense program, more tra c
directed to our websites, as well as more distribution fees paid. The remaining increase was primarily driven by increase in data
center costs, hardware product costs and content acquisition costs. The increase in tra c acquisition costs as a percentage of
advertising revenues was primarily the result of a greater increase in tra c acquisition costs related to distribution arrangements
compared to the increase in advertising revenues generated by Google websites. The increase in Google cost of revenues as a
percentage of Google revenues was also driven by an increase in hardware product costs.
Cost of revenues increased $2,771million from 2010 to 2011. The increase was primarily related to an increase in tra c acquisition
costs of $1,132million resulting from more advertiser fees generated through our AdSense program. The increase was also related
to an increase in tra c acquisition costs of $362million from our distribution arrangements as a result of more tra c directed to
our websites, as well as more distribution fees paid. The decrease in tra c acquisition costs as a percentage of advertising revenues
was primarily due to an increase in the proportion of advertising revenues from our websites compared to our Google Network
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