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Yahoo And Google Count Ad Revenue Differently

Staff Writer
Published: 2004-05-11

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Keyword advertising accounts for much of the revenue that search engines Yahoo and Google receive. Google has stated that 90+% of their earnings comes from its AdWord service. As a whole, keyword advertising took in 35% of internet ad revenue generated during the last fiscal year.

However, the method in which the two search engines count their revenue is completely different. The way that search engine ads work is when an ad is clicked, the search engine serving the ad gets paid by the advertiser, as does the website that the ad appeared on. This is universal between the two. The differences comes in how Yahoo and Google consider what is revenue and what is an expense.
If an ad pays $5 each time it is clicked, Yahoo considers the money from the click as revenue. It would record the transaction as Yahoo making $5. Yahoo would then give the website who hosted the ad the amount due to them because of the click, say $3, and record that payment as an expense.

Google differs in that it would not count the initial $5 charge as revenue. Google would only count the $2 it receives AFTER paying the ad hosting website as revenue.

This type of accounting, the "gross" accounting that Yahoo employees and the "net" method that Google uses, can paint different images for investors. According to the Wall Street Journal, accounting practices in internet ad revenue are still evolving.

A representative for Yahoo claims that the search engine reports its gross revenue "based on our interpretation of the accounting guidance and our contractual terms." Google, on the other hand, reports the net amount because the company feels they "are not the principal to transactions," because ads appear on websites of independent websites. These website determine the content they wish to display, making Google the intermediary.

Although it records gross revenue, Yahoo, when speaking to investors, reports net revenue.

A quote from the article that appeared in WSJ paints a clear picture of why the search engines employ the accounting practices they do: "When it comes to profit margins, the accounting choices create the opposite impression: Yahoo's accounting makes its profit margins appear smaller, and Google's makes its appear larger."

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