It is so much more nuanced than that. That number is essentially manufactured for the street (and before anyone jumps down my throat about being some sort of conspiracy nut let me explain).

Early in Google's life there was an article which asked the question "Is Google's gross margin 100%?" It went on to observe that Google had overhead, staff, facilities, and monthly recurring costs like electricity and phone bills, but every advertisement they 'served' cost them essentially no delta in their overhead, so their "cost of goods" when looking at the business through the lens of the goods economy[1] was zero. And any revenue they generated by selling a "click" (their stand in for a widget) was 100% gross profit. As a result, using old school goods economy accounting rules, profit is entirely a function of how many clicks they "ship" and there are many knobs to adjust which boost how many clicks they ship. They include, but are not limited to, putting more ads on their own pages and buying traffic to point at their pages with ads on them.

But when you evaluate their business using the principles of information economics[1] you see that they do have costs and their core product's value is eroding.

To understand that statement, you have to ask "what does Google actually sell to advertisers?" An 'ad unit' or an 'ad word' is the name but what is it really? My claim is that what they really sell is a piece of very valuable information that is hard to get. They sell "this person has just looked for this good or service, now who wants to respond?" They create that information by providing a portal that people can write in a question.

This "solves" for advertisers their biggest ask, that a consumer looks at their advertisement exactly when they need the good or service that advertisement is promoting. You can put an ad for a sports car in a magazine about cars, you can put an ad for a sports car on a television show about cars, but that pales in comparison to the idea of putting your ad for a sports car in front of someone who has just asked "What's the best sports car?".

I think that it is pretty easy to see the value there to advertisers, they would rather spend money advertising to people looking for their products then advertising to everyone and hoping that some of them want their products. What is more is that it works well and that is why it has become a major force in advertising. It is also an interesting measure of the value too advertisers.

Advertisers will constantly evaluate what it costs to advertise against product sales or market penetration or market visibility. They have a limited budget to spend and they want to make it count. That sets up the traditional economic forces which demands they allocate their ad spend capital wisely to get the most impact. Google, unlike a television network or magazine, brought into wide use the notion of an auction that happens at the decision point, between potential advertisers on what they would pay to have their ad shown, and where it would be shown, in the search results for a given query. In an information economic sense this gives us the fundamental value of the information that Google sells.

The key being that all of the knobs that Google has at its disposal will eventually be turned to their maximum point, and if CPC keeps falling their profit margin will too. Because Microsoft's CPC number is going up their margins will continue to increase. At Google's current rates they will eventually be buying so much traffic and putting so many ad slots on their own sites that non-"free" services will appeal to more and more people which reduces the number of eye-balls on a Google ad which reduces its value to advertisers still further. If Google reaches the point where they are no longer able to adjust their traffic mix to achieve their numbers, they will be in a very tight spot.

[1] The "goods economy" is the system of directing capital into the production of goods. The "information economy" is the system of directing capital toward the disclosure of information.