Google may have paid $3 billion to remain the iPhone's default search engine
A new analysis from Bernstein analyst Toni Sacconaghi estimates that Google might be paying Apple as much as $3 billion per year.
Based on that estimate, Google may account for 5% of Apple's total operating profits this year, and up to 25% of total operating profit growth recently, according to the Bernstein research.The only hard number we know is that Google paid Apple $1 billion in 2014, thanks to court documents. That $1 billion was derived as a percentage of revenue generated by Google through iPhone and iPad users, as much as 34%, according to some reports.
But recently, Apple has been drawing investor focus to its "Services" line item, which could amount to as much as 13% of Apple's total revenue this year. When Apple executives talk about Services, they like to focus on the fee Apple collects from software sold on the App Store, or the money they make through subscriptions like Apple Music.
Because of this, it believes the amount Google will pay Apple this year "will be closer to $3B." Here's how Sacconaghi and team came to that number:
Our estimate is triangulated in a number of ways: (1) third party market research suggests that Google's total mobile revenues have increased from $16B to $50B (i.e., have tripled) from CY14 to CY17 (Exhibit 3); accordingly, payments to Apple likely have increased commensurately (to $3B) since then; (2) In the last two quarters, Apple's Services revenues have increased YoY by $2.4B, with the App Store being the biggest contributor (which we model has increased $1.35B YoY), and Licensing revenues to be up by the second largest amount, which could be up $500M or more - suggesting that total licensing in the last two quarters is increasing at a rate of $1B per year this year; and (3) Google's distribution Traffic Acquisition Costs (TAC - the amount it pays OEMs and carriers for search placement) is 2.2x what it was in 1H 14 (Exhibit 4), again suggesting that if Apple held share, payments from Google to Apple might be up a similar amount to $2.2B (or more assuming Apple gained share). We note that press reports have indicated that the revenue share between Apple and Google was at one point 34%, which if true and still the case today, would point to a much higher than $3B in payments from Google to Apple today.
Basically, this means that the analysis started out with the $1 billion payment in 2014, and then extrapolated for Google or Apple's growth in the relevant line items in the three years since then to come up with the $3 billion estimate.Bernstein points out that the whatever money Google pays Apple is likely all profit - a pretty great deal for Apple and a strong sign of the importance of the iPhone ecosystem.
And unless Google changes the deal, Apple will collect larger and larger checks every year as its installed base grows.
Bernstein analysts even see a possibility that Apple could double-down on licensing revenue by selling off app placement on the iPhone, which could be profitable "particularly if Apple offered to make them default applications within iOS - think Uber (vs. Lyft) or Amazon (vs. Jet) or Facebook (vs. Snapchat/Twitter) or Google Maps (vs. Mapquest) or WeChat (vs. Line) or Netflix (vs. Hulu)," Sacconaghi wrote.
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