Why Google (Might Be) Paying Apple $1 Billion To Remain Default iOS Search Engine

"The next Google is Google," proclaimed Morgan Stanley analyst Scott Devitt in a recent message to investors. Devitt justified his seemingly tendentious congratulations by praising Google for remaining flexible in an exponentially unpredictable industry.

Underlying Devitt's statement is likely the industry's guesstimation that Google pays notorious frenemy Apple up to $1 billion a year to remain the default search engine for the latter company's mobile operating system, iOS.

Devitt's statement, relayed by the Business Insider on Sunday, continues the notion that "Google's search business has room for revenue growth and YouTube has an opportunity to generate billions in more sales."

But it is Google's "bullish" business acumen viz. the mobile realm that Devitt particularly lauded.

As suggested by Macquarie analyst Ben Schachter in March 2012, "Google searches on Apple devices resulted in $1.3 billion in gross revenue ... Google has a 75% traffic acquisition cost associated with that revenue [meaning Apple gets 75 cents for every one dollar search advertising collected on an iOS gadget]. If Apple were to abandon Google, the impact to Google would be minor. The impact to Apple might actually be worse, since it would have to rely on search engines that are arguably inferior to Google."

Regardless of whom the alleged revenue sharing may benefit more, Devitt is far more incredulous than his analyst colleagues, believing that such a deal would in fact be "too messy."

Instead, Devitt submits that a simpler strategy would have Apple engage in a "fee per device," resulting in upfront payments for Apple (not to mention more efficient accounting; it's all right there and far more easily quantifiable than an abstract annual payment).

Perhaps more importantly, a fee-per-device deal would limit iPhone and iPad/iPad mini users from going to Google's site in lieu of iOS' default search query.

"Some investors are worried that Google's traffic acquisition cost (TAC) on Apple devices is going to balloon over time," continues the Business Insider.

There is some historic validity to such compunction, as Tech Crunch noted that Google's payment for the same privilege in 2009 was a mere $82 million.

"Devitt doesn't think it's going to happen," says the Business Insider regarding a TAC inflation. "He believes the TAC will only increase at ~5% per year, and in terms of Google's overall TAC, he thinks it's steady at ~30-35%. What does that equate to in real dollars? A little under $1 billion this year, steadily rising over the years."

Keeping in mind that Apple's last quarter profits showed $13 billion, a billion-dollar deal is good but not great for the company.

But, for Google — which might control as much as 95 percent of the mobile search market, in Devitt's approximation — $1 billion for a monopoly on "the most lucrative online business in the world is a no-brainer." Particularly as Google, too, saw a profit last quarter of nearly $13 billion ($11.34 to be exact).

Of course, as Samsung has won out as the leader in the mobile manufacturing community, perhaps the Apple-Google deal may be a moot point in the nearer future. Only time — or, in this case, crafty analysts — will tell.

Follow @profklickberg

© 2021 iTech Post All rights reserved. Do not reproduce without permission.

More from iTechPost