Apple won’t say what the exact number is, but Google pays a substantial amount of money to remain the default search engine on iPhones and iPads.
A new analysis from Bernstein analyst Toni Sacconaghi estimates that Google may be paying Apple upward of $3 billion a year.
Based on that estimate, Google may account for 5% of Apple’s total operating profit 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. That $1 billion, specified in court documents, was paid as part of Google’s agreement to pay Apple a percentage of the money Google earns from iPhone and iPad users. The percentage is unclear, but Bernstein cited media reports putting the agreed-upon percentage at 34% “at one point.”
Apple has recently 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 the company makes through subscriptions like Apple Music.
But Bernstein dug through Apple’s filings and found that licensing revenue, like that which Google pays Apple, is actually the biggest or second-biggest contributor to Services growth.
Because of this, it believes Google will pay Apple “closer to $3B” this year. 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 the analysis started 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.
Bernstein points out that whatever money Google pays Apple is most 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 is set to collect larger and larger checks every year as it gains users.
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.