Google will pay Apple a large amount of money every year to stay as the default search engine on Apple devices, Bernstein analyst A.M. Sacconaghi said.

Since Apple didn’t disclose the exact number yet, but Bernstein believes that that Google will pay Apple $3 billion per year, up from $1 billion in 2014. The firm also believes that Google’s licensing fees contribute to a large bulk of Apple’s services business.

Based on this evaluation, Google may account for up to 5% of Apple’s entire operating profit growth, and may account for 25% of total company growth over the last two years. Bernstein analyst said.

Google paid Apple $1 billion three years ago. And that $1billion was paid due to Google’s contract to pay Apple a specific percentage of the revenue Google generates from iOS devices.

The percentage is still not confirmed, but Bernstein analysis says that perhaps it is 34%.

Apple has recently gained attention of investors to its Service line product, which might equal to 13% of Apple’s total revenue in 2017. When Apple officials discuss about Services, they prefer to focus on the amount Apple collects from selling its apps on the App Store or the revenue the brand generates by subscriptions.  

But when Bernstein researched Apple’s filing and media reports, what the firm found is very interesting. The licensing fees which Google pays Apple is the prime contributor to its services growth.

This data shows that Google will pay Apple about $3 billion this year. Here is how Toni Sacconaghi and his team figured out this estimated figure.

The estimated figure is triangulated in numerous ways:

  •         Third party market research recommends that Google’s total mobile revenue have increased by 3X from $16 Billion to $50 Billion. Therefore, licensing fee to Apple possibly have increased commensurately to $3 Billion.
  •         In the past two quarters, Apple’s services profits have increased by $2.4 Billion with the App store being the major contributor and the licensing profits to be up by the second largest amount that might be up $500 Million or perhaps more than that. It suggests that total licensing in the past two quarters is significantly growing at a rate of $1 Billion every year.
  •         The Traffic Acquisition Costs (TAC) which is basically the amount Google pays OEMs and carriers for search placement is 2.2X which suggests that if Apple seized share, amount from Google to Apple might be up a similar amount to $2.2 Billion or more depending upon Apple gained share. Toni and the team explained that press reports clearly indicated that the profit share between Google and Apple was 34%, which if the exact number, would point to more amount than $3 Billion that Google will pay Apple.

These findings suggest that with the $1 Billion licensing revenue in 2014 and then extrapolated for Apple and Google revenue and growth in the relevant service items in the past three years since then.

Bernstein research suggests that whatever amount Google pays Apple is most likely a profitable agreement for Apple and a positive sign of the significance and prevalence of iOS devices.

Unless Google changes its mind, Apple is all set to collects considerable amount of money every year to improve its products and gain its user-base.

Bernstein analysts also think that there is still a possibility that Apple could increase the licensing fee by selling off app placement on the iOS devices, which could be greatly profitable, especially if Apple offered to make their apps default within iOS.

But Sacconaghi also thinks that Google might walk away from paying Apple any licensing fee if it feels that its search engine is so popular and Apple won’t have any other choice to place by default.

On the other hand, Sacconaghi said that Apple iOS devices contribute about 50% of Google mobile search revenue, which clearly indicates Google might be too afraid to back away from the deal with Apple. In this scenario, it’s a win-win deal for both Apple and Google.


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