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'Apple's bargaining power over Google is weaker than previously thought'

A couple of weeks ago, a court in the US heard that Google pays Apple $1 billion to keep its search engine in iOS, the iPhone operating system. Few other details are available. But that “$1 billion” factoid set off a round of speculation about how dependent Google is on Apple for its revenues. The $1 billion number suggests that 13.5% of Google’s entire revenue comes from Apple users, predominantly when they use Google as their search engine in the Safari browser.

That makes Apple one of very few companies big enough to do serious financial damage to Google, if it chose to.

It also adds a new wrinkle to the mystery of why Apple tolerates products from Google on its phones when the two companies compete so fiercely. Apple and Alphabet (Google’s parent) compete head-to-head in phone sales, with operating system software, and in the recruitment of tech talent.

Apple can remove Google search services from iPhone if it wanted. iPhone users are generally the most valuable, most lucrative customers on mobile, so that would hurt Google’s ad business. One blogger even suggested that Apple might “leverage its entrenched position in hardware in order to starve Google’s core business into irrelevance.”

But a recent note from Enders Analysis in London argues the opposite. According to analysts Matti Littunen and Joseph Evans, the $1 billion number is much lower that previous estimates — guesses, really — at how much Google paid Apple to keep its spot as the search default on iPhone:

The surprising aspect of the revenue share percentage is actually how favourable it seems to be for Google. Authoritative analyst estimates before the figures surfaced put Google’s traffic acquisition costs at over 60% of assumed Safari search bar revenue, with Apple’s share of the 2014 revenue amounting to well over $2 billion. Rather than challenging previous analyst estimates of Google’s iOS revenue as too high, the figure of 34% at $1 billion suggests that Apple’s bargaining power over Google is weaker than previously thought. The price was especially low considering the value to Google of Apple’s lavishly spending mobile users.

Google’s costs for acquiring search traffic — the sums it pays other media providers who select Google for their search services — have been getting cheaper over time, the Enders pair says:

GoogleEnders Analysis

Apple has done its best to replicate a bunch of Google’s apps, in hopes of persuading iPhone users to stop using Google. Apple has its own apps for search (Spotlight), maps, email, calendar, and cloud photo backup. In theory, an iPhone user can get by perfectly well without ever opening a Google app.

Good luck trying to do that in the real world, however. Google’s basic apps are still largely superior to Apple’s, despite Apple’s obvious progress on maps and search. And this is why Apple is
not actually in a strong position to wring more money from Google, Littunen and Evans at Enders say. Even when Apple removes Google as its defaults, iPhone users reinstall them:

The reason for Google’s unexpectedly strong leeway could lie in the brand loyalty of Google search users and their likelihood of manually switching back to Google even if the default search provider were to be changed to that of a competitor. This theory is supported by 2015 surveys conducted by Goldman Sachs and UBS which indicated that as many as half of iOS Safari users would be likely to do precisely that.

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