Apple could be about to kick Google off its Safari web browser — and in doing so, hand the search giant billions in additional revenues.
This year, the deal between Apple and Google to provide the default search tool for Safari on iOS, Apple’s mobile operating system, is up for renewal. Some people think Apple may decide to drop Google altogether.
Right now, Google is the default — that means unless the user actively changes it, all the searches they do on their iPhone will be powered by Google. Google then places ads by these results, and Apple shares a portion of these advertising revenues.
But it’s looking more and more like Apple could refuse to renew this deal, and turn elsewhere for its search (Citi believes the chance of Apple not renewing is higher than 50%). Apple might turn to Yahoo: CEO Marissa Mayer has previously wrestled a similar default search deal away from Google on the Mozilla Firefox web browser, and is focusing ever-more on search. Microsoft’s Bing is another option — it already powers Siri, Apple’s voice-controlled personal assistant. Or it could even produce its own in-house search tool, as it did when it ditched Google Maps in 2012 in favour of its own Apple Maps. (The roll-out of Apple Maps was an unmitigated disaster, with Apple ultimately firing the division head — but it’s unlikely to make the same mistakes again.)
Whichever the new partner — ending the deal would be embarrassing for Google. It’s a company that is quite literally built on search, and it would be losing default status on a browser responsible for nearly 50% of the mobile market (according to UBS). But, strangely, Google might actually stand to benefit from it.
This is because Google pays Apple for the privilege of being the default search. If you assume that many users would switch back to Google anyway, the company might actually profit from the collapse of the deal.
In a Goldman Sachs survey of 500+ iPad/iPhone users, 48% of respondents said they would switch back if the deal was cancelled. People clearly prefer Google’s product to the alternatives out there — it comprehensively dominates the desktop market after all. (A previous UBS report also estimated a roughly 50% switchback rate.) “If Google is able to recapture 50% of Safari default revenues,” the firm says, “net advertising revenue would increase by $US1.2 billion.”
But if Google were able to exceed these expectations, it could make billions. GS says that “if Google is able to recapture 70% of Safari-related revenue, net advertising revenue would increase by $US2.7 billion.”
Here’s the report’s key takeaway (emphasis ours):
If Google does not renew the Apple/Safari deal, we estimate that it could be ~5-10% accretive to earnings if Google is able to recapture 50-70% of revenue that would have fallen under the deal. We estimate Google saw $US11.8bn in total mobile search revenue in CY14 and while we believe that ~75%, or $US8.9bn, was generated from iOS devices (iPhones and iPads), our research suggests that ~50% of this portion, or $US4.4bn, is directly related to the Safari deal. There is much debate over the TAC rate that Google pays to Apple, with the market estimating anywhere from 30-85%. By analysing Google’s major distribution deals, we come to a TAC rate of 65% which implies $US1.6bn in CY14 net advertising revenue from the Safari deal, contributing ~350bps of growth.
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