You Won’t Believe How Much Google Is Paying Apple to Be Your iPhone’s Search Engine

While Apple’s services now make up a significant share of the company’s quarterly revenue, second only to iPhone sales, you may not realize that the lion’s share of these earnings comes from one of Apple’s biggest rivals.

Ironically, it’s Google that’s Apple’s biggest single customer, throwing billions of dollars at Apple each year for the privilege of being the default search engine on the iPhone and iPad, and now a new analyst report suggests that the rental fees for this prominent piece of digital real estate may run as high as $15 billion for 2021.

After all, there are over a billion iPhones and iPads in active use, and most users don’t put a lot of thought into what search engine they’re using when they simply open up Safari and type something in, so it’s pretty easy to see how being the default search engine is easily worth many billions of dollars for a company whose entire business is based on the kind of data that comes from search queries.

Recent statistics suggest that Google currently handles over 60,000 search queries every second, or over 5 billion search requests per day. That’s a lot of data, and it’s safe to say that most of it comes to Google by default.

So, needless to say, this is also a pretty competitive landscape. Google may be the biggest search engine in town, but it’s far from the only one — it has to compete with other juggernauts like Microsoft that would surely like to get a leg up on the competition by being front-and-centre on billions of Apple devices.

In an investor note shared by Ped30, it looks like it’s this fear of competition that’s going to force Google to up the ante, offering Apple nearly $15 billion this year to make sure that it stays on top.

We have noted in prior research that GOOG is likely paying to ensure Microsoft doesn’t outbid it.

Toni Sacconaghi, Bernstein

According to Bernstein analyst Toni Sacconaghi, Google’s estimated payments to Apple last year were around $10 billion — higher than the $8 billion they originally estimated, but right in the middle of the range in which analysts had collectively pegged it. This updated estimate is based on disclosures in Apple’s public SEC filings and a “bottom-up analysis of Google’s TAC (traffic acquisition costs).”

Sacconaghi adds that these numbers could go as high as $20 billion in 2022, and while he acknowledges the possibility of regulatory antitrust concerns that could declare the search deal between Apple and Google to be illegal, he suggests that’s “likely years away.”

Apple’s Complicated ‘Services’ Category

What’s most significant here, however, is how much of Apple’s profits come directly from this search deal with Google.

According to Sacconaghi, if Google does, in fact, pay the predicted $15 billion for this fiscal year, that would work out to 9% of Apple’s gross profits. This means that almost 1/10th of Apple’s profits are coming from a deal with one of its biggest tech rivals.

To be fair, however, these kinds of deals cut both ways. As we saw a few weeks ago, Apple is also paying Google around $300 million per year to rent space for iCloud data on its servers. Still, $300 million is a tiny fraction of $15 billion.

The size of the Google search deal puts Apple’s Services revenue in a very different light from what most people realize. When most users think of Apple’s Services, they’re thinking of consumer-facing services like Apple Music, Apple TV+, Apple Arcade, Apple Fitness+, and so forth. However, these outward services actually make up a tiny fraction of the $17.5 billion that Apple posted in Services revenue last quarter.

For example, if Sacconaghi’s numbers are accurate, almost 15% of Apple’s Services revenue came directly from the Google search deal in the past quarter alone, and this was even more significant in previous quarters.

Since Apple doesn’t break down its Services category, it’s difficult to say exactly where the rest comes from, but most analysts peg Apple’s 15-30% App Store commissions as the other sizeable chunk in the Services category, bringing in around $20 billion annually.

To be fair, this still means that Apple’s consumer-facing Services are growing in revenue, but they don’t account for as much revenue as you might think.

For example, in Q1 2021 — Apple’s “Holiday Quarter” — services revenue was $15.8 billion. It jumped up to $16.9 billion in Q2 2021, and then a record-breaking $17.5 billion in the recently ended Q3. Since the money Apple makes from the Google search deal and the App Store likely remains fairly static from one quarter to the next, it’s fair to say that the bulk of this growth has come from Apple’s Services.

However, there’s still a lot more in this category than you may realize. Apple’s Services include:

1. Apple Music: With an estimated 70 million paying subscribers paying between $9.99 and $14.99/month, it’s fair to say that Apple Music makes up the bulk of revenue among the services that users can actually pay for directly.
2. Apple TV+: With many users still likely taking advantage of Apple’s free one-year trial, the company may not be collecting too much actual money directly from its fledgling video streaming service, but that doesn’t mean it’s not recording that income in the Services column. To comply with General Accepted Accounting Principles (GAAP), Apple is actually obligated to take the cost of every free one-year Apple TV+ subscription off of its hardware sales revenue and record it as Services revenue instead to ensure that investors aren’t being misled.
3. Apple Arcade: Apple hasn’t said much about how many subscribers it has for its subscription gaming service, and by itself Apple Arcade likely isn’t contributing significantly to Apple’s bottom line.
4. Apple News+: By all reports, we imagine that the revenue from Apple’s subscription news service is probably little more than a rounding error on Apple’s income statements. It’s had a very hard time gaining traction, and may not even have more than a couple of million subscribers.
5. Apple Fitness+: Having only launched last December, it’s hard to say right now what contribution Apple’s new Fitness+ service is making to its bottom line, but the fact that numbers are still going up each quarter suggests that it’s at least helping a bit.
6. iCloud Storage: Apple still only gives away a paltry 5GB of free iCloud storage, with an upgrade to a 50GB plan starting at $0.99/month, while you can get 2TB for $9.99. Analysts estimate that around 20% of iCloud accounts are on one of the paid tiers, although it’s almost impossible to know what the breakdown of these is. This one may also grow a bit with the new iCloud+ features coming in iOS 15.
7. Apple One: Last year, Apple rolled all of its services into a set of Apple One bundles, offering some nice savings for users who wanted to subscribe to multiple services. While this may have attracted new users that helped to drive up Apple’s Services revenue, it may have also lost money from users taking advantage of the savings by bundling those services that they were already paying for separately.
8. iTunes Sales: This includes movies, TV shows, and music that customer still actually buy from the iTunes Store. With streaming services taking over, it’s fair to say this is probably a shadow of what it once was, but there are still folks who prefer to own their content rather than renting it.
9. Apple Books: As with the iTunes Store, books and audiobooks sold through Apple’s Books app are an oft-forgotten element of Apple’s Services revenue.
10. Apple Pay: Another category that’s easy to miss is the cut that Apple takes from every transaction you make using Apple Pay. While Apple doesn’t charge users, merchants, or developers to use Apple Pay, it does get a small fraction of each transaction from the banks that issue the cards you’re using with Apple Pay. When Apple Pay launched in the U.S. in 2014, that was reported to be 0.15 percent, or 15 cents for every $100 spent. That may not sound like much, but with over 2 billion Apple Pay transactions per year, it can add up to some real money.
11. AppleCare: Every AppleCare+ plan you buy, whether it’s for your iPhone or your HomePod mini, counts as revenue in Apple’s Services category as well, and this has probably increased significantly since Apple moved over to a monthly subscription model rather than requiring larger up-front payments. After all, it’s easier to pay $10/month to cover your iPhone than $199 all at once — and unless you cancel it early, Apple makes a bit more money that way too.
12. Licensing Fees: The Google search deal is Apple’s biggest licensing deal by far, but it’s not the only one. For instance, The Weather Channel pays Apple to get prominent placement in the iOS Weather app, having outbid Yahoo Weather a few years ago.
13. Maps, Siri, Free iCloud, iOS Updates, and more: Much like it does with free one-year Apple TV+ subscriptions, Apple also deducts the costs of many of its “free” services like Maps, Siri, iMessage, and the 5GB of iCloud Storage from its iPhone revenue and records them in its Services revenue to reflect that users are indirectly paying for these services as part of their iPhone purchase price. While Apple only started doing that for most of its services in Q1 2018 — resulting in a 7.7 percent jump in revenue in that quarter — it’s actually been doing it for iOS updates since the very beginning, at least for the iPhone.
    

While this last point may seem particularly weird, it basically comes down to Apple’s “free” Services being included in the purchase price of your iPhone, iPad, or Mac. To avoid misleading investors, Apple has to account for the added value of these services in their proper categories, which ultimately means that some portion of the purchase price of every iPhone you buy gets reported as “Services” revenue instead of “iPhone” revenue.

In fact, one of the best examples of how this works was the time when Apple actually charged a nominal fee for software updates for the iPod touch. iPhone users got those same updates for free because Apple had set aside a portion of the purchase price of each iPhone to account for the “free” iOS updates that it would offer over the lifetime of the product. It wasn’t originally doing that for the iPod touch, although it ultimately solved the issue by moving that device over to the same accounting standards.