It’s always difficult to tell who’s winning when two tech giants dance with one another. So it goes with Apple and Google. A new report from Bernstein, the investment research and management firm, suggests that Apple’s heavy reliance on Google could place it in a precarious financial position.
One of Apple’s big growth areas over the last couple years has been its licensing revenue, most of which drops directly to the bottom line. The iPhone maker doesn’t break out how this revenue is generated, but in a Aug. 14 report, Bernstein estimates a lot of it comes from Google, which pays to be the default search engine on iOS devices.
Bernstein says Google will pay Apple up to $3 billion in the fiscal year ending Sept. 30, or 5% of Apple’s total operating profits, for this privilege. Court documents stemming from a copyright dispute between the companies showed that Google paid Apple $1 billion in 2014. The search firm’s payments accounted for 25% of the consumer device company’s estimated $8.2 billion growth in operating profits over the last two years, Bernstein said.
Such a relationship is a double-edged sword. Third-party estimates suggest that Apple devices account for more than 50% of Google’s mobile search revenues, giving Apple unique leverage to maintain its current licensing agreement. On the other hand, Google’s escalating mobile traffic acquisition costs have drawn increasing scrutiny from investors, and the company might be financially better off if it could capture at least 80% of its current iOS search volume without paying Apple.
In the last 10 of 11 quarters, Apple’s licensing revenues have been either the largest or second largest contributor to its growth in services revenue, according to its quarterly reports. Though the consumer device company has opportunities to continue this growth with other ad or commerce-intensive apps, like Uber, Amazon, Facebook, and Netflix, it will be tough to recuperate its losses should Google walk away.
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