Earlier this week, Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) subsidiary Google and Mozilla announced that Google would be returning to the Firefox browser as the default search engine in the U.S. and Canada. The news comes almost exactly two years after Firefox switched from Google to Yahoo! (which is now owned by Verizon subsidiary Oath), and was included alongside the announcement for Firefox Quantum, the newest version of the browser.
Mozilla relies almost entirely on these types of search partnerships, with the related royalties often comprising about 90% of revenue for the non-profit organization. For example, in its 2015 annual report (Mozilla has not yet released a 2016 annual report), it notes:
Mozilla entered into a contract with a search engine provider for royalties which expired in November 2014. In December 2014, Mozilla entered into a contract with another search engine provider for royalties which expires December 2019.
Approximately 90% of Mozilla's royalty revenues were derived from these contracts for 2015 and 2014 with receivables from these contracts representing approximately 75% and 77% of the December 31, 2015 and 2014 outstanding receivables, respectively.
This snippet clearly refers to the switch from Google to Yahoo!, and Mozilla's total royalty revenue did jump 29% that year to $417 million, suggesting the Yahoo! partnership was working out well (at least financially). However, if Mozilla's deal with Yahoo! was set to last through December 2019, we're clearly not there yet. Google and Mozilla both declined to provide any financial details or terms surrounding the new partnership, which reportedly caught Verizon off guard.
Does the win really make a difference for Google, though?
Firefox remains a small, but stable player
Firefox has been declining in relevance for years, thanks in no small part to Google's own Chrome browser. Obviously, Google doesn't have to pay royalties to anyone for the search traffic that Chrome drives, which is why it was such a genius move in the first place to create Chrome nearly a decade ago.
As of October 2017, FireFox had a 13% worldwide market share of internet browsers, compared to Chrome's 60%, according to NetMarketShare.
That's a decent chunk of the browser market that's still worth going after. Perhaps more importantly, Firefox's share has remained mostly steady in recent years (albeit with some fluctuations), suggesting that Firefox still has a loyal user base that Google hasn't been able to win over with Chrome. Just like the old saying goes: If you can't beat 'em, license your search engine to 'em.
Might as well grab the Firefox spot
Google's traffic acquisition costs (TAC) to distribution partners have been rising quite a bit lately, in part because of the ongoing shift toward mobile platforms. TAC to distribution partners soared 54% last quarter to $2.4 billion. Distribution partners include browser providers, among others.
Apple is certainly benefiting from the fact that iOS does not allow any browser other than mobile Safari to be the default. Google could pay an estimated $3 billion to the Mac maker this year for the privilege of being mobile Safari's default search engine.
Even without knowing the details, the Firefox deal will have modest financial implications due to the browser's limited market share, which is unlikely to fluctuate much even with the new Quantum version. Considering Firefox's small but stable share, Google might as well swoop in to grab that search traffic, too.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of AAPL. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), AAPL, and VZ. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool has a disclosure policy.