Over the past few years, Apple (NASDAQ:AAPL) has fashioned itself a champion of consumer privacy, fighting to protect users' personal information as much as it feasibly can while taking overt jabs at peer tech companies that offer free online services at the expense of privacy. CEO Tim Cook's latest effort to advocate for user privacy comes in the form of an op-ed in Time magazine today. "Consumers shouldn't have to tolerate another year of companies irresponsibly amassing huge user profiles, data breaches that seem out of control and the vanishing ability to control our own digital lives," Cook writes.
Cook renewed his call for oversight and regulation, something comparable to the European Union's General Data Protection Regulation (GDPR) that went into effect last year. The chief executive then derides the "shadow economy" of data brokers that traffic in personal information "out of sight of consumers, regulators and lawmakers." However, undercutting Cook's argument is the fact that Apple is a small part of that shadow economy, albeit indirectly.
Google represented 60% of Apple's services growth in 2018
One of the most lucrative partnerships Apple has is with Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) subsidiary Google, which pays handsomely to remain the default search engine in mobile Safari. Users are also unable to change the default browser in iOS, reinforcing just how valuable that cushy spot is for search providers. Beyond Safari, Apple replaced Microsoft Bing with Google for Siri and Spotlight search in 2017. In sending iOS users to Google via numerous avenues, Apple is indirectly contributing to the search engine's data collection -- and getting paid billions in the process.
In 2014, court filings confirmed that Google paid Apple $1 billion that year to be the default search provider. Bernstein analyst Toni Sacconaghi estimated in 2017 that this figure had risen to $3 billion. The amount skyrocketed to $9 billion in 2018, and is expected to reach $12 billion for 2019, according to recent estimates from Goldman Sachs. "We believe Apple is one of the biggest channels of traffic acquisition for Google," Goldman analyst Rod Hall wrote. Google's traffic acquisition costs (TAC) have been on the rise, which could partially be a result of Apple scoring higher rates from its Silicon Valley neighbor.
In fact, these payments are a huge part of what's driving Apple's services revenue growth. Goldman's estimate for 2018 ($9 billion) would be 22% of the $41 billion in services revenue that Apple recorded for the year. In comparison, Bernstein's estimate for 2017 ($3 billion) would represent less than 10% of Apple's 2017 services revenue ($31.3 billion). Put another way, Google may be single-handedly responsible for 60% of Apple's services revenue growth in 2018, if these analyst estimates are accurate.
Apple has no choice
To be clear, Apple's work to advocate for consumer privacy is noble and a key point of differentiation. The company also has little choice: It's not as if Apple can choose to not offer search in its products, and Google is the most popular search engine in the world. When called out about the apparent cognitive dissonance in a November interview with Axios, Cook defended Google as "the best" while pointing to privacy controls Apple includes in mobile Safari:
I think [Google's] search engine is the best. Look at what we've done with the controls we've built in. We have private web browsing. We have an intelligent tracker prevention. What we've tried to do is come up with ways to help our users through their course of the day. It's not a perfect thing. I'd be the very first person to say that. But it goes a long way to helping.
Apple does offer privacy-focused search engine DuckDuckGo as an option in mobile Safari, but hardly anyone uses it. DuckDuckGo's mobile search market share is a minuscule 0.11% globally, according to NetMarketShare. Google's mobile search share is a staggering 81%. The Mac maker is in a tough position. It wants to protect user privacy, but in reality Apple has no practical choice but to partner with Google. Consumers need mobile search, Google's is the best, and Apple knows how valuable the Safari search bar real estate is.
Regulation really would be the best outcome for Apple, as it would accomplish much of what Cook is seeking without sacrificing that massive and growing revenue stream.
Check out the latest Apple earnings call transcript.