What happened
Apple's (AAPL 1.27%) stock price climbed 3% to a record closing high of $153.12 on Monday, following an intriguing analyst report.
So what
Alphabet's (GOOGL 0.55%) (GOOG 0.74%) Google could pay Apple roughly $15 billion this year to retain its place as the default search option on iOS, according to Bernstein analyst Toni Sacconaghi. That's up from an estimated $10 billion in 2020.
Apple's shares popped on reports of a lucrative new deal with Google. Image source: Getty Images.
Sacconaghi posits that the deal with Google will boost Apple's services revenue growth by 8.5 percentage points -- and account for as much as 9% of the iPhone maker's gross profits in fiscal 2021.
Now what
It's not hard to see why Google would be willing to pay such large sums. Despite its efforts to diversify its business, advertising revenue still represents the lion's share of its profits. And while Google remains the dominant search engine in the U.S. and many other areas of the world, the last thing it wants to do is let rival Microsoft outbid it and claw back market share.
As for Apple, there's little to lose and much to gain. Google is clearly the most popular search engine, and the great majority of its users would probably choose Google for their search needs. Apple also lets its users choose among different search providers, such as Microsoft's Bing, if they prefer a different option. So for simply doing something most of its customers would do anyway, Apple reportedly earns billions of dollars of high-margin revenue.
The risk, however, is that regulators will move to block these payments to curb Google's ability to stifle competition. Yet for today, at least, investors appear to be taking a more optimistic view -- and are bidding Apple's shares up in kind.
