In an interview with Charlie Rose in September, Apple (NASDAQ:AAPL) CEO Tim Cook said that Google (NASDAQ:GOOG) (NASDAQ:GOOGL) is his company's biggest competitor, not Samsung or old rival Microsoft (NASDAQ:MSFT). But when you're responsible for half a billion or so computing devices, you're bound to give some business to your rivals, even if they're your biggest threat.
Such is the case with all three of the companies mentioned in the preceding paragraph. Samsung manufacturers Apple's mobile processor chips. Microsoft's technology is behind Siri. And Google is the default search engine on Apple's Safari web browser.
That last example might not be true by the end of the year. Google's search deal with Apple is reportedly up for renewal this year. This could have a meaningful impact on Google's mobile search market share, as well as its revenue.
How much is Apple's business worth?
Analysts at UBS estimate Google is poised to generate $7.8 billion in revenue from its position as the default search engine in Safari. However, it also notes the company spends $2.2 billion in traffic acquisition costs related to its deal with Apple, bringing down net revenue to $5.6 billion.
Now, $5.6 billion in net revenue is about 8.5% of Google's 2014 revenue. Losing that revenue would be a major blow for Google, especially considering analysts expect the company to grow 14.5% this year and 15.5% next year. The analysts at UBS don't think the net revenue impact will be that bad, though.
Instead, they expect 50% of Safari users to switch back to Google as their default browser. That means Google would still generate approximately $3.9 billion from Apple device users, and save its $2.2 billion traffic-acquisition costs. As such, UBS expects losing the Apple contract would only cost Google $1.7 billion in net revenue -- less than 3%.
But what might it really be losing?
If Apple ditches Google, Google stands to lose more than just a couple of billion dollars. It would be getting boxed out of one of the most valuable and fastest-growing markets in online advertising.
Business Insider expects mobile advertising spend to grow 43% per year through 2018, growing to a $42 billion market. Safari accounts for approximately 43% of the mobile-browser market. Even if 50% of users switched back to Google, that would be more than 20% of mobile web browsers that Google could be missing out on.
What's more, Apple users are typically more valuable than non-Apple users due to the premium nature of Apple's products. Indeed, Google specifically mentioned shopping ads are extremely valuable on mobile during its fourth-quarter earnings call, and iPhone and iPad users do much more shopping than Android users. During the holiday season, 80% of mobile shopping orders in the U.S. took place on an Apple product.
A potential replacement
Apple might tap Microsoft to replace Google if it decides to go in a new direction this year, and stick it to its biggest competition. As mentioned, Microsoft's search engine already powers the search capabilities of Siri, and Bing has steadily gained share from Google, particularly on desktops. Nonetheless, Google remains king of mobile devices.
Google accounts for 84% of searches on mobile in the United States, whereas Bing accounts for just 5.7%. A partnership with Apple could be a big boost to Microsoft's search business, with the potential to add 20%-plus of mobile-search share.
While Microsoft may not monetize search queries at the same rate as Google, it's improving rapidly. Search advertising revenue grew 39% in fiscal 2014 on the back of increased search ad prices. The question for Microsoft is whether its ad prices are strong enough to make a bid for Apple's business that's better than Google's. A key part of Apple's decision is how much a search engine is willing to pay in traffic-acquisition costs. If those costs get too high, it stops making sense for Microsoft to make a deal with Apple.
Finally, there's always the possibility that Apple will go the Maps route and to its own search. Despite the backlash and inaccuracies when Apple Maps first launched, about a year later, the number of Apple Maps users to Google Maps users was six-to-one on iPhone. What's to stop Apple from doing the same with search?