Please ensure Javascript is enabled for purposes of website accessibility

How Much Is iOS Worth to Google?

By Adam Levy - Jan 27, 2016 at 10:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Google is paying upwards of $1 billion to remain the default search engine for Safari.

Source: iTunes.

We've always known Google has been paying Apple (AAPL -0.47%) a good sum of money to remain the default search engine for its iOS Web browser. Now, a court transcript from Oracle's copyright lawsuit against Google has revealed just how much the Alphabet (GOOG -0.09%) (GOOGL -0.23%) company is paying the iPhone maker. The transcript revealed that Google paid Apple $1 billion in traffic acquisition costs in 2014, and "at one point in time the revenue share was 34%," according to documents obtained by Bloomberg.

It was unclear from the transcripts which company took the 34% share. Goldman Sachs analysts previously estimated that Apple takes a 65% share of revenue from Google search ads on Safari, which the number from the trial corroborates. With Apple taking either 34 or 66 cents of every dollar Google makes on iOS, how much is the Apple user base actually worth to Google?

High-value customers
Although iOS represents a small share of the mobile device market, its average user is much more valuable to advertisers than the average Android user. The premium that iOS users spend on Apple devices is indicative of their willingness to spend on other products. Indeed, iOS users in aggregate spent 75% more than Android users on apps in 2015, according to App Annie. That's despite Apple's taking only a fraction of the markets for smartphones and tablets.

As a result, advertisers are willing to spend more for advertisements on iOS devices versus Android devices. In fact, Goldman Sachs estimates that 75% of Google's search ad revenue comes from iOS devices.

For 2014, analysts estimate that Google's total mobile ad revenue totalled $11.8 billion, and 75% of that figure is $8.9 billion. If Google paid only $1 billion for $8.9 billion of revenue, it got one heck of a deal. Traffic acquisition costs would come to just 11% if that were the case.

But Google doesn't pay traffic acquisition costs on every search on an iOS device. Searches conducted from users using Google's Search app or navigating directly to google.com don't require Google to pay. Analysts believe only about half of Google's iOS revenue is attributed to the Safari deal. Still, that only raises the $1 billion to about 23% of revenue.

At 34%, Google generated only about $3 billion from the traffic acquisition deal in 2014 -- $2 billion in net revenue. If the $1 billion represents 66% of revenue, then Google netted only about $500 million from the deal. For a company that generated $66 billion in 2014, that's not a huge value.

So, are the rumors that Apple could derail Google overblown?
There are suspicions that part of the reasoning behind Apple's decision to downgrade iAd, its mobile advertising product, was a precursor to Apple's plan to remove ads from the Safari browser altogether. Apple started allowing ad blockers on iOS last fall, and CEO Tim Cook has made several comments about how competitors such as Google are invading users' privacy, something he's very much against.

The next step to cut off the legs of Google would be to end its traffic acquisition agreement. Apple has already tapped Bing to power its Spotlight search feature and Siri. It could use a competing service such as Bing or the privacy-conscious DuckDuckGo to replace Google as the default search engine in Safari.

And while Google won't lose too much net revenue from losing that deal directly, it will miss out on the value that deal provided. The more searches conducted on Google, the better its search engine performs, because it tracks which results users actually click on.

More importantly, users are typically logged in to a Google account when conducting searches, which means the data it collects on users from iOS can be used to show advertisements across all the devices that user is logged into. So, while Google may only generate a few hundred million from ads shown on iOS devices, the data it collects from those searches provides it with what it needs to maximize its revenue on PCs and other devices.

If Apple cuts off Google from Safari, the impact will reach much further than Apple's devices.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool owns shares of Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$164.58 (-0.47%) $0.77
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$117.19 (-0.23%) $0.28
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$118.12 (-0.09%) $0.10
Oracle Corporation Stock Quote
Oracle Corporation
ORCL
$76.42 (-1.21%) $0.94

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/08/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.