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Google fees, not iTunes and Apps, may be biggest part of Apple’s services business

The rivalry between Google and Apple has defined the mobile experience and the smartphone industry over the past decade, but they remain dependent on one another in many ways too. For instance, Google is still the default search engine on the iPhone and iPad, something which costs the web giant a huge sum – up to $3bn this year alone, according to calculations by Wall Street analysts Bernstein.

Bernstein used legal filings, third party research, and its own estimates to work out the price tag for staying on the iDevices – with all the search traffic and associated revenues that position brings.

“Court documents indicate that Google paid Apple $1bn in 2014, and we estimate that total Google payments to Apple in fiscal year 2017 may approach $3bn,” Bernstein analyst AM Sacconaghi Jr wrote in a client note. “Given that Google payments are nearly all profit for Apple, Google alone may account for 5% of Apple’s total operating profits this year, and may account for 25% of total company operating profit growth over the last two years.”

He added, “We note that press reports have indicated that the revenue share between Apple and Google was at one point 34%, which if true and still the case today, would point to much higher than $3bn in payments from Google to Apple today.”

So it seems a substantial portion of Apple’s services revenues – on which it is placing heavy emphasis to drive growth amid the slowdown in smartphone growth – are coming from Google fees, not from its own innovations, such as the music and the rumored original content offerings (see separate item).

“Services has become an increasingly important part of Apple over the last several years,” Sacconaghi continued. “While investors typically think of the App Store and iTunes/Music as the key drivers of services, Apple’s 10-Q reporting reveals that licensing revenues have been the biggest or second largest contributor to Apple’s year-over-year services growth in 10 of the last 11 quarters.”

In the most recent two quarters, Apple’s services revenue has increased by $2.4bn year-on-year, with licensing revenue up by $500m or more. That suggests, Bernstein said, that Apple’s total licensing income in the past two quarters was increasing at a rate of $1bn a year.

Of course, there is money in this for Google too. About half of Google’s mobile search revenue comes from iOS devices, and that revenue has trebled since 2014 to reach $50bn today, an increasingly significant percentage of the total.

As in any business relationship, the balance of power, and therefore the level of payments, may be renegotiated over time. If Apple loses market share and/or iOS usage patterns change, in a way that drives less traffic and advertising for Google, the search giant may try to sweeten its deal. “Google could ultimately decide that its search position is sufficiently strong that it no longer needs to pay to be the default browser,” Sacconaghi concluded. However, given Apple’s continuing resilience in the mobile market, and the high levels of data usage its customers typically generate, that day  seems along way off.

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