Why Google Pays Apple $18 Billion Every Year
Contrary to what the world thinks, Google and Apple depend on each other
Google and Apple hold one of the biggest rivalries in the tech industry, competing on various products and services, such as operating systems, web browsers, maps, digital assistants, and mobile phones.
To the public, these two tech giants appear to be enemies. Behind the scenes, however, they are more of frenemies, with a secret partnership that benefits them both.
So why exactly does Google pay Apple an eye-watering $18 billion annually, indirectly funding the competition?
To Maintain Its Monopoly
Before we go into why Google pays Apple so much, it is important to understand how Google makes money in the first place.
As of 2022, $162.45 billion (58.1%) of Google’s revenue came from advertisements shown through Google’s search engine.
These are ads shown when people make Internet search queries via Google’s search engine. Advertisers pay Google to show their products and services to people searching the Internet.
That’s why when you search for ‘best hotels in the UK’ on Google, you are bombarded with advertisements at the top of your search results. Hotels in the UK, for example, pay Google to show their room listings to potential customers searching the Internet.
The amount advertisers pay, however, depends on who is being shown the ad. Advertisers consider various factors such as the person’s current location, previous spending history, and the brand of the device the customer uses, to determine how much it pays to show an ad to that person.
For example, a hotel in the UK might be willing to pay Google $0.10 to show their room listings to a person from Canada, using an iPhone, yet will only be willing to pay $0.03 to show their listings to another person also from Canada, using an Android device.
A recent report from AllConnect states that 60% of all Internet traffic comes from mobile devices. Furthermore, a report from Martech states that 75% of Google’s mobile search engine revenue comes from showing ads to iPhone users.
This is no surprise, as advertisers believe a person with a more expensive phone, an iPhone, is likely to spend more money on their products or services, hence advertisers are willing to pay more to have their ads shown to iPhone users.
Now, using all the information above, we can estimate just how much Google generates from iPhone users on an annual basis.
We know that Google makes $162.45 billion per year from people making Internet searches through Google’s search engine, an estimated 60% of which comes from mobile devices.
This means that 60% of $162.45 billion, $97.47 billion, comes from people searching the Internet using their mobile devices.
Additionally, we know that Google makes most of its revenue from iPhone users; 75% of its mobile search engine revenue comes from iPhone users. That’s 75% of $97.47 billion.
In 2022, iPhone users alone generated a staggering $73.10 billion in Google ad search revenue.
And that, ladies and gentlemen, is what Google is after. Not only Google, however, is interested in the $73 billion iPhone users generate, other search engines such as Bing, and Yahoo want a piece of the pie as well.
This is why Google pays Apple billions of dollars every year to be the default search engine on more than a billion Apple devices all around the world.
In 2007, when the iPhone first launched, Google was the default search engine on all devices, until Apple realized Google was more dependent on them than they were on Google.
So, in 2012, Apple signed a deal with Microsoft, making Bing the default search engine on all Apple devices. This was a threat to Google’s monopoly over the search engine industry, hence it made efforts to outbid Microsoft year after year until it finally did.
In 2017, Google paid Apple a reported $3 billion to be the default search engine on not only iPhones but iPads and MacBooks as well.
The deal also includes other terms and conditions that ensure Google’s dominance over Internet search on all Apple devices.
For example, Google requires Apple to make Google Search available across all iOS and MacOS applications, not just Safari. This means that Apple users can access Google Search through Siri, Apple’s voice assistant, Spotlight, the Mac’s search function, and other Apple apps that use web search.
The deal also prohibits Apple from using any other search engine as a secondary option or a fallback. This means that users cannot get search results from other search engines on any Apple device unless they change their settings, which most users don’t realize.
Interestingly, Microsoft continues making efforts to outbid Google to be the default search engine on Apple devices, causing the amount Google has to pay Apple to increase year after year.
According to Forbes, this amount increased from $3 billion in 2017 to $10 billion in 2020, then to $15 billion in 2021, and is now estimated to be between 18 to 20 billion dollars annually.
This deal between Google and Apple is one of the most valuable partnerships in tech history. It is also one of the most controversial.
Frenemies?
Contrary to what the world thinks, Google and Apple depend on each other.
The deal between Google and Apple is mutually beneficial, as it helps them achieve their strategic goals and maintain their competitive advantages.
In 2022, Apple made an annual net profit of $99.8 billion. Therefore, about 20% of Apple’s final take-home came from one deal with Google.
For Google, this deal helps it secure a monopoly over the search market. According to StatCounter, for global web search in 2022, Google has a market share of 91.85%, followed by Bing with 3.02% and Yahoo with 1.35%.
On mobile devices, however, Google’s market share is even higher, at 95.22%. This means that almost all mobile web queries in the world are done through Google, thanks to its deal with Apple.
Mobile search is crucial for Google, as it generates more than half of its ad revenue, as people tend to search more frequently on their mobile devices, meaning they click on more ads on their phones.
Also, mobile search allows Google to collect more user data, such as location, device type, and browsing history, which Google uses to show people more profitable targeted ads.
For Apple, on the other hand, the deal helps boost its profits and fund its services unit. Apple is known for its high-margin hardware products, such as iPhones, iPads, Macs, and AirPods.
In recent years, however, Apple has faced challenges such as slowing iPhone sales due to increasing competition from rivals like Samsung and Huawei.
Hence, to diversify its revenue streams and reduce its dependence on hardware sales, Apple has been investing in its services unit, which includes products such as iCloud, Apple Music, Apple TV+, and Apple Pay.
These services, however, have lower profit margins compared to hardware. For example, Apple Music faces similar challenges to Spotify when it comes to making money from music streaming, due to high licensing fees. I wrote an article on that:
Therefore, the money Apple receives from Google helps it cover these costs and maintain good profit margins.
Also, this collaboration helps Apple offer consistent and useful search results across its products. Apple prides itself on providing a seamless and integrated user experience for its customers.
By using Google as the default search engine on its devices, Apple ensures that its users get the same high-quality and relevant search results that they are used to on other platforms.
Could Google and Apple Breakup?
The partnership between Google and Apple comes with its fair share of controversy. In October 2020, the US Department of Justice sued Google over antitrust concerns, accusing it of monopolizing the search and search advertising markets. One of the main allegations was that Google used exclusive and unlawful contracts with Apple and other device makers to prevent them from using other search engines.
Also, In January 2023, the Justice Department filed another lawsuit against Google over its monopolization of digital advertising technologies. This lawsuit alleged that Google used anticompetitive and exclusionary conduct to eliminate or severely diminish any threat to its dominance over online advertising.
Google denied the allegations, stating that its relationship with Apple is customary and beneficial for users. It has also claimed that its search engine is popular mainly because of its quality, and not because of its $18 billion contract.
Apart from the heat Google faces from the US Justice Department, another factor that could cause a breakup between the two tech giants is Apple itself.
Apple has done the maths, and reports show that it could be interested in a share of Google’s $162 billion of advertising revenue.
Apple has not officially announced that it is building its own search engine. However, there have been rumors that Apple is considering launching its own search engine to rival Google.
Some of the evidence for this includes Apple’s acquisition of a machine learning startup called Laserlike in 2018, its hiring of search engine engineers, and its increased crawling of websites with its Applebot. These are all signs that point towards Apple building its own search engine.
If Apple decides to enter the search market, it would be facing Google head-on, and could immediately wipe out billions from Google’s market capitalization. This will negatively impact Google’s profits, as well as its ability to collect user data and offer targeted ads to iPhone users.
The outcome of these lawsuits and the future of the deal between Google and Apple are uncertain at this point.
However, if the deal ends or changes significantly, it will have major impacts on both companies, the tech industry, and society at large. I mean, we could all be using Bing tomorrow!
Also, here is another article you will get value from:
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