According to a note to investors issued by Bernstein on Monday, Apple is receiving billions of dollars every year from Google just to stay the default search engine on iPads and iPhones.
The company says Apple will receive around $3 billion from Google this year alone, compared to only $1 billion three years ago. This, Bernstein says, makes up a large share of Apple’s income from services.
Apple has in recent years been boasting that its services business was a rapidly expanding segment of the firm, claiming that this branch alone would soon be as big as the average Fortune 500 business.
A.M. Sacconaghi Jr, a Bernstein analyst, said that according to court documents Apple received $1 billion from Google in 2014, and they estimated that Apple’s total income from this source will increase to $3 billion in 2017.
He added: “Given that Google payments are nearly all profit for Apple, Google alone may account for five per cent of Apple’s total operating profits this year, and may account for 25 per cent of total company OP growth over the last two years.”
Bernstein sees benefits and disadvantages in these payments. According to Sacconaghi, Google might sooner or later back out of this deal if it should at any stage become sufficiently confident in the popularity of its own search engine, and feels Apple will not risk including an alternative search engine by default.
The other side of the coin, he went on to say, was that Apple’s iOS devices accounted for close to 50 per cent of Google’s revenue from mobile search. This meant that Google might simply be too scared to abandon the licensing deal with Apple. At this stage, however, both parties benefit from the deal.
Bernstein currently has an outperform rating on the Cupertino-based tech giant’s stock, with a $175 price target.