October 17, 2018 / 7:26 PM / a month ago

Breakingviews - Finance makes Apple and Google forced friends

An Apple computer is shown on Google's company campus in Mountain View, California February 9, 2010. REUTERS/Robert Galbraith

NEW YORK (Reuters Breakingviews) - Apple founder Steve Jobs once wanted “to go to thermonuclear war” against Google for – he said – copying the software that powers the iPhone. Now his company and Alphabet, which owns the giant search engine, are bound by tight financial ties. Payments from Google may account for over 10 percent of Apple’s profit, a figure that is likely to rise.

Google pays nearly a quarter of its advertising revenue to partners for sending internet searches their way. Just under half of these payments, or around $3 billion, went to phone makers, operators and browser operators in the second quarter. That figure is rising fast – it’s about 50 percent more than the same period in 2017 – because more searches are happening on mobile, and phone makers like Apple get paid for making Google their default search engine.

Apple is entitled to be demanding. The company has sold about 2 billion mobile devices, and well over half are still in use. Apple disclosed in 2014 that Google paid it $1 billion. Goldman Sachs estimates the number this year will be $9 billion – equivalent to more than one-tenth of Apple’s forecast pre-tax profit for this year, according to Refinitiv I/B/E/S – and $12 billion in 2019. That’s conceivable, based on Apple’s soaring services revenue, which grew 31 percent to $9.5 billion last quarter.

Sales of iPhones don’t fully capture Apple’s market clout. The company is making devices that last longer, as it emphasized when it rolled out new models last month, so will account for a greater share of devices in circulation. While smartphone sales were flat last year, sales of spiffed-up used phones grew 13 percent according to market-research firm Counterpoint, most of them made by Apple.

The two firms may bicker, but their dependence is mutual. Apple switched voice-driven searches to Microsoft’s Bing a few years ago, but then switched back. Pushing what consumers see as an inferior product would harm Apple’s brand. And Google won’t want to let Apple’s users, who are high-income and buy a lot of stuff online, slip away. It’s a connection neither can afford to drop.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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