According to a note released by investment firm Bernstein, Google (NASDAQ:$GOOGL) is paying Apple billions of dollars every single year in order to persist as the default search engine on your iPhones and iPads.
According to their projections, the firm believes Apple will be collecting a total of $3 billion from Google this year, making up a significant portion of income from Apple’s services. This has tripled since just three years ago when the fees were slightly lower at $1 billion.
As a result, Apple has continued to speak highly of their services segment, and has noticed its rate of growth, noting that this branch alone could very well reach the size of a Fortune 500 company on its own.
“Court documents indicate that Google paid Apple $1B in 2014, and we estimate that total Google payments to Apple in FY 17 may approach $3B,” Bernstein analyst A.M. Sacconaghi Jr. explained. “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 OP growth over the last two years.”
Bernstein sees pros and cons with the payments, however.
The risks that Sacconaghi sees in the deal is the potential for Google to decide that they don’t need to pay Apple to be the top search engine, as they could be so dominant that users choose no other option, and ultimately forces Apple to use Google regardless.
However, as iOS devices contribute approximately 50% of Google’s mobile search revenue, it could be far too big of a gamble for Google to terminate their licensing deal with Apple. At the very least, both parties benefit from this relationship.
With a target share value of $175, Bernstein believes Apple will outperform.
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