Apple vs. Google – The big trade

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Replacing Google as default for search is a big trade off.

  • If Apple’s deal with Google for search is due for renewal next year, there is every chance that Apple will switch to another search provider.
  • In reality, there is only one choice as both Bing and Yahoo! are powered by the same search engine owned by Microsoft.
  • I have long been of the opinion that Apple would dearly love to remove Google from all of its ecosystem but it is a decision not to be taken lightly.
  • Google and Apple are the main ecosystem providers and their business models for monetisation are completely different.
  • Apple monetises its ecosystem through premium pricing of hardware while Google monetises through targeted advertising.
  • Access to Google services is a very important part of the iOS user experience and as a result, I think that Apple will consider its options very carefully before deciding whether or not to ditch Google.
  • This is because at the moment losing Google services would encourage a meaningful number of loyal Apple users to consider using Android.
  • Consequently, I think that no matter what happens users that really want to use Google for search will be able to, but the removal of Google as the default search provider has meaningful implications for Google.
  • This is due to the fact that the vast majority of users use whatever the default search provider is and never bother to change it.
  • RFM estimates that in 2015E, Google will generate $10.2bn in mobile advertising revenues from iOS alone.
  • With the vast majority never bothering to change their default search provider, the loss of this hallowed position is likely to put a meaningful dent in revenues due to a market share loss to the new provider.
  • This is not a decision that will be taken lightly as the Google search experience is still meaningfully better than those of its competitors and consequently the user experience on iOS risks not being as good as it was before.
  • In this case I think that the advantages of removing Google outweigh the risks, especially as users can still switch to Google should they choose to do so.
  • Furthermore, Sirs has already switched to Bing and it looks very likely that the other parts of Apple’s ecosystem will follow suit when they have the opportunity
  • This is a negative for Google, as it derives a lot of revenue from iOS and there is nothing that it can do should Apple decide to remove it entirely.
  • This is the single biggest risk to the upside in Google’s revenue and profit forecasts.
  • With Samsung on the ropes, Google has the upper end of Android nicely under its thumb and there is very little risk to those revenues now.
  • Microsoft and Yahoo! are the likely winners should this deal happen and of the two, Microsoft is by far the best bet over the next 12 months.

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.

Blog Comments

‘I have long been of the opinion that Apple would dearly love to remove Google from all of its ecosystem but it is a decision not to be taken lightly.’

While iOS gains more users from Android than it loses, Google services enable the transition. So having them available helps Apple gain users. After users move over, many will try the Apple defaults and those that prefer at least some of them or other parts of the ecosystem, will stay on iOS.

Tim Cook is pragmatic and if Apple wants to keep growing as the high end segment of the smartphone market matures, making life as easy as possible for those Android users who want to move, is the best way of doing it.

‘RFM estimates that in 2015E, Google will generate $10.2bn in mobile advertising revenues from iOS alone.’

Given the high TAC for being the default search option, how much will Google lose? Anyone using Google services from iOS can be told that for the best results using … you need to have Google search enabled and how to do it. Google Maps has managed to keep over 10% of iOS users so search, with an ad campaign linked to Google services, should do much better. While Google gross mobile revenue will suffer, the effect on net revenue may be minimal.

Apple is already well down the path of replacing Google for search. Siri search uses Bing, as does OS X Spotlight as it searches local media and the internet at the same time. Apps are also displacing web search on both iOS and OS X. This disintermediation is reducing Google’s revenue from Apple products regardless of the user’s web search preferences. Google relies on privacy intrusion that is illegal under European data protection law and Apple is right to protect their customers’ privacy whilst also competing with Google.