$1bn for keeping Google as default search on iPhones

A report on the Business Insider website suggests that Apple is receiving $1bn per year from Google, in exchange for keeping its search engines as the default choice on every new iOS device. The website quotes a report from Morgan Stanley analyst Scott Devitt, who was giving reasons why Google will remain the dominant force in online services.

Neither Apple nor Google have publically discussed financial details of their arrangement, leading to plenty of speculation. It is generally believed that Apple had a revenue sharing deal with Google, earning as much as 75 cents for every $1 of search advertising revenue. Not so, says Devitt, who doesn’t believe Apple would entertain such a deal, preferring a more clean-cut option. An upfront deal based on devices sold would be more advantageous to Apple.

That might also explain why Devitt is bullish about Google’s prospects, as he believes $1bn per year is cheap at half the price. To Apple, it is a fraction of the $13bn of profits it made in the last quarter alone. He also dismisses suggestions that traffic acquisition costs are set to rise, believing that these costs on iOS devices will only rise by about 5 per cent per year (compared to an overall rise in traffic acquisition costs for Google of about 30 per cent or more).

True, this $1bn would rise as Apple sells more devices, but then Google would benefit from more exposure and by maintaining its hold on mobile search. We’ve speculated in the past that Apple may look to severe ties with Google in search, as it has done with mapping and the YouTube service (removing both services from its bundled apps that come with new devices). Could Microsoft’s Bing be a viable alternative? Would it be able to offer better terms than Google?

For the moment though, Google is the search engine of choice. As a result, Devitt concludes that the company now controls 95 per cent of the mobile search market.