In the public mind, Google and Apple seem to be incompatible.
The two technology giants compete on a variety of products and services, such as operating systems, browsers, maps, digital assistants, mobile phones, and the list goes on. But behind this hostility lies a secret partnership that benefits both of them.
You may not know that Google pays Apple $18 billion in "protection fees" every year. Is it a bit surprising? So, why does Google "indirectly fund" competitors like this?
1. Maintain its monopoly position
Before we get into that, let’s first understand how Google makes money.
As of 2022, $162.45 billion (58.1%) of Google’s revenue comes from ads displayed on Google’s search engine.
These are ads that appear when people make internet queries through the Google search engine. Advertisers pay Google to have its products and services displayed to Internet search users.
This is why when you search for “best hotels in the UK” on Google you’re bombarded with ads at the top of the search results. For example, hotels in the UK pay Google to display their room listings to potential customers searching the internet.
However, the amount an advertiser pays depends on who the ad is shown to. Advertisers consider factors such as a user's current location, previous purchase history, and the brand of device the customer is using to determine how much it will cost to show an ad to that user.
For example, a hotel in the UK might be willing to pay $0.10 to show listings to Canadians using iPhones, but is only willing to pay $0.03 to show listings to Canadians using Android devices.
A recent report from AllConnect stated that 60% of internet traffic comes from mobile devices. Additionally, a Martech report noted that 75% of Google’s mobile search engine revenue comes from showing ads to iPhone users.
This is not surprising since advertisers believe that people with more expensive phones may be willing to spend more on their products or services, so advertisers are willing to spend more to show their ads to iPhone users.
Now, using all the above information, we can estimate the annual revenue that Google earns from iPhone users.
We know that Google generates $162.45 billion in revenue annually from Google search engine users, an estimated 60% of which comes from mobile devices.
This means that of the $162.45 billion, 60% ($97.47 billion) came from users searching the Internet using mobile devices.
Furthermore, we know that Google makes most of its revenue from iPhone users—75% of its mobile search engine revenue comes from iPhone users, or 75% of $97.47 billion.
In 2022, iPhone users alone will generate a staggering $73.1 billion in advertising search revenue for Google.
Everyone should understand that this is what Google is pursuing. Of course, it's not just Google that's interested in the $73 billion in revenue generated by iPhone users; other search engines like Bing and Yahoo want a piece of the pie, too.
That’s why Google pays Apple a huge “protection fee” every year to become the default search engine on more than a billion Apple devices around the world.
In 2007, when the iPhone was first released, Google was the default search engine on all devices until Apple realized that Google was more dependent on them than they were on Google.
So in 2012, Apple signed a deal with Microsoft to make Bing the default search engine on all Apple devices. This posed a threat to Google's monopoly in the search engine industry, so Google tried to outbid Microsoft year after year until it finally succeeded.
In 2017, Google reportedly paid Apple $3 billion to become the default search engine not only for iPhones, but also for iPads and MacBooks.
The agreement also includes other terms and conditions to ensure Google's dominance of Internet searches on all Apple devices.
For example, Google asked Apple to make Google Search available on all iOS and macOS apps, not just Safari. This means Apple users can access Google Search through Apple's voice assistant Siri, Mac's search feature Spotlight, and other Apple apps that use web searches.
The agreement also prohibits Apple from using any other search engine as a secondary option or alternative. This means that users cannot get search results from other search engines on any Apple device unless they change their settings, which most users are not aware of.
Interestingly, Microsoft is still persevering and continues to work hard to outbid Google in order to become the default search engine for Apple devices, causing the amount Google pays Apple to increase year by year.
According to Forbes, this number increased from $3 billion in 2017 to $10 billion in 2020, then to $15 billion in 2021, and is now estimated to be between $18 billion and $20 billion annually.
The deal between Google and Apple is one of the most valuable partnerships in tech history and one of the most controversial.
2. Both friends and enemies, loving and killing each other
Contrary to stereotypes, Google and Apple are dependent on each other.
The deal between Google and Apple is mutually beneficial as it helps them achieve their strategic goals and maintain a competitive advantage.
In 2022, Apple achieved an annual net profit of US$99.8 billion. It can be seen that about 20% of Apple's final revenue comes from this deal with Google.
For Google, the deal helps secure its monopoly in the search market. According to StatCounter data, by 2022, Google will have a market share of 91.85% in the global web search field, followed by Bing at 3.02% and Yahoo at 1.35%.
On mobile devices, however, Google's market share is even higher at 95.22%. This means that, thanks to Google's partnership with Apple, almost all mobile web queries in the world are done through Google.
Mobile search is crucial to Google as it generates more than half of its ad revenue because people tend to search more frequently on mobile devices, meaning they click on more ads on their phones.
Additionally, mobile searches allow Google to collect more user data, such as location, device type and browsing history, which it uses to show people more profitable targeted ads.
For Apple, on the other hand, the deal could help boost its profits and fund its services unit. Apple is known for its high-margin hardware products, such as iPhones, iPads, Macs and AirPods.
However, in recent years, Apple has faced challenges such as slowing iPhone sales due to increasingly fierce attacks from competitors such as Samsung and Huawei.
Therefore, in order to diversify its revenue sources and reduce its reliance on hardware sales, Apple has been investing in its services unit, which includes products such as iCloud, Apple Music, Apple TV+ and Apple Pay.
However, these services have lower profit margins compared to hardware. For example, Apple Music faces similar challenges to Spotify in making money from music streaming due to high licensing fees.
So the money Apple gets from Google helps cover those costs and maintain healthy profit margins.
Additionally, this partnership helps Apple provide consistent and useful search results across its products. Apple prides itself on providing customers with a seamless, integrated user experience.
By using Google as the default search engine on its devices, Apple ensures its users get the same high-quality and relevant search results they use on other platforms.
3. Will Google and Apple break up?
The cooperation between Google and Apple has also caused a lot of controversy. In October 2020, the U.S. Department of Justice sued Google on antitrust grounds, accusing it of monopolizing the search and search advertising markets. One of the main accusations is that Google used illegal exclusivity contracts with Apple and other device makers to prevent them from using other search engines.
Additionally, in January 2023, the Department of Justice filed another lawsuit against Google for its monopoly on digital advertising technology. The lawsuit accuses Google of using anticompetitive and exclusionary practices to eliminate or significantly weaken any threats to its dominance of online advertising.
Google has denied the accusations, saying its relationship with Apple is customary and beneficial to users. Google also claims that its search engine is popular primarily because of its quality, not because of its $18 billion contract.
In addition to Google facing pressure from the U.S. Department of Justice, another factor that could lead to a breakup between the two tech giants is Apple itself.
Apple has done the math, and reports suggest it may be interested in grabbing a piece of Google's $162 billion in ad revenue.
Apple has not officially announced that it is developing its own search engine. However, there are rumors that Apple is considering launching its own search engine to compete with Google.
Some evidence of this includes Apple acquiring a machine learning startup called Laserlike in 2018, hiring search engine engineers, and increasing crawling of the site using Applebot. These signs indicate that Apple will build its own search engine.
If Apple decides to enter the search market, it will go head-to-head with Google and could immediately wipe billions of dollars from Google's market value. This would have a negative impact on Google's bottom line and its ability to collect user data and serve targeted ads to iPhone users.
At this point, the outcome of these lawsuits and the future of the agreement between Google and Apple is uncertain.
However, if the deal is terminated or significantly changed, it will have a significant impact on both companies, the technology industry, and society as a whole. Bing, watching from afar, may be the ultimate winner. I mean, we may all be using Bing tomorrow!