Google to pay Apple $1bn to be its default search engine

Don’t you wonder why Apple allows Google to be the default search engine on its iOS devices? Surely, they could scupper their closest smartphone rival by using some other search service.

Of course, that would mean Apple foregoing close to $1 billion per year from Google. That’s how much a Morgan Stanley report estimates Google has to pay to Apple for the rights to have their search engine used in Apple’s iOS version of Spotlight.

Google search on an iPod touch

Morgan Stanley analyst Scott Devitt put Google on his best ideas list for investments last week in a report titled ‘The Next Google Is Google’. He dug into the mobile business to find an estimate of how much Google pays Apple for iOS devices. Google search is Apple’s first-choice engine, preferred over the likes of Microsoft’s Bing and Yahoo search, for iPhones, iPads and the touchscreen iPods as well.

In the past, some analysts had estimated that Apple and Google have a revenue-sharing agreement on iOS Spotlight. It was believed that for every dollar of search advertising revenue on an iOS gadget, Apple gives Google 25 cents. However, according to Devitt a revenue-sharing deal with Google is too messy for Apple. He believes Cupertino is Apple would be more agreeable to a fee per device because for reasons of easier accounting and up-front payments. Using Google on Spotlight allows users to search faster rather than firing up the browser and heading to Google.com, for which Apple would not get any fee.

Going by this theory, Google's traffic acquisition cost (TAC) on Apple devices should rise drastically over time as more and more iDevices are sold. However, Devitt believes the TAC will only increase at around 5 percent per year, not that sharp a change for Google to be caught unawares.

In terms of money, this means Apple is getting a little under $1 billion this year from Google, a figure that is going to steadily rise every year. Of course this income is just a drop in Apple’s revenue ocean. The company made $13 billion in profits last quarter alone.

The figure may also look alarming for Google, but since it already has search engine priority on Android handsets (those without carrier interference anyway), locking down iOS search has only served to increase their stranglehold on smartphones. It controls an estimated 95 percent of all smartphone searches and paying just shy of a billion dollars a year to maintain it is a no-brainer in terms of business.