Google's $1B to Apple for iOS search rights was a steal

Oracle attorney spilled 2014 payment in court last week; Google and Apple want to close the barn door after the horse bolted

Google paid Apple $1 billion in 2014 for the right to be the default search provider on iOS devices, including iPhones and iPads, according to a report by Bloomberg Thursday.

"Is that a steal? Absolutely," said Will Stofega, an analyst with IDC, in an interview today. "Given as much as Apple has captured the high end of smartphones, [iOS users] are the people with more money." And so they're of great interest to any search provider whose revenue depends on ads, like Google.

The news service quoted a transcript of a Jan. 14 hearing in a four-year-old lawsuit in which Oracle accused Google of copyright infringement when it allegedly used Java to build Android.

During the hearing last week, an Oracle attorney spilled the beans about Google's payment to Apple. Although the transcript was available until mid-afternoon Thursday, Bloomberg said, it has since been scrubbed from the federal court system's document database.

The $1 billion was payment for using Google's search engine as the default in iOS, Apple's mobile operating system, the Oracle attorney claimed. She also told the court that "at one point in time the revenue share was 34%." It wasn't clear, Bloomberg noted, whether that share was the amount retained by Google or paid to Apple.

Both Google and Apple filed motions Wednesday asking the court to reconsider an earlier decision to not seal the transcript.

"This information is considered confidential and commercially sensitive," wrote Leslie Fithian, the senior director of the software products legal team, in Apple's Jan. 20 declaration of support for Google's motion to seal. "Apple does not disclose this information to the public. Moreover, Apple restricts knowledge of this information to only a subset of Apple employees on a need-to-know basis.

"If this information is disclosed ... third parties seeking to negotiate terms of a business relationship with Apple might leverage this information against Apple, thereby forcing Apple into an uneven bargaining position in future negotiations," Fithian added.

Apparently, the Google and Apple briefs were convincing, at least in the short term. Computerworld confirmed that the Jan. 14 hearing transcript has been removed from the court case's document list.

The billion dollars was likely only a portion of what Google paid Apple two years ago, said Jan Dawson, principal analyst at Jackdaw Research. "What exactly does that [$1 billion] represent? Is that an incentive fee or also the payment for additional royalties?" asked Dawson in an interview.

For Dawson, the $1 billion was the entry fee, but royalties paid to Apple on Google's search revenue -- perhaps the 34% mentioned by the Oracle lawyer last week -- added significant amounts to the total annual outlay.

"I think [the $1 billion] is not the only cost, but just the cost of getting into the door on iOS," Dawson continued. "It's likely the total was quite a bit more than that."

Google reports its audience acquisition costs, but does not break those down by vendor. The bulk of acquisition costs, Dawson said, were to browser makers -- to Mozilla, for example, until late 2014 -- and to Apple.

A billion dollars or more annually may be real money to people playing Powerball, but to Apple, it's just a small fraction of its money-making efforts, Dawson said. Even if it gets half a billion quarterly from Google, that's a pittance compared to Apple's total income.

In the last four quarters, for example, Apple's revenue averaged $58.4 billion in each. Half a billion would represent less than 1% of each quarter's take.

"In the grand scheme of Apple's revenue, half a billion each quarter is not exactly moving the needle," said Dawson. "But Apple would like to keep it. It's not nothing."

Apple includes payments like Google's in its "Services" reporting line, which for the September 2015 quarter reported $5.1 billion in revenue. "Apple's never given any kind of indication what proportion of [Services] revenue the Google payments may represent," Dawson added.

As Apple's Fithian noted in her filing with the federal court, the Cupertino, Calif. company would very much like to keep it that way.

Other search providers, notably Microsoft (with Bing) and Yahoo, were probably pleased at the disclosure: It gave them an idea of how much it would cost, at a minimum, to convince Apple to replace Google on iOS with their search engines.

Neither Stofega or Dawson thought it likely that Apple would, assuming contracts allow, drop Google as iOS's default search for Yahoo or Microsoft. "At the end of the day, Apple does want to do right by its users," said Stofega. "Therein lies the rub."

His point: Google was both the popular and technological leader in search, and Apple would be unlikely to foreswear its engine for another -- risking user dissatisfaction -- simply because a Google competitor threw more dollars at Cook and company.

"Apple could switch, but at the end of the day Google has proven itself to be the leader in search," Stofega concluded.

Dawson, who two years ago discounted speculation that Apple might switch the default search engine in iOS's Safari browser, agreed.

"Apple's not purely coin-operated on this," Dawson said. "It's not who is the highest bidder. Apple's not going to let some unknown search engine come in here. They want to make sure that it's a good deal for [iOS] users."

A federal court hearing on revisiting the transcript sealing is slated for Feb. 25, when lawyers for Oracle, Google and perhaps even Apple will make oral arguments.

Copyright © 2016 IDG Communications, Inc.

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