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Google pays $1bn a year to run Apple's search

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By Stewart Mitchell

Posted on 11 Feb 2013 at 13:45

Google will next year pay $1bn to Apple to remain the default search tool in iOS devices, according to a report from Morgan Stanley.

In a report into Google's prospects for investors, Morgan Stanley said it believed Google paid a flat fee per Apple iPad and iPhone, to ensure its search technology was the preset engine for customers.

According to Morgan Stanley, Google makes as much as $4bn a year from mobile search advertising, so making sure its technology drives searches on Apple's devices is a key part of its strategy.

The payments make up part of Google's "traffic acquisition costs" (TACs) which it pays out to companies, including other browsers like Mozilla.

Market analysts have previously speculated that the company had a revenue sharing deal with Apple, but Morgan Stanley believes there's a per-device price for choosing Google for search.

We believe that in exchange for being the default search provider on iOS devices, Google compensates Apple either on a per-device or revenue-sharing basis

"We believe that in exchange for being the default search provider on iOS devices, Google compensates Apple either on a per-device or revenue-sharing basis,” said analyst Scott Devitt, in a report entitled The next Google is Google.

"In our view, a per-device arrangement may be more likely given significantly easier accounting and Apple’s preference for upfront payments to hedge against non-payment for users that navigate directly to Google.com. Google may also prefer upfront payments if it expects mobile search revenue to grow rapidly over the term of its contract with Apple."

The analysts believe Google pays Apple $3.30 per iOS device in return for its inclusion on handsets, with the company expected to hand over $877m to Apple this year - a figure likely to rise to $1bn next year and $2.3bn by 2019.

However, despite the escalating costs, mobile search income driven by its own Android operating system on handsets from third party manufacturers, such as Samsung's Galaxy S3, is likely to outweigh the payments to Apple as the company looks to maintain the 90% mobile search revenue share it holds in the UK.

"Due to the rapid rise of Android device sales from 2010, and iOS’ share of global web traffic declining from a 40s percentage in 2009 to a 20s percentage today, we feel comfortable modelling Google’s Apple-related distribution TAC payments at a stable 30%-35% of total [payments]," the company said.

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