He did the math three ways.
Bernstein analyst Toni Sacconaghi made headlines Monday with $3 billion—his estimate of how much Google will pay this fiscal year to retain its coveted position on the home screen as the iPhone’s default search engine.
Wonder where a number like that comes from? So did I. Luckily for us, Sacconaghi shared his work in a note to clients that landed in my inbox Tuesday. It’s a clever piece of forensic math:
Court documents indicate Google paid Apple $1B in 2014… We estimate the amount Google pays Apple in 2017 will be closer to $3B. Our estimate is triangulated in a number of ways:
(1) third party market research suggests that Google’s total mobile revenues have increased from $16B to $50B (i.e., have tripled) from CY14 to CY17; accordingly, payments to Apple likely have increased commensurately (to $3B) since then;
(2) In the last two quarters, Apple’s Services revenues have increased YoY by $2.4B, with the App Store being the biggest contributor (which we model has increased $1.35B YoY), and Licensing revenues to be up by the second largest amount, which could be up $500M or more – suggesting that total licensing in the last two quarters is increasing at a rate of $1B per year this year; and
(3) Google’s distribution Traffic Acquisition Costs (TAC – the amount it pays OEMs and carriers for search placement) is 2.2x what it was in 1H 14, again suggesting that if Apple held share, payments from Google to Apple might be up a similar amount to $2.2B (or more assuming Apple gained share). We note that press reports have indicated that the revenue share between Apple and Google was at one point 34%, which if true and still the case today, would point to a much higher than $3B in payments from Google to Apple today.
“Google’s willingness to share material revenues with Apple,” Sacconaghi concludes, “is a testament to the power of Apple’s iOS platform.”
Google’s $3 billion represents 23% of the $13.231 billion Sacconaghi estimates Apple will report as fiscal 2017’s “other” Services income, the khaki-colored column in Exhibit 1 below:
Sacconaghi scored in the top 10 in last quarter’s Earnings Smackdown.