Toni Sacconaghi: Apple could take a 20% hit without Google’s kickbacks

Bernstein’s top Apple analyst has a famously bad track record on Apple, but he was one of the first to spot the value of Google’s search payments.

From Tim Higgins’ “Apple’s Booming Services Business Could Be Hit in Google Antitrust Battle” ($) in Monday’s Wall Street Journal:

The Justice Department’s attempt to punish Google for its competitive practices in internet search could end up taking a major toll on a different tech giant: Apple Inc.

A multibillion-dollar deal in which Google pays to be the default search engine on Apple’s iPhones and other devices is at the heart of the case the U.S. government filed last week against Google. That deal is also at the heart of Apple’s services unit, which has been the biggest contributor to its growth over the past several years.

The government has pointed to the deal, whose history dates back 15 years, as an example of how Google, a unit of Alphabet Inc. uses its giant profits to block out competition—a contention Google denies. For Apple, it has been a lucrative illustration of the value of access to the more than 1 billion global users of its devices. And while the outcome of the Justice Department’s suit—which could take years to play out—is far from clear, analysts and investors say losing that deal could be a sizable blow to Apple, given estimates that Google’s payments account for up to a fifth of the iPhone maker’s overall profit.

“There’s a risk, if you play it out, that there actually could be more financial impact to Apple than there is for Google,” said Toni Sacconaghi, an analyst for Bernstein. He estimates that Apple’s stock could fall as much as 20% if the deal with Google were to be eliminated entirely. At the same time, he and others say, any damage could be far less if Apple is able to offset it through other deals involving Google and its competitors, as many investors and analysts say could happen.

My take: For Sacconaghi, Apple’s glass has been half empty for nearly a decade. But to his credit, here’s what he told CNBC in January:

Google pays $8 billion a year and ultimately generates $25 billion a year from search on iOS, on Apple’s operating system. And the reason it pays that much we believe is that if it doesn’t someone else—like Microsoft—might.

The worry of course for Apple is let’s say one day Microsoft says “search isn’t that important to us, we have other priorities. In which case there is no counter bid and Google could turn around and say we’re only going to pay you half a billion Apple, and that would be very risky to Apple.

And hence, could you have a stalking horse, is there something Apple could do that would provide an inexpensive insurance policy to keep Google and/or Microsoft at the table bidding for this asset.

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18 Comments

  1. Tommo_UK said:
    And right on cue, “our Toni” spews out his usual unrelenting sacc’o’crap just before a pivotal event in Apple’s calendar. “Top Apple analyst?” This is the guy who said the iPhone would fail, the Mac was doomed, and Apple’s ability to innovate was so poor it would fall further behind its rivals forever after.

    How does this guy stay relevant? Hiw can anyone take him seriously? His tale is so old. Reading his unbalanced comments is like watching Different Strokes from the 80s. Is Gary Coleman going to make an appearance too?

    5
    October 26, 2020
    • Gregg Thurman said:
      Great to hear from you Tommo. Don’t be such a stranger.

      2
      October 26, 2020
  2. Miguel Ancira said:
    Enough of Toni. He could be right, but who cares? He’s been too wrong for too long.

    1
    October 26, 2020
  3. Miguel Ancira said:
    Enough of Toni. He could be right, but who cares? He’s been too wrong for too long.

    Almost made me sell my position entirely about 12 years back. Thank god I never listened to him.

    4
    October 26, 2020
  4. Horace Dediu said:
    The alternative to a deal with Google is not Microsoft but Apple building (read: releasing) its own search engine and selling access to the index for a potentially larger value than what Google pays it. The dollar value of this deal is not some windfall what Google bestowed on Apple out of the goodness of its heart. There is a multiple of that gained by Google. And that gain would be up for grabs now. DOJ may compel Apple to effectively compete with Google on search–something they are very capable of if not keen to do; and it may prove catastrophic for Google.

    9
    October 26, 2020
    • Bart Yee said:
      @Horace I like that idea, the DOJ / Government could mandate that Apple must compete in a completely new area, Search, with Google, in order to provide “significant (my emphasis” competition. Like Apple Maps, it may start small, then slow and steady progress. Of interest is if Apple give users options of no ads (maybe by a (Apple One?) subscription model, light ads (current user but not subscriber), or heavy ads (Android users, because, uh, they’re used to that?). Uh, could Apple in an Apple Search app, also be allowed to have In-App purchases, and if on Android, would they have to pay Google’s Play Store? And would Apple’s iOS Search App have to pay Apple its 30% (a business expense?) while accepting the revenue?

      Mind boggling.

      2
      October 26, 2020
      • Horace Dediu said:
        Apple already handles 25 billion queries per month through Siri. It’s not impossible to imagine that they are looking at search via Siri. Job ads have been posted for some time for search, by the way.

        3
        October 26, 2020
    • David Emery said:
      I have a hard time thinking about a court -forcing- a corporation to enter a new line of business.

      Furthermore, the money in search is in associated advertising. I’m not keen on seeing Apple expand its closed world advertising network. One nice thing about the status quo is that ad blockers and packet sniffing firewalls work quite well on the open internet. Apple’s recent practice of hiding its own traffic doesn’t bode well for consumer control of his own network.

      That being said, I could see Apple negotiating with DoJ to buy or invest in DuckDuckGo. I’m just afraid that transaction would run afoul of antitrust concerns in Congress.

      0
      October 26, 2020
    • Jacob Feenstra said:
      Right Horace. Very few have brought up that this is an opportunity for Apple. The challenge will be how to monetize it without making the consumer too much a product by gathering and analyzing their info. The last is against Apple’s DNA.

      0
      October 26, 2020
      • Gregg Thurman said:
        The challenge will be how to monetize it

        Charge a premium on your hardware. Oh wait, isn’t that what Apple does now?

        0
        October 26, 2020
        • Bart Yee said:
          True but that’s a one time option we know Apple users have accepted with or without Google Search. That’s why I proposed a very modest privacy oriented Search subscription or bundle. Allow trial subscriptions or a bundle of services similar to Apple One where now Search Secure & Private ™ is added. Or explicit instructions on how to de-track all Google products on iOS (good App idea?) to allow user choice.

          0
          October 26, 2020
  5. Bart Yee said:
    OTOH, “And hence, could you have a stalking horse, is there something Apple could do that would provide an inexpensive insurance policy to keep Google and/or Microsoft at the table bidding for this asset.”

    One possible scenario is just have Apple make DDG the default search engine (or Apple form a partnership? or buy it?) and then see what happens to DDG’s finances and search metrics. If we suddenly start seeing huge increase and reasonably good feedback from Apple users, well, the worth of Apple’s installed base becomes clearer. If even 5-10% of Google’s dominance is eroded, that would make everyone sit up and notice.

    Apple could take a hit, relatively small IMO, when the news of Google payments stopping is announced. But that is, for $10B/yr, about $2.5B/quarter off of services. I would submit Apple could, in the long run, grow other services (Arcade, TV+, Apple One, Games, App Store, iCloud, Music, Search, Apple Pay, Financial, Card, etc.) back to fill in. It would be a rewind to a lower number, but given time, eventually Services would recover.

    4
    October 26, 2020
  6. Gregg Thurman said:
    Google is a one trick pony that discovered how to monetize search. From its first mover position and constant improvement it has leveraged that advantage to be #1 in search today. But like McDonald’s hamburgers it wasn’t the product that drove market share, it was the name. The name became synonymous with search. You didn’t search for something, you Googled it.

    Apple can’t change that and so will never have a competitive search presence. It’s for that reason I don’t see Apple ever developing its own search product There’s nothing to be gained by doing so. Apple doesn’t sell user info to advertisers, ergo there would be no ad revenue. It would be most difficult to improve on Google’s search engine, but even if Apple successfully did so, how would Apple change the lexicon of search? Nobody says they are going to Duck Duck Go it, or Yahoo it, or Bing it, but they do say they are going to Google it.

    Nah, Apple is far better off selling the default position to the search company consumers were going to use anyway.

    1
    October 26, 2020
  7. Gregg Thurman said:
    Oh, and Sacconaghi is a Johnny come lately that has been coasting on his earlier success for way too long. The industry allows him to do so because of the dearth of really good “public facing” analysts on WS.

    2
    October 26, 2020
  8. Jerry Doyle said:
    I liked David Emery suggestion the other day when he said for Apple to provide no-default search engine, but require selection of such as part of the set-up requirement of the device. Apple has an approximate degree of knowledge based on consumer usage of a search engine as to the level of monetary value derived. Apple then would take a percentage of that monetary value derived from running the search engine on its platform of a billion plus installed base users.

    0
    October 26, 2020
  9. John Konopka said:
    If Google is forced to stop paying Apple for the default position in Safari that will likely be several years down the road. Lots can happen in that time.

    Regarding Apple making its own search engine, this is very possible. We have to remember that Apple is usually thinking long term. Whatever the notion of search may be ten or twenty years from now and how to monetize that is likely to be different from what it is now.

    1
    October 26, 2020
  10. Romeo A Esparrago Jr said:
    Would Apple be in a similar Map services revenue situation if it had kept Google Maps? It could have been a service revenue stream by this time but Apple didn’t go down that path. Whose loss/gain long-term?

    1
    October 26, 2020
    • Gregg Thurman said:
      Whose loss/gain long-term?

      People used to laugh at Apple Maps. Funny thing is, I don’t hear that laughter anymore. I don’t think it will be all that long before people talk about Apple Maps in very glowing terms.

      As iOS users rely on more and more Apple versions of Google products APPLE WINS.

      1
      October 26, 2020

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