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.