Bernstein says Google’s FY21 payments to Apple might reach nearly $15B

“We have noted in prior research that GOOG is likely paying to ensure Microsoft doesn’t outbid it.” — Analyst Toni Sacconaghi

From a note to clients that landed on my desktop Wednesday:

We now estimate that Google’s payments to AAPL to be the default search engine on iOS were ~$10B in FY 20, higher than our prior published model estimate of $8B. Recent disclosures in Apple’s public filings as well as a bottom-up analysis of Google’s TAC (traffic acquisition costs) payments each point us to this figure…

We now forecast that Google’s payments to Apple might be nearly $15B in FY 21, contribute an amazing ~850 bps to Services growth YoY, and amount to ~9% of company gross profits.

We see two potential risks to GOOG’s payments to AAPL: (1) regulatory risk, which we believe is real, but likely years away; we see a potential 4-5% impact to Apple’s gross profits from an adverse ruling; & (2) that Google chooses to stop paying Apple to be the default search engine altogether, or looks to renegotiate terms and pay less. We have noted in prior research that GOOG is likely paying to ensure Microsoft doesn’t outbid it. That said, with payments likely to approach $18 – $20B in FY 22, it not implausible that Google could revisit its strategy.

Maintains Market-Perform rating and (underwater) $132 price target.

Cue the ad revenue chart:

My take: Leave it to Sacconaghi to move straight to the risks. Here was the headline to his note today:

Wow, Google’s payments to Apple might be $15B this year… What risks exist?

4 Comments

  1. David Emery said:
    So that’s $15B of -pure profit-, right? And if Google is willing to pay to keep Microsoft away, that certainly argues against the risk of Google abandoning this -with no replacement-.

    As is typical, Toni’s arguments don’t make sense.

    2
    August 25, 2021
  2. Gregg Thurman said:
    Saccocrap is, and always has been, a glass half empty kinda guy (can’t bring myself to label him “analyst”). It doesn’t matter to him that that half empty glass is the world’s largest glass.

    4
    August 25, 2021
  3. Bart Yee said:
    Isn’t it interesting or ironic that Google, who has grown over 60% in market cap YTD, is willing to pay ever increasing annual amounts to maintain a preferred position within Apple’s ecosystem to access Apple users while App developers want to pay ever less single transaction fees for that same access.

    Google already “owns” Android and its access to Android users for search yet is quite willing to pay Apple 5.5% of its 2020 gross revenue and potentially similar expansion in 2021 due to even higher iOS search revenue. The same 5.5% applied to Google’s 2021 FY consensus ($250.54B) or high estimate ($258B) would out the payments at $13.7-14.2B.

    I suspect Apple’s contract states Google pay as a fixed percentage of iOS related search revenue. Google does better, Apple does better; Apple does better, Google does better. Synergistic in both directions. Pity that developers can’t see that. But that’s the difference between big vs small or relatively tiny in business.

    5
    August 25, 2021
  4. Gary Morton said:
    Agree with PED’s take: Leave it to Sacconaghi to move straight to the risks.

    You know that nearly 3/4 full glass is over 25% empty.

    6
    August 25, 2021

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