Google pays Apple a large sum of money to be the default search engine on the iPhone. According to Bernstein's Toni Sacconaghi, Apple receives about $8 billion a year just so Google can be the default search engine on iOS devices like the iPhone. This generates plenty of advertising revenue for Google, as much as $25 billion a year from iOS, and the money that Apple receives from the search firm goes right to its bottom line. So why should either firm make a change?
Analyst says Apple should buy DuckDuckGo
Sacconaghi appeared on CNBC today and said that the reason why Google pays so much to Apple is the fear that if Google doesn't pay the amount that Apple is asking, Microsoft will. And that would make Bing the new default search engine on the iPhone. Apple also has some risk here, says the analyst. He says that if Apple were to replace Google with Bing, one day Microsoft could tell Apple that since search isn't a priority, it no longer is interested in making Bing the default search option on the iPhone. That could leave Google waiting in the wings willing to return Google as the default iOS search engine, but only for say $500 million.
The analyst says that Apple could purchase a cheap "insurance policy" against a scenario like this occurring by purchasing a search engine of its own. He correctly points out that Apple can't monetize search on its own and should purchase DuckDuckGo. With a 1.35% share of the U.S. search market as of last month (compared to 88.16% for Google and 6.51% for Bing), owning Duck Duck Go could make Google concerned about losing the $25 billion revenue that comes from iOS search.
Sacconaghi says that such a purchase can be made by Apple for less than $1 billion. That would amount to less than one week of Apple's cash flow. Calling it a "really tricky three-legged stool," he notes that the revenue it receives from Google equals more than 10% of Apple's operating earnings and reiterates how owning a search engine could provide Apple with some insurance.
One thing that Apple needs to consider that Sacconaghi didn't is the possibility that the 50 state attorneys general or the Department of Justice (DOJ) could decide to break up Google's ad business. This would certainly affect Google Search and in the worst-case scenario, the company could be smashed to bits and scattered in the wind. If Search ends up as part of a smaller independent company, there would be a possibility that paying $8 billion to Apple would be impossible.
Besides DuckDuckGo, Yahoo Search could be pried away from Verizon for the appropriate amount of money. Yahoo Search owned a 3.62% market share in the U.S. last month; however, it would surely be more expensive for Apple to buy that DuckDuckGo and the latter's policy privacy would dovetail perfectly with Apple's.