Google to pay up to $3B this year to Apple to remain default search provider, analyst reports

iPhone 7 Plus
Apple provides much of Google's mobile search revenue. (Apple)

Perhaps counterintuitively, Google is the default search engine on Apple iPhone and iPad—and the company is paying billions of dollars per year for the privilege, according to analysts. In fact, Google will pay up to $3 billion this year alone to stay on board.

Wall Street firm Bernstein has been crunching the numbers, and it said that legal filings, third-party research, reporting and its own triangulations point to a hefty price tag for the iPhone real estate this year.

"Court documents indicate that Google paid Apple $1 billion in 2014, and we estimate that total Google payments to Apple in fiscal year 2017 may approach $3 billion," Bernstein analyst A.M. Sacconaghi, Jr., said in a note to investors. "Given that Google payments are nearly all profit for Apple, Google alone may account for 5% of Apple's total operating profits (OP) this year, and may account for 25% of total company OP growth over the last two years."

He added, “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 much higher than $3 billion in payments from Google to Apple today.”

Those fees are, in fact, so hefty that they are likely a big part of what drives Apple's services business, he added.

"Services has become an increasingly important part of Apple over the last several years,” wrote Sacconaghi. “While investors typically think of the App Store and iTunes/Music as the key drivers of services, Apple's 10-Q reporting reveals that licensing revenues have been the biggest or second largest contributor to Apple's year-over-year services growth in 10 of the last 11 quarters."

He added that in the last two quarters, Apple's services revenue has increased year over year by $2.4 billion, with licensing revenue up about $500 million or more; that suggests that Apple’s total licensing income in the last two quarters is increasing at a rate of $1 billion per year.

While those numbers are large indeed, Sacconaghi noted that it’s a win-win arrangement: Apple iOS devices contribute about 50% of Google's mobile search revenue, which has tripled from $16 billion in 2014 to $50 billion today.

Still, it could be that Google will look to renegotiate the terms of the licensing deal if it decides that users are too attached to Google search for Apple to risk losing it.

“Google could ultimately decide that its search position is sufficiently strong that it no longer needs to pay to be the default browser,” Sacconaghi concluded.