Why Apple’s Acquisition of DuckDuckGo Would Not Work
Could Apple be diving headfirst into the search engine and online advertising business? Bernstein’s Toni Sacconaghi believes that it should.
The analyst explained that the Cupertino company should acquire DuckDuckGo, a 93-person search aggregator out of Paoli, Pennsylvania. According to him, DuckDuckGo would allow Apple to capture a larger chunk of advertising revenue generated from iOS searches. Currently, Google’s parent Alphabet is estimated to pay Apple $10 billion for the right to be the default engine on its devices, and then makes $15 billion in ad sales from iOS traffic.
However, I am skeptical that Apple would make the acquisition. Here are a few of the reasons.
Nothing is higher margin than royalties
At first glance, it seems like Apple is leaving quite a bit of money on the table. If the company already has the user base in place, why allow someone else to monetize on it? Bring search in-house, and Apple could earn the difference between what it receives in royalties from Google and what the Mountain View company makes in ad revenues.
But Alphabet’s payments are “easy money” for Apple, which in turn does not need to worry about the operational aspect of running an online search business. Even if online advertising may be lucrative (Google’s adjusted margin ex-other bets were 32% last year), nothing beats Apple’s current deal: money flowing straight into operating profits.
Apple will not go for scraps
The Cupertino company is not one to engage in M&A very often. It spent only $7.3 billion in its top 10 acquisitions ever – barely 2% of the company’s total assets today. When Apple acquired Beats in 2013 for a relatively large sum of $3 billion, it did so for a very strategic reason: to jumpstart a crucial “new venture”, Apple Music.
It would be very unlike Apple to disburse $1 billion, Toni Sacconaghi’s estimated value of DuckDuckGo, for a minor player in a space that would be brand new for the company – and then to turn around and set it as the default platform to iOS users. Keep in mind that Google dominates search, at an astonishing market share of over 90%.
Bing And Yahoo can be the bargaining chips
The last argument in favor of a DuckDuckGo acquisition is that the deal would boost Apple’s bargaining power. It is rumored that Alphabet may not want to renew its agreement with Apple and leave behind a gap in revenues, maybe a bluff to negotiate better terms from a stronger position.
But if the partnership is lucrative for Alphabet, there should be at least two other search engines salivating to take over Google’s spot: bing and Yahoo. For reference, Microsoft’s search revenues have been increasing at a dismal pace of 1% per year. A boost from iOS could be what it needs to turn around one of its very few low-growth businesses.
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