Apple (AAPL) - Get Report and Alphabet's Google (GOOGL) - Get Report increasingly compete directly with each other in areas such as phones and smart speakers, but Google also contributes significantly to Apple's top and bottom lines.
In a report out this week, Goldman Sachs analysts estimated that Google paid Apple a whopping $9.46 billion in 2018 in traffic acquisition costs (TAC) to be the default search engine on Apple devices and computers. The analysts had estimated in September the figure to be right around that mark, and finalized the number based on Google's fourth-quarter earnings report. That report showed that Alphabet spent a total of $26.7 billion in TAC in 2018, equivalent to 23% of Google's advertising revenue for the year.
To put that payment in perspective, $9.46 billion represented 23% of total revenue for Apple's Services group in 2018, and 33% of that group's gross profits last year, Goldman Sachs estimated. Apple has increasingly focused on the growth of its recurring Services businesses, which includes its App Store, iCloud service and Apple Music, as iPhone sales growth continues to slow. The App Store comprised about 29% of Apple's Services revenue in 2018, estimated Goldman, while Apple Music accounted for about 8% and "Other," which includes iCloud, for about 40%.
In 2017, Apple targeted a doubling of the Services group's revenue to $50 billion by 2020; in its latest fiscal year, Services revenue increased 33% to $39.75 billion, or 15% of Apple's total revenue for that period. The iPhone still accounts for about two-thirds of the company's revenue, however.
Goldman estimated that Apple's TAC revenues, the vast majority of which came from Google, grew 46% in 2018, but that this growth would slow to about 29% in 2019 in the face of tougher comparisons, with higher per search charges boosting results last year.
For the Services group as a whole, Goldman analysts estimated that its revenues would increase by 16% in 2019, down from a growth rate of 24% in 2018. But they noted that one thing that could help the group grow more quickly would be a successful launch of Apple's rumored bundle of music, original video and print content that's expected to debut this year.
In the meantime, Apple should hope that the fire hose of payments from Google for traffic acquisition will continue to flow freely.