There have been reports that Google’s deal with Apple to be the default search engine for Safari is up for renewal. As a result, analysts from multiple firms are weighing in on that deal and what might happen if Google loses it.
Google to see earnings accretion
In a report dated April 6, Goldman Sachs analyst Heather Bellini and her team said they surveyed more than 500 iPad and iPhone users about their search behaviors. They estimate that losing the Safari deal will actually be between 5% and 10% accretive to Google’s earnings, but only if the search giant is able to recapture between 50% and 70% of the revenue that previously would have fallen under the deal.
They estimate that in the 2014 calendar year, Google’s total mobile search revenue was about $11.8 billion. They estimate that about 75% or $8.9 billion of that came from iPads and iPhones. Further, they believe that about 50% of that or $4.4 billion is related directly to Google’s deal with Apple.
How much does Google pay Apple now?
One of the key areas of debate on this topic is how much Google pays to Apple for traffic acquisition costs. Some estimate it at as low as 30%, while other estimates reach as high as 85%. The Goldman Sachs team estimates traffic acquisition costs at 65%. That would suggest Google paid $1.6 billion in net ad revenue in 2014 from the Apple deal. This would represent about 350 basis points of growth.
They do note that if Google does lose the deal for Safari, there will be a headwind for growth in paid clicks. Also this metric has been decelerating for about the last year. But even though the cost per click on iOS devices is higher than it is on Android, they say cost per click on smartphones remain lower than that of desktop. As a result, they think any loss Google sees from this deal will help “aggregate” cost per click growth but at the expense of growth in paid clicks.
The Goldman Sachs team reiterated its Neutral rating and $540 per share price target for Google. As of this writing, Class A shares of Google were up 0.51% to $544.09 per share. Shares have been declining steadily in value since early March.
