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Calculating Google's contribution to iPhone profitability

In the iPhone cost structure analysis I showed how revenues and costs for iPhone are probably allocated. The revenue per iPhone was shown to include $29 for revenue items “above” the price of the phone to the channel. This total includes Apple’s own iPhone accessory sales plus revenue from licensing the “Made for iPhone” trademark to third party accessory makers. Apple also receives some revenues from cloud services. But, pertinent to our recent discussions on the Android business model, Apple also receives revenues from Google.

Wouldn’t it be nice to know how much? Here’s a way we can estimate it.

I’ve read an estimate that 50% to 60% of ad revenues from Google search initiated via iOS are paid to Apple. This is believable because the TAC for Google overall is about 40% and Apple probably drove a hard bargain to get a premium for its, presumably, premium traffic.

So if we knew the revenue run rate for Android search on a per device basis we could perhaps guess how much of each phone’s revenue comes from Google. What we’ve heard last year in Congressional testimony is that two thirds of its mobile revenues come from iOS devices. This would imply that the run rate for iOS would be 2x the run rate for Android.

Having a model of Android revenues helps at this point. Assuming Google obtains $4.4 from Android (excluding AdMob and App sales) and assuming negligible other mobile revenues from other platforms gives a possible Google revenue per iOS device per year of nearly $9.

Taking the lower bound of the revenue share estimate above means that half of Google’s revenue goes to Apple or $4.4/iOS device/year or $9 over the two year life of the device.

That would put revenue from Google at about 1.4% of iPhone revenues (see average revenue per iPhone here). And that revenue comes without any costs and so flows straight to the bottom line. That, in turn, would imply that 3% of Apple’s operating margin is provided by Google. Not a bad deal considering that some phone vendors can’t get that for their entire product line.

The interesting factors at work here are that this contribution by Google to Apple is higher than the contribution by Android to Google. In yesterday’s post, I calculated that in 2011 Android contributed about $590 million to Google’s operating margin (5% of total).

If we consider that Google pays Apple $9[1] for every iOS device and since Apple sold 156 million iOS devices in 2011 then Apple received $1.4 billion from Google, all of which went to the bottom line.

$1.4 billion from Google to Apple vs. $600 million from Android to Google. Three percent contribution of Google to iPhone profits vs. 5% contribution of Android to Google’s profits.

This sets up all kinds of game theorizing which will undoubtedly entertain and enrich us all.

Notes:

  1. Perhaps this $9 value is not valid for all devices. Perhaps iPod touch does not get a lot of traffic and is less valuable. Perhaps iPads get more traffic and are worth more. On average, this may be plausible.
  • http://twitter.com/e_orione Emilio Orione

    As deep throat said: follow the money. Nice post Orace.

  • Eric Hedström

    One other interesting point is that Google must not pay $13 per device Apple sells in China. No wonder Apple is integrating with Baidu in Mountain Lion, and presumably iOS 6.

  • Tatil

    Why would Google share AdMob revenue with Apple? With iOS developers, yes, but why Apple? Apple may not be able to ban AdMob from App Store without an anti-trust investigation. Just adding additional privacy controls limiting the data that can be collected by third party ad networks created quite a hubbub. $2 billion may indeed flow to iOS eco system, but I don’t think all of it ends up in Apple’s hands.

    • http://www.asymco.com Horace Dediu

      You’re right. I made an error with the AdMob figure. I adjusted the figures to reflect the correction.

  • Walt French

    “This sets up all kinds of game theorizing which will undoubtedly entertain and enrich us all.”

    Well, certainly the former. As I’ve posted earlier, Google’s objectives aren’t always 100% clear, and especially given the anticipation of changes over time, it’s still VERY hard to back out their decision rules.

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  • KirkBurgess

    2 pronged plan:

    1. Pay apple a premium for proven search revenue stream.

    2. Distribute android for free to obtain minuscule revenue, but more importantly deny Microsoft easy access to search in the mobile space.

    ?

    • JohnDoey

      Nobody has to deny Microsoft anything in Web or mobile. Every new iteration of Microsoft’s online strategy loses even more money. Every iteration of Microsoft’s mobile phone system sells fewer models.

      What Google has done is keep the Microsoft-centric idea of 3rd party hardware makers on life support so that Microsoft can continue to make money off them via patent and software licensing. What Google has done is kill RIM and Palm and Symbian and make the way clear for Apple to not only make the best phone, but also the only phone that is even trying to be the best. So Google has done everything they can to turn exciting, innovative mobile phones into boring, commoditized PC’s. But it turns out that 90% of the people who need a phone have iPod skills, not PC skills. So ultimately, we are looking at an iPod-like consumer-driven phone market in which nerds like Google and Microsoft only have a place making back-end servers.

      • http://profiles.google.com/simon.hibbs Simon Hibbs

        >
        What Google has done is kill RIM and Palm and Symbian and make the way clear for Apple to not only make the best phone, but also the only phone that is even trying to be the best.

        Perhaps Symbian and Palm would have been more successful if Android hadn’t existed, but they would not have been more successful against Apple than Android has been. After all they were there in the market and failed. They had every chance to compete with Apple more effectively than Android, and they didn’t, so I’m not sure what you’re suggesting.

  • Martin Lawrence

    Fascinating analysis, as always. Not so sure about the premium value of search requests from iPhones: I’ve always wondered why Apple places the cursor in the search-field (versus the URL-field).

    I would assume that many of the searches Google gets this way are for properties – such as known URLs – the user has made his mind up about. The search results for such are not a good place for ads.

    Apple will get a heck of a lot of search requests just by defaulting the cursor to the search field. Not so sure of the value Google gets.

    • http://twitter.com/juancho Juan Jose

      curson on search: that would be because it is hard to type direct sites with the iphone keyboard. And also because most people (non techies) just google the site they want to go.

      • Tatil_S

        Typing into URL is not any more difficult than typing into Google search box, especially if it is a site that has been visited recently, as the history based suggestions are quite helpful. In any case, even on desktop, I (and most people I suspect) prefer using Google instead of trying to type AT&T’s web address. Was it att.com, att-wireless.com, wireless.att.com, whatever, I just start typing att to Google box and there are accurate suggestions from Google before I hit the third letter. Desktop or palmtop… Google makes no money out of such transactions, but all it needs is something like one click per 100 searches, so everybody is a winner.

    • JohnDoey

      The cursor goes in the search field by default because that is what 90% of users want.

      Most Web users do not even know what the Web is, let alone know what a URL is.

    • http://www.facebook.com/james.scariati James Scariati

      “Not so sure about the premium value of search requests from iPhones: I’ve always wondered why Apple places the cursor in the search-field (versus the URL-field).”

      I don’t understand what you mean – you have to tap either the URL field or the search field to bring up the keyboard in order to begin typing. It doesn’t select either field by default. (I thought maybe you were referring to Safari on the Mac, but that doesn’t select either field by default either).

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  • http://www.linkedin.com/in/daviddrinkwater demodave

    This sort of takes on the look and feel of the Dick Tracy line:
    “Is the enemy of my enemy my friend, or the enemy of my friend my enemy?”

  • JohnDoey

    No company ever destroyed their brand so completely as Google between 2005-today. In 2005, Google meant God Knows. Now, it means Motorola.

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  • Mark B

    Would the $1.4 Billion paid to Apple from Google be in addition to the estimated $1B annually that Morgan Stanley estimates Google is paying Apple to remain default search on iOS devices, or these numbers the same?