While Apple switching Siri and Spotlight to Google is beneficial for Search traffic, there is a notable business cost associated. Investors (via Bloomberg) are noticing and wary of the rising traffic acquisition costs from Google paying Apple and Android OEMs to use Search and other services.
Traffic acquisition costs are what Google pays Apple and other companies so that their services are the defaults, ads appear, and apps are pre-installed. In 2012, that figure was about 7% of Google’s online revenues. Last year, it jumped to 11% and $19 billion — it’s been in a steady rise over the years.
Apple and Android OEMs were paid $7.2 billion — in a three-fold increase from 2012 — last year to be the default search provider and the inclusion of other apps. Analysts estimate that at least $3-4 billion go towards the Apple contract alone.
With an eye towards future costs, investors are worried about rising traffic acquisition costs that could hurt Google’s profit margins:
“RBC Capital Markets analyst Mark Mahaney recently estimated that each percentage point increase to traffic acquisition costs would drain about 1 percent from Google’s estimated earnings next year, or roughly $280 million in profit.”
One particular worry is the increased chatter of European anti-trust investigations into Android. Phone makers might be able to haggle Google into increased payments depending on the outcome of the EU case. After settling in Russia so that Google is no longer the default search engine in browsers on Android, shares in competing local search company Yandex increased.
On the other hand, some investors don’t fear the Apple side of the costs given how those negotiations to be the default search engine have been completed for now.