Google Search: Could Apple Boot it From iOS?

by Brad Moon | December 12, 2013 11:06 am

This time last year, I pondered what might happen if Apple (AAPL[1]) were to take a shot at replacing Office[2], the productivity software that remains one of Microsoft’s (MSFT[3]) most profitable products. This time around, I’d like to expand on a thought raised in a piece from a few days ago about Apple’s acquisition of social media analytics company Topsy[4].

Google-Search-GOOG-AAPL[5]What if Apple is assembling the pieces for its own mobile search engine to take on Google (GOOG[6]) Search?

When it comes to mobile, Apple makes its big money from hardware sales, while mobile search ad revenue is the driving factor behind Google’s entire mobile strategy. With users shifting from PCs to smartphones and tablets, Google — which gets roughly 94% of its revenue from search advertising — needs to make that transition too.

Mobile ad revenue is the backbone of Google’s Android strategy (get as many Android devices as possible out there to ensure use of Google Search) and the reason why the company is willing to sell a flagship smartphone like the Nexus 5[7] at break-even prices.

According to eMarketer, by the time 2013 is tallied, the mobile ad pot will have nearly doubled over last year, reaching $15.82 billion[8] — of which Google Search is expected to bring home $8.85.

Apple has never made much money from advertising, despite its position as a leading mobile platform. The company’s advertising vehicle is iAd, a service for paid advertising within apps. The most recent numbers I’ve seen for iAd were for 2012, when iAd revenues were $125 million. Peanuts.

Google Search Is Vulnerable

All of this gets interesting is when you look at Apple’s super-sized influence in generating mobile ad revenue, despite the dominance of Android. According to Business Insider, iOS was responsible for generating fully 50% of global mobile advertising in Q2 2013[9].

This is an opportunity for Apple and a risk for Google. The opportunity is for Apple to snatch a chunk of that mobile advertising revenue by implementing its own search functionality in Safari, Maps and Siri instead of relying on Google Search or Microsoft’s Bing. Google recognizes the threat, which is one reason why it’s willing to give up some of what could be Android’s killer features — Google Now, Google Maps and the Chrome web browser being prime examples — by developing native versions for iOS and keeping them competitive with the Android versions.

Using eMarketer figures once again, mobile is expected to account for 48% of all display ads and nearly 60% of search ads by 2017, with a combined value of $29.75 billion. If Apple were to continue its 50% pace, that means about $15 billion annually (or $3.75 billion per quarter) in mobile ad revenue generated by iOS devices.

Google’s revenue for the past quarter was $15.89 billion, which means $3.75 billion represents a huge impact on its bottom line. Apple’s Q3 revenue was $37.5 billion, so $3.75 billion would have a much smaller effect; still, it would be enough to make ad revenue the company’s fourth-largest line of business, behind iTunes and software sales. And ad revenue offers high profit margins.

There’s a pretty compelling case for why AAPL should make the move, but how would the company take on Google Search?

Google has had 15 years to develop its search engine and Google Search has become the de facto standard, generating 67% of search queries[10] — Bing and Yahoo (YHOO[11]) represent most of the remainder, while others like AOL (AOL[12]) hold low, single-digit shares. But that doesn’t mean Apple can’t break in.

How Apple Could Challenge Google Search

Let’s start with that fact that Apple has half of mobile ad-generating capacity as a captive audience, so to speak — iOS users who tend to make use of the services Apple provides by default on their iPhones and iPads.

Consider Maps. Even in the case of an Apple service that was fundamentally flawed on release and where Google quickly offered a compelling, standalone app alternative, Apple has kept hammering away with improvements, and iPhone users have responded. A year after being publicly humiliated over its many flaws, 35 million iPhone users in the U.S. were using Apple’s Maps while only 6 million were using Google Maps[13].

I doubt Apple would release its own search engine immediately, but I could see it following the path suggested by Azeem Azhar[14] — use that Topsy acquisition to incorporate a social media search layer in the background for Siri and Safari, while mining the massive database of user preferences Apple already has from years of iTunes purchases. This could add a level of immediacy and relevance that Google Search currently lacks.

In the meantime, Apple can be working on its own web searching algorithms, and a few releases of iOS down the road, Apple Search could become the default used by its Safari web browser, Siri and Maps. Google Search and Bing would get relegated to optional choices; but given past patterns, many iOS users would likely stick with the default and wait for Apple to get better.

Apple is quietly building massive data centers[15] across the U.S. — designed for easy expandability for future processing needs — and it already has its iAd team in place. It also has more money than it knows what to do with. The company should be able to ramp up the infrastructure and sales support needed to go after search and mobile ads in a big way … if it decides to.

Will It Happen?

That’s the big question: Would Apple ever choose to go after Google Search? It may be a longshot, given the company’s preference for hardware sales. Still, it found success with iTunes and has become much more aggressive about incorporating services as part of iOS  (and search is the foundation behind many of those services).

If I were Google — and I’d already kicked the Apple hornet nest by competing against the iPhone and iPad with Android — I’d be a little nervous about the possibility of Apple returning the favor by taking on Google Search and gutting my core revenue stream.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

Brad Moon has been writing for InvestorPlace.com since 2012. He also writes about stocks for Kiplinger and has been a senior contributor focusing on consumer technology for Forbes since 2015.

Endnotes:

  1. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  2. were to take a shot at replacing Office: https://investorplace.com/2012/12/what-if-apple-kicked-out-microsofts-most-profitable-crutch/#.UqexMpETvZs
  3. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  4. Apple’s acquisition of social media analytics company Topsy: https://investorplace.com/2013/12/topsy-apple-acquisitions-aapl/2/#.Uqez7ZETvZs
  5. [Image]: https://investorplace.com/wp-content/uploads/2013/12/Google-Search.jpg
  6. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  7. flagship smartphone like the Nexus 5: https://investorplace.com/2013/12/nexus-5-review-goog/5/
  8. reaching $15.82 billion: http://www.emarketer.com/Article/Google-Takes-Home-Half-of-Worldwide-Mobile-Internet-Ad-Revenues/1009966
  9. iOS was responsible for generating fully 50% of global mobile advertising in Q2 2013: http://www.businessinsider.com/mobile-ad-revenue-by-platform-2013-10
  10. generating 67% of search queries: http://searchenginewatch.com/article/2289560/Googles-Search-Market-Share-Shoots-Back-to-67
  11. YHOO: http://studio-5.financialcontent.com/investplace/quote?Symbol=YHOO
  12. AOL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AOL
  13. 35 million iPhone users in the U.S. were using Apple’s Maps while only 6 million were using Google Maps: http://www.theguardian.com/technology/2013/nov/11/apple-maps-google-iphone-users
  14. following the path suggested by Azeem Azhar: http://www.linkedin.com/today/post/article/20131203115846-2954-the-real-reason-apple-bought-topsy
  15. building massive data centers: http://www.datacenterknowledge.com/archives/2013/10/16/apple-quietly-builds-its-prineville-data-center/

Source URL: https://investorplace.com/2013/12/google-search-aapl/