VAL9000 Posted February 12, 2013 Share Posted February 12, 2013 This is fascinating: http://techcrunch.com/2013/02/12/google-to-pay-apple-1-billion-next-year-to-be-default-search-engine-on-ios/ A few things come out of this: - Being the default search provider on iOS is worth $1bn per year to Google. - The returns on Google's investment in Android exceed $1bn per year, using this metric as a proxy. - $1bn per year in pure profit is all it takes to move Apple from a non-Google phone to a Google phone. I am somewhat surprised by this. I would expect that Apple would prefer to hurt Google's mobile business by offering the deal to Bing on substantially better terms. As valueInv's posts have pointed out, Google is doing an awful lot of deals that amount to paying for traffic. Is this a flaw in their business model, or are they discouraging competition by buying a moat? Who else has billions to spend on deals like this? Link to comment Share on other sites More sharing options...
Liberty Posted February 12, 2013 Author Share Posted February 12, 2013 Apple probably will be very careful in the future about changing defaults to things that its customers will find inferior (ie. Apple Maps backlash), and the same search traffic is probably worth more to Google than Bing because of their better ad inventory, economies of scale on infrastructure, etc, so Bing's probably not quite as ready to spend a billion on this. Just my guess. Link to comment Share on other sites More sharing options...
Palantir Posted February 12, 2013 Share Posted February 12, 2013 No, that traffic is worth more to Bing. That extra traffic would suddenly make Bing profitable with no additional investment. Furthermore, the more people use your search, the better it gets, there is no question Bing would benefit more given where it's starting. Link to comment Share on other sites More sharing options...
Guest valueInv Posted February 12, 2013 Share Posted February 12, 2013 This is fascinating: http://techcrunch.com/2013/02/12/google-to-pay-apple-1-billion-next-year-to-be-default-search-engine-on-ios/ A few things come out of this: - Being the default search provider on iOS is worth $1bn per year to Google. - The returns on Google's investment in Android exceed $1bn per year, using this metric as a proxy. - $1bn per year in pure profit is all it takes to move Apple from a non-Google phone to a Google phone. I am somewhat surprised by this. I would expect that Apple would prefer to hurt Google's mobile business by offering the deal to Bing on substantially better terms. As valueInv's posts have pointed out, Google is doing an awful lot of deals that amount to paying for traffic. Is this a flaw in their business model, or are they discouraging competition by buying a moat? Who else has billions to spend on deals like this? Google not only pays Apple, it pays operators a cut of the revenue, it subsidizes devices, it is starting to subsidize newspapers, subsidize networks, subsidize patent protection and much more. On top if this, it puts a lot of money in science projects. The margin conversation we should be having is Google's. Link to comment Share on other sites More sharing options...
Liberty Posted February 12, 2013 Author Share Posted February 12, 2013 No, that traffic is worth more to Bing. That extra traffic would suddenly make Bing profitable with no additional investment. Furthermore, the more people use your search, the better it gets, there is no question Bing would benefit more given where it's starting. The way I see it, it's worth more as a relative share of total revenue/traffic to Bing than Google, but it's worth more to Google in absolute dollar terms. Link to comment Share on other sites More sharing options...
Guest wellmont Posted February 12, 2013 Share Posted February 12, 2013 No, that traffic is worth more to Bing. That extra traffic would suddenly make Bing profitable with no additional investment. Furthermore, the more people use your search, the better it gets, there is no question Bing would benefit more given where it's starting. yeah it's too bad apple doesn't want bing on it's phone. it's users would revolt. Link to comment Share on other sites More sharing options...
blainehodder Posted February 12, 2013 Share Posted February 12, 2013 As valueInv's posts have pointed out, Google is doing an awful lot of deals that amount to paying for traffic. Is this a flaw in their business model, or are they discouraging competition by buying a moat? Who else has billions to spend on deals like this? ...Or, rather than a flaw, the billion dollar equity outlay could result in 1.2 or more billion in net income, no? Wouldnt that just be smart capital allocation? Is cementing the moat and cutting out the competition just a cherry on top? Is it unreasonable to assume 250 million + and growing iphones constantly performing google searches would generate $8-10 revenue/user? 1 billion starts to look pretty cheap in that case, and they should be buying traffic with high returns like that all they want. Would this hurt margins? Link to comment Share on other sites More sharing options...
Guest valueInv Posted February 12, 2013 Share Posted February 12, 2013 As valueInv's posts have pointed out, Google is doing an awful lot of deals that amount to paying for traffic. Is this a flaw in their business model, or are they discouraging competition by buying a moat? Who else has billions to spend on deals like this? ...Or, rather than a flaw, the billion dollar equity outlay could result in 1.2 or more billion in net income, no? Wouldnt that just be smart capital allocation? Is cementing the moat and cutting out the competition just a cherry on top? Is it unreasonable to assume 250 million + and growing iphones constantly performing google searches would generate $6-10 revenue/user? 1 billion starts to look pretty cheap in that case, and they should be buying traffic with high returns like that all they want. Would this hurt margins? As users move from desktop to mobile, mobile revenues replace desktop. If the cost of mobile revenues is much higher , it will result in declining margins. Link to comment Share on other sites More sharing options...
Guest valueInv Posted February 12, 2013 Share Posted February 12, 2013 No, that traffic is worth more to Bing. That extra traffic would suddenly make Bing profitable with no additional investment. Furthermore, the more people use your search, the better it gets, there is no question Bing would benefit more given where it's starting. yeah it's too bad apple doesn't want bing on it's phone. it's users would revolt. I would guess that their search strategy revolves around Siri. If I was Apple, I would work with MSFT to plug Bing into Siri and bring advanced search. Link to comment Share on other sites More sharing options...
VAL9000 Posted February 12, 2013 Share Posted February 12, 2013 ...Or, rather than a flaw, the billion dollar equity outlay could result in 1.2 or more billion in net income, no? Wouldnt that just be smart capital allocation? Is cementing the moat and cutting out the competition just a cherry on top? Is it unreasonable to assume 250 million + and growing iphones constantly performing google searches would generate $6-10 revenue/user? 1 billion starts to look pretty cheap in that case, and they should be buying traffic with high returns like that all they want. Would this hurt margins? As users move from desktop to mobile, mobile revenues replace desktop. If the cost of mobile revenues is much higher , it will result in declining margins. This is true, but cementing the lead in mobile advertising is clearly worth $1bn today. Besides, when everyone ditches their Apple devices for Android devices, this cost will go away ;) I bet 75% of Apple users wouldn't even notice if Google were swapped for Bing. Link to comment Share on other sites More sharing options...
Liberty Posted February 12, 2013 Author Share Posted February 12, 2013 As users move from desktop to mobile, mobile revenues replace desktop. If the cost of mobile revenues is much higher , it will result in declining margins. It's not as simple as moving from one to the other, though. People do more total searches when they have Google in their pocket at all times rather than just when they are in front of their computer. A lot of those search are additional searches, not just the same searches done on a different device. Link to comment Share on other sites More sharing options...
Guest valueInv Posted February 12, 2013 Share Posted February 12, 2013 As users move from desktop to mobile, mobile revenues replace desktop. If the cost of mobile revenues is much higher , it will result in declining margins. It's not as simple as moving from one to the other, though. People do more total searches when they have Google in their pocket at all times rather than just when they are in front of their computer. A lot of those search are additional searches, not just the same searches done on a different device. How do you know? Link to comment Share on other sites More sharing options...
blainehodder Posted February 12, 2013 Share Posted February 12, 2013 How do you know? While a couple data points hardly proves anything, I certainly perform far more searches on a daily basis than I did before I had a smartphone. Same thing for my family and friends. A quick glance around a train, or public sidewalk seems to confirm that more and more searches, potentially of a more local nature are being performed. Link to comment Share on other sites More sharing options...
Liberty Posted February 12, 2013 Author Share Posted February 12, 2013 How do you know? I've seen it. I bet even you do it that way. All the searches that you do when not in front of your computer, would you do all of those if you didn't have a smartphone? Link to comment Share on other sites More sharing options...
Guest valueInv Posted February 12, 2013 Share Posted February 12, 2013 ...Or, rather than a flaw, the billion dollar equity outlay could result in 1.2 or more billion in net income, no? Wouldnt that just be smart capital allocation? Is cementing the moat and cutting out the competition just a cherry on top? Is it unreasonable to assume 250 million + and growing iphones constantly performing google searches would generate $6-10 revenue/user? 1 billion starts to look pretty cheap in that case, and they should be buying traffic with high returns like that all they want. Would this hurt margins? As users move from desktop to mobile, mobile revenues replace desktop. If the cost of mobile revenues is much higher , it will result in declining margins. This is true, but cementing the lead in mobile advertising is clearly worth $1bn today. Besides, when everyone ditches their Apple devices for Android devices, this cost will go away ;) I bet 75% of Apple users wouldn't even notice if Google were swapped for Bing. The 1 billion is only Googles payment to Apple. They're paying operators a lot more. Lets say their deal with operators and Apple is the same: 30% of search revenues. If Androids market share is 3x Apples, they're paying an additional $3B to operators all over the world. Guess why Android is gaining market share quickly. Google's revenues grew about 22% yoy. How much did net income grow? Link to comment Share on other sites More sharing options...
Guest valueInv Posted February 12, 2013 Share Posted February 12, 2013 How do you know? I've seen it. I bet even you do it that way. All the searches that you do when not in front of your computer, would you do all of those if you didn't have a smartphone? I'd wait till I get back to my desk. Link to comment Share on other sites More sharing options...
Guest wellmont Posted February 12, 2013 Share Posted February 12, 2013 No, that traffic is worth more to Bing. That extra traffic would suddenly make Bing profitable with no additional investment. Furthermore, the more people use your search, the better it gets, there is no question Bing would benefit more given where it's starting. yeah it's too bad apple doesn't want bing on it's phone. it's users would revolt. I would guess that their search strategy revolves around Siri. If I was Apple, I would work with MSFT to plug Bing into Siri and bring advanced search. maybe down the road. and you're right siri does need to get better. but google is a verb. and people want their google. even IOS users. I think a longer term issue for apple is what happens if google now starts to extend it's lead over siri just as google maps has done? Link to comment Share on other sites More sharing options...
Liberty Posted February 12, 2013 Author Share Posted February 12, 2013 I'd wait till I get back to my desk. Good for you, having a superhuman memory to remember all the things you'd like to look up throughout the day and then doing a big batch of searches later, but if that's how you do it, you are an exception. Link to comment Share on other sites More sharing options...
Guest valueInv Posted February 12, 2013 Share Posted February 12, 2013 I'd wait till I get back to my desk. Good for you, having a superhuman memory to remember all the things you'd like to look up throughout the day and then doing a big batch of searches later, but if that's how you do it, you are an exception. I spend most of my waking hours in front of a computer screen. I don't need to remember much. Link to comment Share on other sites More sharing options...
Guest valueInv Posted February 12, 2013 Share Posted February 12, 2013 No, that traffic is worth more to Bing. That extra traffic would suddenly make Bing profitable with no additional investment. Furthermore, the more people use your search, the better it gets, there is no question Bing would benefit more given where it's starting. yeah it's too bad apple doesn't want bing on it's phone. it's users would revolt. I would guess that their search strategy revolves around Siri. If I was Apple, I would work with MSFT to plug Bing into Siri and bring advanced search. maybe down the road. and you're right siri does need to get better. but google is a verb. and people want their google. even IOS users. I think a longer term issue for apple is what happens if google now starts to extend it's lead over siri just as google maps has done? How come Apple's maps usage is higher now than before IOS 6 launch then? Link to comment Share on other sites More sharing options...
Liberty Posted February 12, 2013 Author Share Posted February 12, 2013 I spend most of my waking hours in front of a computer screen. I don't need to remember much. Me too, but I know I'm an extreme case. The reason people do more searches on average in a day when they have a search engine in their pocket is the same reason why people will check facebook more often on average in a day if they have a facebook app in their pocket, or email, or whatever. I don't think it's too controversial to say that ceteris paribus, people check email/facebook/the web more often if they have a smartphone than if they don't (they don't just transfer the same quantity from desktop to mobile, they add on top of it because of the extra convenience and availability), and the same applies for search in my experience. Even if I saw data that showed a decline in the average number of searches from mobile users, to be truly convinced I'd have to look closely at the sample used because I wouldn't be surprised if it included a lot of people that didn't use to go online much before smartphones and tablets, and so of course they'll be less active than more technologically-inclined people from the desktop-laptop era (it would be comparing apples and oranges). But bringing these people on board is still a win in the absolute because it's extra searches that wouldn't have been made before, even if they dilute the average. This happens when you make something more accessible. As a relative number, more computer users knew how to program in the 1980s than now, but the absolute number of people who know how to program is much higher now because the whole pie is much larger. Link to comment Share on other sites More sharing options...
hyten1 Posted February 12, 2013 Share Posted February 12, 2013 just a casual comment more search on mobile might actually be bad, mobile ads are not as profitable as desktop ads, then again more search with mobile but less profit per search compare to desktop Link to comment Share on other sites More sharing options...
Palantir Posted February 12, 2013 Share Posted February 12, 2013 A shift to mobile is not a "permanent" impairment in profitability. It's merely a new paradigm and challenge that the company has to figure out and the result is uncertain. I think it is a mistake to automatically discount cash flows based on such a faulty assumption. Link to comment Share on other sites More sharing options...
Guest valueInv Posted February 12, 2013 Share Posted February 12, 2013 just a casual comment more search on mobile might actually be bad, mobile ads are not as profitable as desktop ads, then again more search with mobile but less profit per search compare to desktop This is not even counting the money they need to pay out to Apple and others. Link to comment Share on other sites More sharing options...
Guest valueInv Posted February 12, 2013 Share Posted February 12, 2013 A shift to mobile is not a "permanent" impairment in profitability. It's merely a new paradigm and challenge that the company has to figure out and the result is uncertain. I think it is a mistake to automatically discount cash flows based on such a faulty assumption. What assumption? Link to comment Share on other sites More sharing options...
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