Sacconaghi: Google Is Paying Apple $3 Billion A Year To Remain iPhone's Search Engine

While Apple Inc. AAPL and Alphabet Inc GOOG GOOGL are the two most notable smartphone operating system rivals, the latter understands how important it is to remain the preferred search engine on the iPhone, shelling out an estimated $3 billion to do so, according to one analyst.

Services have become one of the most important and fastest-growing segments of Apple’s business over the past several years. While many believe the App store and iTunes/Music are the key drivers of Apple’s service business, it's actually licensing revenues that have been either the biggest or second largest contributor to Apple’s year-over-year services growth.

Bernstein analyst Toni Sacconaghi estimates total Google payments to Apple in fiscal year 2017 could approach $3 billion, which is nearly pure profit for Apple. If this figure were correct, Google alone would account for 5 percent of Apple’s total operating profit this year and 25 percent of total company operating growth over the last two years.

“Google’s willingness to share material revenues with Apple is a testament to the power of Apple’s iOS platform, but we see it as a double-edged sword," Sacconaghi said. "On one hand, licensing revenues should continue to grow going forward as Apple’s installed base and search usage increases."

“On the other hand, Google could ultimately decide that its search position is sufficiently strong that it no longer needs to pay to be the default browser.”

Bernstein maintains an Outperform rating on Apple with a $175 price target.