Google's search deal with Apple — which makes Google the default search engine on Apple's mobile devices — is up for renewal this year.
Because Apple and Google do not get along, Google investors are worried Apple will dump Google as the default, thus hammering Google's mobile ad revenue.
Analysts at UBS say investors are right to be worried, but they don't think it's that big of a deal. If Apple were to drop Google, it would lead to only a 3% drop in net revenue.
Here's UBS:
We estimate Google is poised to generate $7.8b of gross revenue ($5.6b net of TAC) from its iOS deal in 2015, equating to ~10% of gross revenue for the year. This represents a substantial amount of revenue at risk — that said, if Google was replaced by a competitor and our 50% switchback rate assumption proved accurate, this would represent only a ~5% headwind to 2015 gross revenue, and only a ~3% headwind to net revenue. We believe this is a much smaller headwind that many investors expect.
Basically, UBS thinks that even if Apple changed the default, half of the users would switch the default back to Google. Because Google would not have to make a big lump payment to Apple, on the basis of net revenue it might not be so bad.
That said, Safari on iOS devices is responsible for a significant proportion of the mobile browser market (43%, according to UBS). A 50% switchback rate if Apple doesn't renew the deal still translates to a potential loss of nearly 25% of the mobile search market for Google. As a company built on search, this would be a major failure.
So what would Apple use instead of Google? It might replace Google Search with a competitor such as Yahoo, or Microsoft's Bing, which is already used to power Siri. It could even build its own in-house tool, as it did with Apple Maps after ditching Google Maps in 2012. In 2014, Apple also added Duck Duck Go, a privacy-centric search engine, as an alternative choice for search in iOS. The move could be read as a signal to Google: We don't need you; we have options.
This isn't news in itself — a report from The Information's Amir Efrati that Apple might ditch Google came in November 2013. But UBS' new report puts a figure on just how much the move would hurt Google.
Something similar has happened before. Mozilla recently dropped Google Search as default from its Firefox browser in favour of a new deal with Yahoo. The result? Google's desktop search market share in the US dropped below 75% for the first time in years, while Yahoo saw significant growth.
Here's a chart:
This is just one problem facing Google. There is also the deceleration of desktop search as mobile usage continues to grow, the risks posed by regulatory action taken against the company (especially in Europe), and a shift toward so-called native display advertising at the expense of search advertising.
UBS may be "bullish" over Google stock, but there is a lot to be worried about in terms of the company's market share.
