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Google told investors it needs to pay more money to an unspecified ‘partner’ — and it looks a lot like Apple – Business Insider

Tim CookGetty Images/Stephen Lam

  • Google traffic acquisition costs are
  • Google said the increase was due to changes in partner
    agreements and the shift to mobile
  • Part of the increase appears to be driven by a new
    deal to be on the iPhone’s Safari browser


stellar third-quarter earnings report
one small blemish: The company needs to pay more money
to some of its partners.

Wall Street usually frowns on rising costs, even at a company
like Google, which generated $28 billion in revenue during the
third quarter and is sitting on $100 billion in cash and
short-term securities. 

In this case though, Google’s forecast of increasing expenses
left many analysts just scratching their heads, trying to figure
out what’s going on. 

Ruth Porat, Google’s finance chief, prompted a series of queries
from analysts when she warned at the start of the company’s earnings
that Google’s traffic acquisition costs, or TAC, are
expected to increase as a percentage of revenue going
forward. TAC represents the money the
company pays PC makers, phone manufacturers, and
other websites to promote its services and steer more clicks
to its sites.

Ruth Porat
Alphabet CFO Ruth


In fact, Google’s TAC has already been climbing. In the third
quarter, such costs rose to 23% of Google’s total ad
revenue, up from 21% in the year-ago period.

Porat explained the increase as the result of “changes in partner
agreements” and the shift to mobile computing. But she refused to
provide more details about those agreement or the partners
involved when prodded by analysts. 

All roads lead to Cupertino

One theory is that Google’s rising TAC is a result of a
new agreement with Apple. 

Google has a long-running deal with Apple that makes Google the
default search engine on the iPhone’s Safari web browser. Thanks
to that deal, whenever iPhone users search for something in
Safari, they’re directed to results on Google’s website.

That privilege didn’t come cheap, and according to a recent
analyst report, it’s becoming more and more expensive for Google.
Bernstein analyst Toni Sacconaghi estimated that
while Google paid Apple $1 billion in 2014 as part of
their deal, its total payments to Apple may now be closer to $3
billion, according to a
CNBC report
in August.

If so, that could help explain the rising TAC Google

“TAC growth continues to outpace accelerating Google sites
growth, due in part to recent changes in partner agreements
(presumably Apple),” wrote Baird analyst Colin Sebastian in a
note to investors on Thursday. 

Macquarie analyst Ben Schachter said he wasn’t able to directly
tie the increase to a new Apple deal, but noted the increase was
“clearly very likely from mobile and Apple overall.” 

It’s not an existential threat

Whatever the case, the rising TAC illustrates an opportunity and
a weakness for Google. 

Sundar Pichai
Google CEO Sundar

Justin Sullivan/Getty

Because Google is dependent on Apple for a valuable pipeline of
traffic, it’s in a difficult position. Apple can essentially call
the shots.

“It is not an existential threat, but it is a cost that will
continue to rise,” Schachter told Business Insider in an

But Schachter seemed relatively unconcerned, noting Google’s
management thinks the increased costs are needed to boost

Google knows the value of these TAC deals and it knows when
it can forego them, as it did
in 2014 when it walked away from its deal with Mozilla
. The
agreement made Google the default search engine in the Firefox
web browser, but Yahoo opened its wallet to steal the deal
from Google, and Google allowed it too. 

Since then, Firefox’s share of the browser market has continued
to languish.
Yahoo was acquired by Verizon
. And Google’s revenue has
continued to grow. In other words, Google made a smart bet and
saved itself some money.

The iPhone is much different than Firefox. And Google investors
seem to think even a more costly deal with Apple is a small
price to pay for Google to continue to be a prime destination in
a world of diverse smartphones and mobile devices. 

“Ultimately,” says Dan Ives, of GBH Insights, Google’s
“underlying ad and search strength is the key metric that tells
the growth story.” 

Google told investors it needs to pay more money to an unspecified ‘partner’ — and it looks a lot like Apple – Business Insider

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