Apple, Google and a deal that controls the internet

When Tim Cook and Sundar Pichai, the directors of Apple and Google, were photographed having dinner together at an upscale Vietnamese restaurant called Tamarine in 2017, the picture sparked tabloid madness over the relationship between the two most powerful companies in Silicon Valley.

As the two men sipped red wine at a window table in the Palo Alto restaurant, their companies were in tense negotiations to renew one of the most lucrative deals in history: an agreement to use Google’s search engine as the preselected choice on Apple’s iPhone and other devices. The updated deal was worth billions of dollars for both companies and cemented their status at the top of the tech industry’s pecking order.

Now the partnership is in danger. Last Tuesday, the Justice Department filed a landmark lawsuit against Google – the U.S. government’s largest antitrust case in two decades – citing the alliance as a prime example of the company’s illegal tactics to protect its monopoly and reduce competition in web search .

Examination of the pact, which was first signed 15 years ago and rarely discussed by either company, has highlighted the special relationship between Silicon Valley’s two most valuable companies – an unlikely union of competitors that regulators believe too Wrongly prevents smaller businesses from thriving.

“We have this strange term in Silicon Valley: co-optation,” said Bruce Sewell, Apple’s general counsel from 2009-2017. “You have brutal competition, but at the same time you have the necessary collaboration.”

Apple and Google are on the hip, although Cook has said that internet advertising, Google’s bread and butter is “watching” consumers, and Apple’s co-founder Steve Jobs once promised a “thermonuclear war” in his Silicon Valley neighbor when he did learned It was working on a rival to the iPhone.

Apple and Google’s parent company, Alphabet, valued at more than $ 3 trillion, competes on numerous fronts including smartphones, digital cards, and laptops. But they also know how to be nice when it suits their interests. And few offers were better than the iPhone search offer for both sides of the table.

According to the Justice Department, almost half of Google search traffic now comes from Apple devices, and the prospect of losing the Apple deal has been described by the company as a “code red” scenario. When iPhone users search Google, they see the search ads that promote Google’s business. You can also find your way to other Google products such as YouTube.

A former Google executive who asked not to be identified because he wasn’t allowed to talk about the deal said the prospect of losing Apple’s traffic was “terrifying” for the company.

The Justice Department, which is seeking an injunction preventing Google from doing business like it did with Apple, argues that the deal wrongly helped make Google, which handles 92% of the world’s internet searches, the consumer center. Online life.

Online companies like Yelp and Expedia, as well as companies that range from noodle shops to news organizations, often complain that Google’s search dominance enables it to charge advertising fees when users simply search by name and consumers like their own products from Google, to route cards. Microsoft, which had its own antitrust battle two decades ago, has told UK regulators that if it were the default option for iPhones and iPads, it would make more advertising money every time it searches the competing search engine, Bing.

In addition, competitors like DuckDuckGo, a small search engine that sells itself as a privacy-focused alternative to Google, could never compare the Google tab to Apple.

Apple is now receiving estimated annual payments of $ 8 billion to $ 12 billion – up from $ 1 billion a year in 2014 – in exchange for integrating the Google search engine into its products. This is probably the largest single payment Google makes to anyone and accounts for 14% to 21% of Apple’s annual profits. This is not money Apple would like to get away with.

In fact, Cook and Pichai met again in 2018 to discuss how to increase search revenue. After the meeting, a senior Apple employee wrote to a Google colleague: “Our vision is that we work as if we were a company,” the Justice Department complained.

Forced separation could mean the loss of simple money for Apple. However, it would be a bigger threat to Google that would have no obvious way to replace the lost traffic. It could also lead Apple to buy or build its own search engine. Inside Google, people believe that Apple is one of the few companies in the world that a former executive said could offer a formidable alternative. Google also feared that Apple could make it difficult for iPhone users to get to the Google search engine without the agreement.

An Apple spokesperson declined to comment on the partnership, while a Google spokesperson referred to a blog post in which the company defended the relationship.

Although the bill with Apple continues to rise, Google has kept saying that it dominates internet search because consumers prefer it, not because customers buy it. The company argues that the Justice Department paints an incomplete picture; The partnership with Apple is no different from that of Coca-Cola, which pays a supermarket for outstanding shelf space.

Other search engines like Microsoft’s Bing also have revenue-sharing agreements with Apple to be displayed as secondary search options on iPhones, Google says in its defense. It adds that Apple allows users to change their default search engine from Google – although few probably do because people don’t usually tinker with such settings and many prefer Google anyway.

Apple rarely, if ever, publicly recognized its contract with Google and, according to Bernstein Research, mentioned its so-called license revenues for the first time this year in a request for profit.

According to a former executive who spoke about the condition of anonymity based on confidentiality agreements, Apple employees have done the same calculation through Google as the general public: the benefits of the search engine are worth the cost of its invasive practices.

“Your search engine is the best,” said Cook when he was asked by Axios in late 2018 why he was working with a company that he had also implicitly criticized. He added that Apple also created ways to blunt Google’s data collection, such as a private browsing mode on Apple’s internet browser.

The offer is not limited to searches in Apple’s Safari browser. It extends to virtually all searches on Apple devices, including Apple’s Siri virtual assistant, as well as Google’s iPhone app and Chrome browser.

The relationship between companies has evolved from a friendly to a controversial relationship to today’s “co-optation”. In Google’s early years, the company’s co-founders, Larry Page and Sergey Brin, saw Jobs as mentors and took long walks to discuss the future of technology.

In 2005, Apple and Google made a humble deal at the time: Google was the default search engine in Apple’s Safari browser on Mac computers.

Cook, then a representative of Jobs, quickly saw the lucrative potential of the deal, said another former Apple executive who asked not to be named. Google’s payments were pure profits, and all Apple had to do was set up a search engine that users already wanted.

Apple has expanded the deal for its big upcoming product: the iPhone. When Jobs introduced the iPhone in 2007, he invited Eric Schmidt, then CEO of Google, to join him on stage at the first of Apple’s many famous iPhone events.

“If we just got the two companies together somehow, we could just call them AppleGoo,” joked Schmidt, who was also on Apple’s board of directors. Using a Google search on the iPhone, he added, “You can actually merge without merging.”

Then the relationship turned sour. Google had quietly developed a competitor for the iPhone: smartphone software called Android that any phone manufacturer could use. Jobs was angry. In 2010, Apple sued a phone manufacturer that used Android. “I’m going to destroy Android,” Jobs said to his biographer Walter Isaacson. “I’ll take my last breath if I have to.”

A year later, Apple introduced Siri. Instead of Google, which underpinned the virtual assistant, it was Microsoft Bing.

However, the companies’ partnership with iPhones continued – too lucrative to blow up both sides. According to a former executive, Apple had arranged the deal to require regular renegotiations, and each time more money was being withdrawn from Google.

“You need to be able to maintain these relationships and not burn a bridge,” said Sewell, Apple’s former general counsel, who refused to go into details of the deal. “While you are negotiating on behalf of your company and trying to get the best deal, your gloves are off.”

The deal was up for renewal in 2017. Google was under pressure because clicks on its cell phone ads weren’t growing fast enough. Apple wasn’t happy with Bing’s performance for Siri. And Cook had just announced that Apple intended to double its service revenue to $ 50 billion by 2020, an ambitious goal that would only be possible with payments from Google.

In the fall of 2017, Apple announced that Google was now helping Siri answer questions, and Google announced that search traffic payments had increased. The company made an anodyne statement as to part of the reason it suddenly paid an unnamed company hundreds of millions of dollars more: “Changes in Affiliate Contracts.”