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Apple CEO Tim Cook speaks during the 2018 Apple Worldwide Developer Conference (WWDC) at the San Jose Convention Center on June 4, 2018 in San Jose, California. Apple CEO Tim Cook kicked off the WWDC that runs through June 8.
- Google pays Apple to be the default search engine on the iPhone.
- Goldman Sachs estimates these payments are now over $9 billion per year.
- According to the estimate, Apple makes more money on these payments than iCloud or Apple Music.
Google pays Apple so that it remains the default search engine on the iPhone's Safari browser.
Although neither Google nor Apple discuss the terms of the agreement, most analysts believe the payments are billions of dollars per year.
In fact, the so-called "traffic acquisition cost" payments may be bigger than anyone on Wall Street thinks, Goldman Sachs analyst Rod Hall wrote in a note distributed to clients on Friday.
Google could pay Apple $9 billion in 2018, and $12 billion in 2019, according to the Goldman estimate.
"We believe this revenue is charged ratably based on the number of searches that users on Apple's platform originate from Siri or within the Safari browser," Hall wrote.
"We believe Apple is one of the biggest channels of traffic acquisition for Google," he continued.
Goldman's report models Google's payments to Apple as a fraction of the money it makes on iOS through paid searches, and worked backwards from iOS market share, added a premium, and used a rate based on previous Google disclosures.
Goldman also noted that Google said last year that it had renegotiated TAC terms, which some guessed meant that Apple's rate had increased.
In 2017, Bernstein analyst Toni Sacconaghi estimated that Google was paying Apple $3 billion per year. The only hard number we know for sure is that Google paid Apple $1 billion in 2014, thanks to court filings.
Apple has recently been drawing investor focus to its growing "services" line item, which accounted for 13% of total revenue in Apple's fiscal 2017. "We believe the transformation to services, led by growth in both installed devices and service revenue per device, is tracking better than investor expectation," JPMorgan analyst Samik Chatterjee wrote in a note on Thursday.
When Apple executives talk about Services, they like to focus on the fee Apple collects from software sold on the App Store or the money the company makes through subscriptions like Apple Music and iCloud.
But according to the Goldman model, TAC fees account for 24% of the services business, and AppleCare, Apple's repair and warranty program, accounts for 17% of the $31.3 billion in services revenue that Apple collected last year.
"We don't believe Apple Services should be valued standalone at a higher multiple than the combined company," Hall concludes. Goldman Sachs has a 12-month price target of $240 on Apple.
Get the latest Goldman Sachs stock price here.