This Goldman Sachs note is behind the theory that Apple has figured out how 'to starve Google's core business into irrelevance'

Most people believe that Apple's recent move to downgrade its mobile advertising product, iAd, is a sign that iAd failed to gain traction with advertisers and that Apple has officially stopped trying to compete as a mobile ad business.

Apple is getting rid of the iAd sales force and will let the feature exist only as an automated self-serve product.

Over the weekend, Daniel Eran Dilger wrote a long, interesting column on AppleInsider that contained an interesting theory that the iAd downgrade was part of a much bigger, bolder Apple strategy to crush Google (the search ad business that is the core of Alphabet, the newly named Google parent company).

Dilger believes that the end of iAd as an Apple priority shows that "Apple is ready to stop playing in ads where Google has a home field advantage, and instead begin to leverage its entrenched position in hardware in order to starve Google's core business into irrelevance by targeting the valuable foundation of Internet ads."

Apple and Google are in different businesses, of course. Apple makes devices, while Google makes software. It's not obvious why Apple would care about the fortunes of Google. And Dilger is one of the most pro-Apple bloggers in the field.

But Dilger cited an old note from analysts at Goldman Sachs, published last year. Business Insider obtained a copy of the note, dated April 6. It contains this description of how much revenue Goldman believes Apple supplies to Google. About 75% of all Google's mobile revenue comes from people using Apple devices, according to Goldman analyst Heather Bellini and her team:

We estimate Google saw $11.8bn in total mobile search revenue in CY14 and while we believe that ~75%, or $8.9bn, was generated from iOS devices (iPhones and iPads), our research suggests that ~50% of this portion, or $4.4bn, is directly related to the Safari deal.

... There is much debate over the TAC rate that Google pays to Apple, with the market estimating anywhere from 30-85%. By analyzing Google's major distribution deals, we come to a TAC rate of 65% which implies $1.6bn in CY14 net advertising revenue from the Safari deal, contributing ~350bps of growth.

... To support this assumption, we note that Custora, a digital marketing analytics firm, estimates that 80% of mobile ecommerce sales during the 2014 holiday season originated from iOS devices. Additionally, court documents from the 2012 Oracle vs Google patent case imply 70-80% of Google's mobile search revenues are from iOS devices.

Google's full-year 2014 revenue was $66 billion (£46.1 billion). So about 13.5% of Google's revenue comes from Apple, on those numbers. Google is on course to book north of $70 billion in revenue for 2015. Google's business is becoming more mobile-oriented as time goes by.

Apple has made a couple of other moves that suggest it is downgrading the kind of advertising that Google is dependent on:

• Back in March 2015 there was a lot of talk about whether Apple would remove Google as the default search engine in its Safari mobile browser. That does not seem to have happened, although Google was replaced by Bing as the default search engine in the iOS Spotlight search product that searches your Apple devices.
• Apple also allowed app developers to use an ad-blocking function as part of iOS 9.

Dilger's theory is that as Apple owns the richest, most lucrative users, the company now wants to give them as much ad-free privacy as possible. "Poor neighborhoods are emblazoned with billboards and ads. Rich neighborhoods are not," he writes. "Advertising is increasingly restricted in neighborhoods as land values climb. There's a general revolt against invasive advertising the higher you climb in sophistication and wealth."

In this scenario, it is as if Apple is trying to teach the marketplace that ads are for the poor losers on Android, and people (with money) who want a superior, hassle-free experience should come to Apple.

In this context, it is interesting that Apple probably provides 13.5% of Google's entire revenue. And that Apple can cut much of that off if it tweaks iOS to block more ads or removes Google as the default from its software. While a loss of $9 billion (£6.3 billion) in revenue would not kill Google - Android still owns about 80% of the world market for phones and the search ads they serve - it would severely cripple Google in the arena of e-commerce, where iOS also dominates, with 77% of customers, according to Custora:

So while the theory that Apple wants to "starve" Google into irrelevance is far-fetched, it is noteworthy that Apple can hurt Google severely, if it wants to.