google vs apple

The Complex Solution #2

Imagine that you have been bitten by a startup keeda and you have started fantasizing about a million dollars in revenue for whatever that you are gonna build and how on one fine day you will sell it for a billion dollars!

Sounds great, right? Now here’s the catch. Your product has this core feature which is dependant on a third party service. Somewhat like how Ola, Uber run on Google Maps. But the third party which provides the services (some API or data or platform) is also a budding startup with a bit of competition, where you are a client. Now, both players are kinda generating value for each other. The question is who will pay whom for using the other? Remember the classic chicken-egg problem?

Problem is very clear. Usually, where both the players are on a falling side, this creates a win-win situation. Most startups partner with each other in this case and then they are good to go!

What if both the players are on the strong side of the game and hold most of the market share in their respective segments? Who should roll up their sleeves and demand the payout from the next party? Or should they also follow the startup mindset and partner with other? Unfortunately things are quite different at this scale.

Google holds more than 88% market share for search engines. And any platform leveraging their search aces. It generates more than 90% of its revenue from their search service (ever noticed how searching good sports shoes ends you up in getting relevant ads at the top of search results, gmail and ad-spaces on websites you visit thereafter?) Also, around 50% of Google’s revenue is generated from US markets, mostly from mobile-based searches.

On the other side of the table you have Apple which holds more than 50% of mobile market in US with their proprietary iOS. And thus almost all the phone-surfing is done via Safari, their default browser, holding the most popular mobile internet browser position. Apple, at its core, is a hardware selling company which happened to glorify its offerings by one of the best possible OS, personalised channels & services, huge class of phone applications to choose from and also the fast and best user experience. Now when it comes to surfing the internet you know who offers the best experience on the planet.

Got the catch yet?

Let me walk you through.

Both Google and Apple are on strong positions, have multiple offerings and one can survive without the other. Yet, Google is a search engine or more properly, a website. A website needs a browser to run on. They got that pretty quickly and Google Chrome now holds more than 61% share of the mobile browser market worldwide, a key move. Now, chrome is an in-house product and the default search engine to drive more traffic from could easily be set to google. But what about the rest? A browser needs a phone to run on, right? and who holds the largest market share of mobile phones?

Now who should roll up their sleeves? A company wanting to offer the best user experience via the internet browsed on their phones or a service wanting to run on the largest platform?

From its near inception period, Google has been allocating (2002 onwards) a substantial part of its revenue to Traffic Acquisition Cost (TAC). Why? Because it was the only and important way to generate their revenue! The more traffic ‘www.google.com’ gets, more they can generate the quality traffic for others and can monetize on that. Thus revenue! This advertising revenue accounts for around 90% of its total revenue. And that is why the TAC expense per year serves as a key metric for Google’s success. The lesser the TAC is year on year, more successful the company is.

The way to analyze this problem could be seen like this: who is at more loss if they lose the other player’s contribution in their business?

Apple losing google’s chrome which has almost 33% on iOS devices and losing www.google.com as their default search engine OR Google losing their default presence on more than 50% devices in US? What is more painful?

If you understand the key metric mentioned above in Google’s success, here’s the answer – Google is reportedly paying apple $12 billion for 2019 to remain as a default search engine for Safari. This is almost 45% share of Google’s total TAC for the year.

Hope you guys are satisfied with the answer!!

But for those who have wandering minds, you can still dive deeper and think more. This year’s TAC of around $27 Bn is almost 20% of total advertising revenue of $140 Bn {total $155 Bn (Q1:36, Q2:39, Q3:40, Q4:˜40)}. This expense used to be 39% of their ad revenue in 2004 and then steadily it went down and stabilized to 22% in 2017. If Google already has a Product Market Fit, is it possible to find an optimal point where TAC is minimal and revenues from other non-ad sources are maximum and google cashing the maximum profits? Could YouTube, Cloud, Chrome, AI, Pixel (hardware) and other products be driving Google to that converging point?

See you next time with another problem 🙂

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