Apple, Google and a Deal That Controls the Internet

In a landmark antitrust complaint, the Justice Department is targeting a 
secretive partnership that is worth billions of dollars to both companies.

https://www.nytimes.com/2020/10/25/technology/apple-google-search-
antitrust.html

OAKLAND, Calif. — When Tim Cook and Sundar Pichai, the chief executives of 
Apple and Google, were photographed eating dinner together in 2017 at an 
upscale Vietnamese restaurant called Tamarine, the picture set off a 
tabloid-worthy frenzy about the relationship between the two most powerful 
companies in Silicon Valley.

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

Now, the partnership is in jeopardy. Last Tuesday, the Justice Department 
filed a landmark lawsuit against Google — the U.S. government’s biggest 
antitrust case in two decades — and homed in on the alliance as a prime 
example of what prosecutors say are the company’s illegal tactics to 
protect its monopoly and choke off competition in web search.

The scrutiny of the pact, which was first inked 15 years ago and has 
rarely been discussed by either company, has highlighted the special 
relationship between Silicon Valley’s two most valuable companies — an 
unlikely union of rivals that regulators say is unfairly preventing 
smaller companies from flourishing.

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

Apple and Google are joined at the hip even though Mr. Cook has said 
internet advertising, Google’s bread and butter, engages in “surveillance” 
of consumers and even though Steve Jobs, Apple’s co-founder, once promised 
“thermonuclear war” on his Silicon Valley neighbor when he learned it was 
working on a rival to the iPhone.

Apple and Google’s parent company, Alphabet, worth more than $3 trillion 
combined, do compete on plenty of fronts, like smartphones, digital maps 
and laptops. But they also know how to make nice when it suits their 
interests. And few deals have been nicer to both sides of the table than 
the iPhone search deal.

Nearly half of Google’s search traffic now comes from Apple devices, 
according to the Justice Department, and the prospect of losing the Apple 
deal has been described as a “code red” scenario inside the company. When 
iPhone users search on Google, they see the search ads that drive Google’s 
business. They can also find their way to other Google products, like 
YouTube.

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

The Justice Department, which is asking for a court injunction preventing 
Google from entering into deals like the one it made with Apple, argues 
that the arrangement has unfairly helped make Google, which handles 92 
percent of the world’s internet searches, the center of consumers’ online 
lives.

Online businesses like Yelp and Expedia, as well as companies ranging from 
noodle shops to news organizations, often complain that Google’s search 
domination enables it to charge advertising fees when people simply look 
up their names, as well as to steer consumers toward its own products, 
like Google Maps. Microsoft, which had its own antitrust battle two 
decades ago, has told British regulators that if it were the default 
option on iPhones and iPads, it would make more advertising money for 
every search on its rival search engine, Bing.

What’s more, competitors like DuckDuckGo, a small search engine that sells 
itself as a privacy-focused alternative to Google, could never match 
Google’s tab with Apple.

Apple now receives an estimated $8 billion to $12 billion in annual 
payments — up from $1 billion a year in 2014 — in exchange for building 
Google’s search engine into its products. It is probably the single 
biggest payment that Google makes to anyone and accounts for 14 to 21 
percent of Apple’s annual profits. That’s not money Apple would be eager 
to walk away from.

In fact, Mr. Cook and Mr. Pichai met again in 2018 to discuss how they 
could increase revenue from search. After the meeting, a senior Apple 
employee wrote to a Google counterpart that “our vision is that we work as 
if we are one company,” according to the Justice Department’s complaint.

A forced breakup could mean the loss of easy money to Apple. But it would 
be a more significant threat to Google, which would have no obvious way to 
replace the lost traffic. It could also push Apple to acquire or build its 
own search engine. Within Google, people believe that Apple is one of the 
few companies in the world that could offer a formidable alternative, 
according to one former executive. Google has also worried that without 
the agreement, Apple could make it more difficult for iPhone users to get 
to the Google search engine.

A spokesman for Apple declined to comment on the partnership, while a 
Google spokesman pointed to a blog post in which the company defended the 
relationship.

Even though its bill with Apple keeps going up, Google has said again and 
again that it dominates internet search because consumers prefer it, not 
because it is buying customers. The company argues that the Justice 
Department is painting an incomplete picture; its partnership with Apple, 
it says, is no different than Coca-Cola paying a supermarket for prominent 
shelf space.

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

Apple has rarely, if ever, publicly acknowledged its deal with Google, and 
according to Bernstein Research, has mentioned its so-called licensing 
revenue in an earnings call for the first time this year.

According to a former senior executive who spoke on the condition of 
anonymity because of confidentiality contracts, Apple’s leaders have made 
the same calculation about Google as much of the general public: The 
utility of its search engine is worth the cost of its invasive practices.

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

The deal is not limited to searches in Apple’s Safari browser; it extends 
to virtually all searches done on Apple devices, including with Apple’s 
virtual assistant, Siri, and on Google’s iPhone app and Chrome browser.

The relationship between the companies has swung from friendly to 
contentious to today’s “co-opetition.” In the early years of Google, the 
company’s co-founders, Larry Page and Sergey Brin, saw Mr. Jobs as a 
mentor, and they would take long walks with him to discuss the future of 
technology.

In 2005, Apple and Google inked what at the time seemed like a modest 
deal: Google would be the default search engine on Apple’s Safari browser 
on Mac computers.

Quickly, Mr. Cook, then still a deputy to Mr. Jobs, saw the arrangement’s 
lucrative potential, according to another former senior Apple executive 
who asked not to be named. Google’s payments were pure profit, and all 
Apple had to do was feature a search engine its users already wanted.

Apple expanded the deal for its big upcoming product: the iPhone. When Mr. 
Jobs unveiled the iPhone in 2007, he invited Eric Schmidt, Google’s then 
chief executive, to join him onstage for the first of Apple’s many famous 
iPhone events.

“If we just sort of merged the two companies, we could just call them 
AppleGoo,” joked Mr. Schmidt, who was also on Apple’s board of directors. 
With Google search on the iPhone, he added, “you can actually merge 
without merging.”

Then the relationship soured. Google had quietly been developing a 
competitor to the iPhone: smartphone software called Android that any 
phone maker could use. Mr. Jobs was furious. In 2010, Apple sued a phone 
maker that used Android. “I’m going to destroy Android,” Mr. Jobs told his 
biographer, Walter Isaacson. “I will spend my last dying breath if I need 
to.”

A year later, Apple introduced Siri. Instead of Google underpinning the 
virtual assistant, it was Microsoft’s Bing.

Yet the companies’ partnership on iPhones continued — too lucrative for 
either side to blow it up. Apple had arranged the deal to require periodic 
renegotiations, according to a former senior executive, and each time, it 
extracted more money from Google.

“You have to be able to maintain those relationships and not burn a 
bridge,” said Mr. Sewell, Apple’s former general counsel, who declined to 
discuss specifics of the deal. “At the same time, when you’re negotiating 
on behalf of your company and you’re trying to get the best deal, then, 
you know, the gloves come off.”

Around 2017, the deal was up for renewal. Google was facing a squeeze, 
with clicks on its mobile ads not growing fast enough. Apple was not 
satisfied with Bing’s performance for Siri. And Mr. Cook had just 
announced that Apple aimed to double its services revenue to $50 billion 
by 2020, an ambitious goal that would be possible only with Google’s 
payments.

By the fall of 2017, Apple announced that Google was now helping Siri 
answer questions, and Google disclosed that its payments for search 
traffic had jumped. The company offered an anodyne explanation to part of 
the reason it was suddenly paying some unnamed company hundreds of 
millions of dollars more: “changes in partner agreements.”

Correction: Oct. 25, 2020
An earlier version of this article misstated a term for cooperation 
between competitors. It is co-opetition, not co-optation.

Daisuke Wakabayashi covers technology from San Francisco. He covers Google 
and other companies. Previously, he spent eight years at The Wall Street 
Journal first as a foreign correspondent in Japan and then covering 
technology in San Francisco. @daiwaka

Jack Nicas covers technology from San Francisco. Before joining The Times, 
he spent seven years at The Wall Street Journal covering technology, 
aviation and national news. @jacknicas • Facebook


-- 
No collusion - Special Counsel Robert Swan Mueller III, March 2019.

Donald J. Trump, 304 electoral votes to 227, defeated compulsive liar in 
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Congratulations President Trump.  Thank you for cleaning up the disaster 
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Under Barack Obama's leadership, the United States of America became the 
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President Trump has boosted the economy, reduced illegal immigration, 
appointed dozens of judges and created jobs.

Senile loser and NAMBLA supporter Nancy Pelosi got "Trumped" on February 
5, 2020.  "President Trump, Not Guilty."