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.

In 2007, Steve Jobs, left, Apple’s co-founder, invited Google’s chief executive, Eric
Schmidt, to join him to explain how Google would work on the iPhone.Credit...Tony
Avelar/Agence France-Presse — Getty Images

By Daisuke Wakabayashi and Jack Nicas

 Oct. 25, 2020Updated 12:51 p.m. ET

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.

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.―