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Apple, Google and a Deal That Controls the Internet

By Daisuke Wakabayashi and Jack Nicas

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 Googles search engine as the preselected choice on Apples 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 industrys pecking order.

Now, the partnership is in jeopardy. Last Tuesday, the Justice Department filed a landmark lawsuit against Google the U.S. governments biggest antitrust case in two decades and homed in on the alliance as a prime example of what prosecutors say are the companys 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 Valleys 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, Apples 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, Googles bread and butter, engages in surveillance of consumers and even though Steve Jobs, Apples 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 Googles 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 Googles 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 Googles 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 Apples 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 worlds 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 Googles 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.

Whats more, competitors like DuckDuckGo, a small search engine that sells itself as a privacy-focused alternative to Google, could never match Googles 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 Googles 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 Apples annual profits. Thats 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 Departments 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 Microsofts 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 dont 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, Apples 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 Googles collection of data, such as a private-browsing mode on Apples internet browser.

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

The relationship between the companies has swung from friendly to contentious to todays co-opetition. In the early years of Google, the companys 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 Apples Safari browser on Mac computers.

Quickly, Mr. Cook, then still a deputy to Mr. Jobs, saw the arrangements lucrative potential, according to another former senior Apple executive who asked not to be named. Googles 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, Googles then chief executive, to join him onstage for the first of Apples 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 Apples 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. Im 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 Microsofts 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, Apples former general counsel, who declined to discuss specifics of the deal. At the same time, when youre negotiating on behalf of your company and youre 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 Bings 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 Googles 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.

Then please answer the following questions:

1.What is the article about?

2. Is this partnership bad for the consumer? Please discuss.

3. Why did the DOJ sue Google, and not Apple?

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