Brief:

• Google's payments to Apple will rise 33% to $12 billion next year for the rights to be the default search engine for the Safari web browser on iPhone, iPad and Mac devices, according to a forecast by Rod Hall, an analyst at Goldman Sachs. The bank estimated Google will pay Apple $9 billion in traffic acquisition costs (TAC) this year, per Business Insider.
• Apple groups payments from Google into its services business that also includes revenue from the App Store, iCloud data storage, Apple Music, Apple Pay and AppleCare warranties for devices. Goldman estimated that TAC fees made up 24% of Apple’s $31.3 billion services business last year, and were bigger than revenue from Apple Music and iCloud.
• Google and Apple don't discuss the terms of their agreement, and Goldman's estimate is based on the market share of Apple devices and prior Google disclosures. The world's leading search engine last year disclosed that it had renegotiated its TAC payments, leading analysts to surmise that Apple had raised its prices.

Insight:

While Apple and Google don't disclose how much the search giant pays in TAC, Goldman's estimate indicates the amount is much more significant for both companies than previously thought. Two years ago, court filings in a legal dispute between Google and Oracle over the Android mobile operating system indicated that Google in 2014 paid Apple $1 billion to be the default search engine for Safari. If Goldman's analysis is correct, then Apple has managed to hike TAC fees 12-fold in five years, indicating the importance of iPhone traffic to Google's ad sales.

The possible dependence on TAC fees from Google may indicate that Apple's services business isn't as solid as the company portrays. Apple touts how services are a steady source of subscription revenue from millions of iPhone users who sign up for iCloud storage and Apple Music streaming, but a dependence on a single company like Google makes the business more vulnerable to the highly cyclical advertising business. Apple is seeking additional sources of revenue to reduce its dependence on iPhone sales — its main source of revenue — as the smartphone market becomes saturated.

Google's payments to Apple also highlight the iPhone maker's dependence on the digital advertising business, which CEO Tim Cook has decried for compromising consumer privacy. Cook in March criticized Facebook after the social network admitted it had shared personal information about millions of people with third parties. Cook urged internet users to protect their privacy by browsing in private mode and blocking cookies, per CNBC. Apple last year spurred complaints from the advertising industry after updating iOS to limit tracking in its Safari browser, the Verge reported. Apple's arrangement with Google lets the iPhone maker collect billions from online advertising while also touting its data protections.