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Tim Cook, chief executive officer of Apple, attends the annual Allen & Company Sun Valley Conference, July 12, 2018 in Sun Valley, Idaho.
Apple touts its services revenue as the next growth driver for the company, amid slowing iPhone sales. But the share of the segment that comes from Google is decelerating, and Apple could need to make up the difference with a ‘Prime’ bundle, Goldman Sachs said in a note published Monday.
“Apple will need to add mid to high single digits growth back to Services revenues through successful launch of the ‘Apple Prime’ bundle including original video that we expect to be rolled out this Spring/Summer,” the firm said.
Google pays device makers like Apple traffic acquisition costs to be the default search engine. That revenue gets lumped into Apple’s burgeoning services segment, which also includes App Store, iCloud and Apple Music revenue.
Goldman Sachs estimates Google paid Apple nearly $9.5 billion in traffic acquisition costs (TAC) during calendar year 2018, representing a third of Apple’s profit in the segment. The fees will continue to make up a large portion of Apple’s services revenue into 2019, the firm said, but will grow at slower rates.
“Not only is TAC large but it is still growing as people search more on mobile devices,” the analysts said. “Combining our TAC work with app store data from Sensor Tower we conclude that TAC and Apple’s share of app store downloads represented 51 percent of Services revenues in 2018 and an even larger 70 percent of Services gross profits. Both of these elements should grow in 2019 albeit TAC looks likely to decelerate materially.”