Apple, Microsoft, and Adobe also gets grilled about high prices by Australian regulators

According to Morgan Stanley (MS) analyst Scott Devitt, Google Inc. (GOOG) paid about $700M USD to Apple, Inc. (AAPL) in 2012 to solidify its monopoly on mobile search traffic.

I. The Price of Search Hegemony

As computing continues to shift towards a more mobile profile, Google -- a company driven by search-related advertising profits -- has moved aggressively to be the king of mobile.  By offering its Android operating system "free" to partners Google has established a dominant position in unit sales.  And by extending an olive branch to Apple -- the second place player in the market -- Google is ensuring that if a customer uses the default search on their smartphone, they'll probably use Google's mobile landing page.

Google pays an estimated $3.20 USD per iOS device sold to be the default search provider, according to Mr. Devitt's math.  That deal grossly eclipses Google's lucrative deal with the Mozilla Foundation, which Mr. Devitt estimates paid $200M USD.

Google on Apple
Google pays an estimated $3.20 USD per Apple device to be the default search engine.
[Image Source: Android Headlines]

On the desktop front, many users manually navigate to Google.  Additionally, Google's Chrome browser is currently in third place, while Firefox is narrowly ahead in second place in most usage statistics.  Both browsers have Google as the default search engine.  Overall the two browsers account for about a third of internet traffic according to Net Applications, while Microsoft Corp.'s (MSFT) Internet Explorer (IE) hangs on to half of traffic.  The default search page in IE is Bing (or the Bing-powered MSN), Microsoft's own in-house solution.

Mr. Devitt estimates that by 2019, IE will have bled more market share to Chrome and Mozilla, and Google will have greater control of the market.  However, he also believes that control will cost Google $500M USD in traffic acquisition costs (TAC) to Mozilla.

He also estimates by 2019 Google will be paying Apple $2.3B USD in TAC for iOS, as he expects unit sales of iPads, iPhones, and iPod Touches to soar to half a billion devices a year by 2019.

Google made $10.75B USD for fiscal 2012; by contrast Apple made $13B USD in Q4 2012, alone.

Google's dominant position in mobile and desktop search has drawn scrutiny.  Google recently agreed to make certain changes in the U.S. to placate the U.S. Federal Trade Commission (FTC), but Microsoft and others claim the FTC let Google off too easy.  In Europe Google is looking to settle a similar antitrust spat with more extensive promises and fairness guarantees.

II. Australia Targets Apple With Harsh Words, Parliamentary Probe

In related news, Australia's Parliament is looking to grill Apple, Microsoft, Adobe Systems, Inc. (ADBE), and others over claims that they're overpricing products for the Australian market.  

The Australian dollar is generally relatively "strong", which should mean that products there should be more affordable.  But Australians are finding that Apple and others are charging similar rates in dollars to other countries, making the Australian products much more expensive, effectively.

Labor government MP Ed Husic, who helped set up the hearing and whose party currently is the second largest in the national government remarked to Reuters, "In what's probably the first time anywhere in the world, these IT firms are now being summoned by the Australian parliament to explain why they price their products so much higher in Australia compared to the United States."

iPhone Australia
An iPhone on sale at the Sydney, Australia Apple Store; Apple is among the U.S. companies accused of price inflation and tax evasion in the land down under [Image Source: Reuters]

Australia's Labor Party has been dented by the rising cost of living and looks to leverage the hearing to its advantage before the Sept. 14 elections.

A 16 GB iPad (Wi-Fi) commands A$539 ($553.60), almost $55 more than its U.S. cost ($499 USD).  

So far Microsoft and Adobe have submitted written statements, while Apple has ignored the Parliamentary complaints altogether.  Microsoft and Adobe have defended their pricing saying that there's an inherent cost to imports and that Australia has a higher cost of labor than other markets.

MP Husic is not amused, commenting, "The companies have blamed each other for not appearing. One will say 'we're not going to appear if the other is not going to appear'. So we've cut straight to the chase and said we'll just summons you."

This time if the companies don't send executives to the hearing, they could face contempt of parliament charges, fines or even jail terms.  MP Husic takes particularly hard aim at Apple, who he effectively accuses of tax fraud.  He comments, "Ask anyone who has sought answers from them about their Australian operations and you will hear a common theme. They will not talk."

"While they generated A$6 billion in revenue, they apparently racked up from what I understand A$5.5 billion in costs. How?  They do not manufacture here. They have no factories here."

But it looks like Apple will be forced to finally talk and explain both the high pricing and why it only paid $40M USD in taxes in the lucrative market.

(Apple has faced similar complaints of tax evasion in the United Kingdom, another of its top markets.)

Sources: Business Insider, Retuers

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