Bloomberg News

Apple Said to Be Subpoenaed by U.S. About Google Mobile

March 14, 2012

People waiting outside an Apple store on Jan. 12, 2012 in Beijing are silhouetted by the company's logo . Photograph: ChinaFotoPress via Getty Images

People waiting outside an Apple store on Jan. 12, 2012 in Beijing are silhouetted by the company's logo . Photograph: ChinaFotoPress via Getty Images

The U.S. Federal Trade Commission subpoenaed Apple Inc. (AAPL) as part of its antitrust probe of Google Inc., seeking information on how the computer maker incorporates the search engine on the iPhone and iPad, two people familiar with the matter said.

The agency’s request for documents includes the agreements that made Google the preferred search engine on Apple’s mobile devices, said the people, who weren’t authorized to speak publicly and declined to be identified. Google rivals such as Microsoft Corp. (MSFT) have criticized these agreements as anticompetitive.

The subpoena indicates the FTC is intensifying its scrutiny of Google’s business practices. Details of the Apple-Google relationship may show whether Google is abusing its dominance of Internet search to boost revenue in the mobile phone advertising market, said Allen Grunes, an antitrust lawyer at Brownstein Hyatt Farber Schreck LLP in Washington.

“As mobile search gets more widespread, the default setting becomes more significant,” said Grunes, who doesn’t represent Google or its rivals.

The FTC has sent subpoenas to other handset makers and wireless carriers, said one of the people, who declined to name the companies.

Advertising Rates

In its broader antitrust investigation of Mountain View, California-based Google that began about a year ago, the FTC is examining whether the company unfairly increases advertising rates for competitors and ranks search results to favor its own businesses, such as its social-networking site Google+, two people familiar with the situation said in January.

Google has been the default search engine for the iPhone since Apple introduced the device in 2007 and on the iPad since its 2010 debut, as well as for the iPod Touch. Apple also uses Google Maps as a favored service on the iPhone and iPad.

The FTC’s probe of Google is also looking at whether the company is using its control of the Android mobile operating system to harm competition, two people familiar with the probe said last year. Apple and Google have been vying for leadership in the smartphone market since the first Android-based handset came out in 2008.

Mobile Versus Desktop

“It’s very likely in the next few years, we’ll see mobile search outstripping desktop search,” said Ben Schachter, a New York-based analyst with Macquarie Capital who has a buy rating on Google stock. Schachter estimated that by the end of the year 25 percent to 30 percent of searches would take place on mobile devices, up from about 15 percent currently.

Schachter said consumers usually leave the default settings on smart phones or other mobile devices.

“Most people don’t even know what default search means -- they just know there’s a box they can use to look for information,” Schacter said.

Google’s Android became the dominant mobile phone operating system last year and led the market with a 50.9 percent share in the fourth quarter of 2011, compared with the iPhone’s iOS mobile operating system’s 23.8 percent share, according to a February report by Gartner Inc., a Stamford, Connecticut researcher.

Kristin Huguet, a spokeswoman for Cupertino, California- based Apple, Cecelia Prewett of the FTC, and Adam Kovacevich, a Google spokesman, declined to comment on the subpoenas.

Search Earnings

Google last year earned $1.3 billion in search-related revenue on Apple products, according to a March 8 report from Macquarie Capital. Google paid Apple $1 billion to be the default search engine, keeping only $335 million of the total amount, the report said.

In January, eMarketer, a New York-based research firm, estimated Google’s share of U.S. mobile-ad revenue was 52 percent in 2011, driven by searches. Google earns about 95 percent of all U.S. mobile-search ad revenue, the firm said.

Google was the leader in U.S. Internet search in February with 66.4 percent of the market, according to ComScore Inc. (SCOR), an Internet market research firm based in Reston, Virginia.

Microsoft made a failed attempt to wrest away the default search engine position on the iPhone from Google in 2010, according to two people familiar with the matter, and Apple is starting to use the U.K.-based OpenStreetMap Foundation’s service, which may signal it’s seeking to ease its reliance on Google Maps, according to the Macquarie report.

‘Best Search Engine’

“Our sense is that Apple wants to help Google less and less, but they still provide the best search experience for Apple users,” Schacter said.

Apple sold more than 183 million iPhones and more than 55 million iPads by the end of last year. The products together accounted for more than 70 percent of the company’s sales in the last quarter.

The FTC’s subpoena is the latest twist in the relationship between Google and Apple. The two companies were linked for much of last decade, with Google Inc. (GOOG) Chairman Eric Schmidt serving on Apple’s board of directors.

The dynamic changed when Google announced it would introduce Android to compete against the iPhone.

Schmidt left the board in 2009, the same year the FTC said it was examining whether Apple and Google were violating antitrust laws by sharing board members. Schmidt said the FTC probe didn’t prompt his decision to step down from Apple’s board.

Conflict between the two companies intensified as Apple’s late co-founder Steve Jobs opened a patent battle against companies whose mobile devices run on Android, including Samsung Electronics Co. and HTC Corp. (2498)

Joaquin Almunia, the European Commission’s antitrust chief, said March 5 that he’ll decide next month on the future of the EC’s 18-month antitrust probe into Google and notify the company about any concerns.

To contact the reporters on this story: Sara Forden in Washington at sforden@bloomberg.net; Jeff Bliss in Washington at jbliss@bloomberg.net.

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net: Steven Komarow at skomarow1@bloomberg.net


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