Apple, Microsoft Discuss Giving Bing Top iPhone Billing

In 2003, when Apple said its iTunes music software would work on PCs using the Windows software of its age-old rival, Microsoft, Apple made up posters that read "Hell Froze Over." Hell may be getting frosty again.

Apple (AAPL) is in talks with Microsoft (MSFT) to replace Google (GOOG) as the default search engine on its iPhone, according to two people familiar with the matter. The talks have been under way for weeks, say the people, who asked not to be named because the details have not been made public.

The discussions reflect the accelerating rivalry between Apple and Google, now the main provider of Web search on the iPhone. While the two companies have worked as partners in the past and Google Chief Executive Eric Schmidt had a seat on Apple's board, Apple and Google have more recently begun competing in several markets, including mobile phones. Google sells a smartphone, the Nexus One, that competes directly with the iPhone and it has spearheaded development of a wireless handset operating system that rivals the iPhone OS.

"Apple and Google know the other is their primary enemy," says one of the people, who's familiar with Apple's thinking. "Microsoft is now a pawn in that battle." Apple is also working on ways to manage ad placement on its mobile devices, a move that would encroach on Google's ad-serving business, the person says.

The discussions could still unravel and may not be concluded quickly. Microsoft spokesman Frank Shaw and Apple spokeswoman Katie Cotton declined to comment.

Default Reaps Financial Benefits

A deal between Apple and Microsoft may mean iPhone owners would automatically get Microsoft's Bing as the main search engine, possibly requiring users to actively change phone settings if they want to search via Google. Google is now the default search engine on the iPhone. To search via Bing, a user needs to download a Bing application or go through the browser to call up Microsoft may also be lobbying to make Bing an alternative on Apple's Safari browser for Mac users. Currently, Mac users can choose either Google or Yahoo search through the Safari browser.

Being the default search engine on the iPhone carries financial benefits for Google, which collects revenue from ads placed alongside its search results and shares a portion of that with Apple. Most mobile advertising now is viewed on Apple's iPhone and iPod touch, according to mobile advertising company AdMob. To clinch the deal, Microsoft may be willing to share a higher portion of its revenue or pay a larger flat annual fee than Google does. Neither Apple nor Google discloses the financial terms of their search partnership.

Clinching the coveted default spot on the iPhone would also help Bing gain market share in the quickly growing area of mobile search. Of people who use mobile search, 86% used Google in November, according to the Nielsen Co. Only 11% used Bing.

Google Rivalry Unfolds

Apple and Microsoft are rivals, too, though cooperation between them is not unprecedented. Microsoft builds Mac versions of its Office suite of business programs, such as Word. When Apple co-founder Steve Jobs returned to the company in 1997, one of his first acts was to settle intellectual-property infringement claims in exchange for $150 million in much-needed cash and a promise from Microsoft that it would continue developing upgrades of Office for the Mac. Back then, Apple was in dire financial straits and desperate for friends. Now it's in a position of strength. "If you have to do a deal with the devil, you might as well deal with the devil that needs you most," says Forrester Research (FORR) analyst James McQuivey.

Apple initially agreed with little hesitation to use Google as the default search engine in the iPhone before it was launched in 2007, according to two people familiar with the negotiations. Besides using the search bar, the companies worked together to create special versions of Google Maps and the YouTube video player tailored to run faster on the device. At the time, Apple had little hesitation because Google's popular software could help drive the popularity of the iPhone—and because Google wasn't seen as a potential rival.

That began changing more than a year ago as the two companies encroached further on each other's turf. Apple has refused to approve two Google applications for distribution in its App Store—including one called Latitude that uses GPS data and other types of information to show users which friends are nearby.

Even if it's consummated, an Apple-Bing deal may prove short-lived. The person familiar with Apple's thinking says Apple has a "skunk works" looking at a search offering of its own, and believes that "if Apple does do a search deal with Microsoft, it's about buying itself time." Given the importance of search and its tie to mobile advertising—and the iPhone maker's desire to slow Google—"Apple isn't going to outsource the future."

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