Why is Google pumping more money into Firefox?

Something quite extraordinary has happened to Mozilla. The Firefox maker’s revenue has almost doubled from $163 million in 2011 to $311 million in 2012, according to financial statements released last week.

What’s so strange? Well, Mozilla is almost entirely reliant on Google for its income. In fact, 90% of Mozilla’s revenue comes from the income generated by Google being the default search engine in Firefox, with Google paying Mozilla a fee for the referrals generated.

So why did Google’s payments to Mozilla increase so significantly?

That very question is addressed in the FAQ accompany Mozilla’s financial statement. The answer is as follows:

Our search partnerships are designed as multi-year contracts. Near the end of each contract, Mozilla negotiates market-value rates from multiple search providers based on the present and future value our products provide. At the end of 2011, Mozilla negotiated a new agreement with Google based on growth and impact from our Firefox desktop browser.

On the face of it, that answer makes little sense. Google and Mozilla renew their deal every three years. When Google and Mozilla last negotiated terms at the end of 2008, Firefox had a 22% share of the desktop browser market and the then recently launched Google Chrome was almost nowhere. By the end of 2011, there was next to nothing separating the two browsers, with Firefox on 21% and Chrome on 19%.

So what growth was this based on? If anything, Firefox had lost market share since it last negotiated with Google, and the company that accounts for 90% of its revenue was close to overtaking it in the browser market. Why would Google pay more to prop up a competitor?

There can, as far as I can see, be only two logical explanations. Either Firefox has massively increased the search volumes it’s sending to Google. Indeed, Firefox has over the years changed its default homepage from a splash screen showcasing Firefox features to a Google search box, which could certainly help increase search referrals.

More likely, I suspect, is that one of Google’s search rivals – and let’s not mince words, we’re talking about Microsoft – put a much better offer on the table for Mozilla to switch its default search engine and homepage to Bing, and left the open-source browser maker in a much stronger bargaining position with Google. A browser with 20% market share would still generate enormous search volumes, and Google wasn’t prepared to cede that revenue to Microsoft, so it upped its offer.

Alas, we’ll probably never know, because as Mozilla CEO Mitchell Baker told CNet: “Because of the agreement with Google, that’s not something we can say too much about.”

But if I were a betting man…