Google pays Apple billions of dollars to be the default search engine on iPhones and in the Safari web browser, according to Bernstein.
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Apple
could suffer collateral damage from the Department of Justice lawsuit against Google, which alleges that the company competes unfairly in the market for internet search.
The lawsuit, now taking place in federal district court in Washington, is focused in part on Google’s annual payments to Apple (ticker: AAPL) to be the default search engine on iPhones and in the Safari web browser. The government argues that those payments are intended to cement Google’s overwhelming advantage in the search market. Google, a unit of
Alphabet
(GOOGL), denies that.
In a research note on Monday, Bernstein analyst Toni Sacconaghi said that there is a possibility the relationship between Google and Apple could be struck down by the court and that such an outcome would likely be viewed negatively by investors. Sacconaghi estimates that Apple received payments of between $18 billion and $20 billion a year from Google, accounting for between 14% and 16% of Apple’s overall operating profit.
Neither side has ever disclosed specific terms of the relationship.
Sacconaghi noted that a ruling in the case, which isn’t likely until 2024, would likely be appealed, and could take years to finalize. While it would no doubt hurt Apple shares in the long run, he concluded that the economic impact on Apple of termination of the payments from Google in the long run is “unlikely to be onerous.”
Apple could in theory partner with another search engine to be the default—
Microsoft
‘s (MSFT) Bing would be the most likely alternative—and it could choose to retain Google as the default option outside the U.S., he said.
Sacconaghi thinks one potential scenario is that Apple would offer users a choice screen to pick the search engine they prefer. And he said that Apple could launch its own search engine as an alternative.
“Under scenarios where Apple offers its own search and is even modestly successful,” he wrote, “it could capture more money” than it does now from Google.
The analyst said that while it is unlikely an Apple search engine would be fully competitive with Google at launch, a transition to AI-powered search could help reset consumer behavior.
“Apple could leverage its brand and its messaging around privacy to capture meaningful share,” he wrote. “Google’s deepest moat in Search has been the network effect from its dominant share of search queries, preventing other players from amassing the data needed to build competitive offerings. If Apple is able to peel off a significant volume of queries, Apple Search could improve, in turn making it a more credible challenger over time.”
Write to Eric J. Savitz at [email protected]
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