could face some fallout from the pending Justice Department antitrust case against Alphabet and their dominance of the internet search market.
While neither company discloses the details, it is widely believed that
(GOOGL) Google pays Apple (AAPL) $8 billion to $10 billion a year for the right to be the default search engine on iOS devices, in Safari and Siri voice queries. That deal could account for as much as 10% of Apple’s after-tax profits, analysts calculate—and the ad dollars that result from the relationship likely account for an even higher percentage of Alphabet’s revenues.
In a research note Wednesday, Bank of America analyst Wamsi Mohan notes that part of the complaint refers to Google’s distribution agreements with Apple as locking up one of the most significant distribution channels for general search engines. The complaint asserts that “Google pays Apple billions to be the default search provider, in part, because Google knows the agreement increases the company’s valuable scale; this simultaneously denies that scale to rivals.” The complaint asserts that the Apple relationship covers about 36% of all general search queries in the U.S.—and that Google estimates that almost half of its search traffic in 2019 came from Apple devices.
Mohan says one potential remedy would be for Apple to offer consumers an option to use other search services. Google argues that this capability already exists—it is relatively simple to simply download a search app on your phone from
(MSFT) Bing, Duck Duck Go or other smaller rivals. But Mohan cautions that any changes in the agreement could lead to revenue and margin headwinds for Apple.
Evercore ISI analyst Amit Daryanani estimates that the Google search deal accounts for as much as 4% of Apple’s overall revenues and about 9% of total earnings per share.
Daryanani sees only modest risk to Apple here — but not zero risk. “We do think it is worth noting that while Apple runs Google as a default search option, consumers have the choice to change that option with a few clicks across the devices,” he writes in a research note. “Furthermore, we suspect the rationale will be comparable to the fees consumer goods companies pay to have the more attractive shelf space at a grocery store. Nonetheless, should this result in any change to the licensing agreement it could be a modest negative to Apple’s EPS power—though we see this as a low probability event.”
Bernstein analyst Mark Shmulik dug into this issue in a research note last month. As he wrote, the stakes are high — he estimates that the Google/Apple relationships accounts for 18% of Alphabet’s revenues and more than 10% of Apple’s profits.
But he also says that allowing consumers to choose their own search engine might not change anything. Shmulik observes that in a 2018 settlement with the European Union, Google agreed to offer Android phone buyers an easy way to choose the default search engine on their devices—and that very few chose to use anything other than Google.
Shmulik floated a few other scenarios. One is that Apple could choose buy a search engine like DuckDuckGo, and then to rebrand it as Apple Search. “Given DuckDuckGo has reasonable search capability and Apple has a strong brand, it’s not hard to imagine a portion of consumers could select ‘Apple Search’ from a choice screen, akin to users getting more comfortable with Apple Maps over time,” he wrote.
But he also notes that even if Apple could monetize search as effectively as Google, it would need to take a third of the market to match the revenues it now generates from its relationship with Google.
Shmulik says one other possibility is that Apple replaces Google in iOS with Microsoft Bing.
“This would be the biggest blow to Google, which stands to lose about $17 billion of net revenue in the worst-case outcome,” he wrote. “Prior studies have found that 70%+ of users are unlikely to change out their default search engine, even if it’s not as good. Couple this with the fact that Bing mobile search looks and feels a lot like Google search these days, and it’s hard to imagine most users—apart from some Google loyalists—not sticking with the default option on the Apple devices.”
But he sees a problem with that outcome. “Regulators might be hesitant to create a regulatory framework where one powerful tech incumbent paying for exclusive, default search can largely be replaced by another,” he wrote.
Write to Eric J. Savitz at [email protected]