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In a recent ruling against Google’s parent Alphabet Inc (NASDAQ:GOOGL) (NASDA:GOOG), Judge Amit Mehta identified the tech giant’s practices with search partners, including Apple Inc (NASDAQ:AAPL), as monopolistic. The judgement pinpointed Google’s agreements that make its search engine the default on consumer devices like iPhones.
According to JPMorgan analyst Samik Chatterjee, the court's decision could significantly impact these exclusivity clauses.
Chatterjee notes, “Given the judgement it might be reasonable to assume that exclusivity clauses promising Google a default position…will be one of the areas that will be under the scanner for changes.”
Apple now faces three primary alternatives:
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The revenue sharing agreement between Google and Apple has been highly lucrative. "As per the disclosures cited in the ruling, Apple received $20 bn of traffic acquisition fee from Google in 2022," Chatterjee highlights. This amount is more than the combined total for all other agreements and has likely increased to around $24 billion in 2024.
About 65% of queries on Apple devices flow through Google's default position in Safari, accounting for 28% of all queries in the U.S. The exclusivity of this agreement embeds its value, making it a critical revenue stream for Apple, the analyst says.
Apple has considered alternatives like using Microsoft Corp‘s (NASDAQ:MSFT) Bing or DuckDuckGo, but these options offer lower economic benefits.
“Internal study at Google estimated that, it would take Apple around $10 bn of capital investments to build an efficient General Search Engine (GSE),” Chatterjee explains.
Additionally, Apple estimated it would lose $12 billion in revenues over five years, even if it captured 80% of search queries on its devices.
While Apple’s situation is precarious, Google’s agreements with Android OEMs operate differently.
Google's Mobile Application Distribution Agreement (MADA) requires pre-loading certain applications, benefiting OEMs by waiving fees for a GMS license.
The Revenue Sharing Agreement (RSA) follows a tiered structure based on device exclusivity, further complicating the search landscape.
Investors should brace for potential changes and strategize accordingly. As Chatterjee puts it, “While challenged economics from Search engines in the absence of an exclusivity arrangement does open up the opportunity for Apple to pursue development of an internal engine and forsake revenue sharing agreements, it would mean developing a leading search engine and advertising monetization offset by expenses borne to support it.”
The path forward for Apple in the wake of Google's antitrust ruling is fraught with challenges, but also opportunities. As the tech giants navigate this legal maze, the stakes for their search engine dominance couldn't be higher.
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