How the Growing Search Scrutiny on Apple Threatens $20bn Payouts

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Neither Alphabet nor Apple likes to discuss the exact amount of money exchanged annually to secure Google as the default search engine on iPhones and other devices. Analysts at Bernstein estimate it could be as much as $20bn. Both companies are keeping tight-lipped about the matter. Regardless of its magnitude, this payment is now under threat.

Alphabet is currently facing a lawsuit from the US Department of Justice, which alleges that the company has engaged in anti-competitive agreements to establish a monopoly in online search and digital advertising. Consequently, Alphabet is required to defend itself.

Although Alphabet is transparent about the payments it makes to distribution partners for advertising sales, it does not disclose the fees associated with being the default search engine. These fees are undoubtedly substantial. In the previous year, Alphabet paid out nearly $49bn, amounting to over a fifth of its advertising revenue and surpassing its expenses on research and development. Nevertheless, these agreements have catapulted Google’s search engine into a commanding position, capturing an estimated 90% market share.

For Apple, the Information Services Agreement is a stroke of genius. It receives billions of dollars for what it might already do. Users widely favor Google Search, and not even the new AI features offered by Microsoft Bing have managed to affect its dominance. Replacing Google with Bing or DuckDuckGo would not be well-received.

If Alphabet fails in its lawsuit against the US Department of Justice, it may be compelled to cease payment for default status. Finding an alternative revenue stream to compensate for this loss would be challenging for Apple. Annual losses of $20bn would lead to a 5% reduction in projected revenue for 2024, potentially resulting in a decrease of up to 16% in operating profit.

The consequences of these events could extend to investor payouts. Apple’s consistently improving profit margins have facilitated significant share buybacks, contributing to strong stock performance even during periods of moderate top-line growth.

While change is neither certain nor immediate, Apple could still charge for search engine access, even if it is not the default option. Nonetheless, losing their current search contract with Google would be an unwelcome development.

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