Google’s $26 Billion Search Deals at Risk in Antitrust Trial

Silicon Valley is bracing for a potentially seismic court ruling that threatens to destabilize one of tech’s most lucrative arrangements: Google’s default search agreements.

At stake? A staggering $26 billion annually, with Apple pocketing a lion’s share of $20 billion. That’s a hefty chunk – almost a quarter – of parent company Alphabet’s operating income.

This decades-long alliance between Apple and Google has been a pivotal force in shaping the contours of the internet, and precisely why it’s now under intense scrutiny.

Last year, U.S. District Judge Amit Mehta determined that Google wielded a monopoly grip on both search and advertising. He’s been carefully considering potential remedies since the trial’s final act concluded in May. A separate case, focusing on Google’s ad business, is slated to kick off next month, presided over by a different judge.

While Google faces the prospect of losing a degree of search traffic and the comfort of predictability, analysts suggest that Apple stands to absorb a greater financial blow. The magnitude of the impact hinges on Apple’s ability to secure new deals and the overall scope of the court’s ruling.

Analysts at Jefferies predict that the judge might prohibit exclusive contracts, while still permitting some level of payment. Even under this scenario, Apple’s pre-tax profits could shrink by as much as 7%.

Intriguingly, some economists and Wall Street observers believe Google could emerge as the long-term beneficiary, liberated from costly agreements that no longer serve as crucial drivers of demand.

Barclays analysts noted in an August 5 report that even if Google were to dismantle the payments and contracts, it would remain “nearly impossible” for smaller players to realistically compete.

Consider Microsoft, which has poured a colossal $100 billion into Bing, yet still struggles to rival Google’s Chrome in terms of market share. The uphill battle is steep.

Apple’s Senior Vice President of Services, Eddy Cue, testified during the antitrust proceedings, stating that no financial offer from Microsoft could sway Apple away from Google’s superior search results and more effective monetization engine.

“I don’t believe there’s a price in the world that Microsoft could offer us. They offered to give us Bing for free. They could give us the whole company,” Cue stated definitively.

Apple executives maintain that users can easily switch their default search engines. Currently, users in the U.S. can select Yahoo, Bing, DuckDuckGo, or Ecosia, though few choose to do so. Perhaps the choice paralyzes users.

“I think their search engine is the best,” Apple CEO Tim Cook remarked about Google back in 2018, a tacit acknowledgment of Google’s dominance.

Economist Lones Smith, who developed a model to understand how users choose search engines, describes the landscape as a natural monopoly – where scale begets quality, and quality reinforces scale.

“I don’t understand this deal it has with Apple, because if they didn’t pay Apple $20 billion, do they think that people would really be using another search engine? I don’t see that,” Smith told CNBC, questioning the need for such substantial payments.

Smith analogizes Google to a utility provider: breaking it up makes little economic sense.

“How do we get our water, electrical, and all that? We have a regulated monopoly. We don’t go and break it up,” he explained. “We understand that there’s an efficient outcome for society, and we just don’t want the water company to be exploiting us.”

From a purely economic perspective, certain Wall Street voices argue that these payments are akin to redundancy insurance, and that Google’s market dominance is resilient enough even without them.

Data from Europe reinforces that narrative. Even after regulators mandated that users choose their default search engine following a ruling against Google, its market share barely shifted. StatCounter data indicates that Google still commands roughly 90% of the European search market.

Dan Niles, founder of Niles Investment Management, told CNBC that while Europe demonstrates Google’s capacity to flourish independently of these payments, the U.S. market operates at a faster pace, and future developments eclipse any potential losses.

“Google to me, quite honestly, once this is done … next year, if they continue down this path, it could be one of the best-performing stocks out there,” Niles asserted, expressing optimism regarding the long-term outlook.

Even Google’s proposed remedy suggests a similar trajectory, embracing shorter default contracts, and multiple providers, while highlighting that the biggest risk comes from the DOJ’s push for search data-sharing — A potential Pandora’s box.

Former FTC Chair William Kovacic explained to CNBC that the Justice Department is essentially gambling that limiting Google’s exclusive arrangements will pave the way for emerging competitors.

“In part, it’s an act of faith,” he said, while acknowledging the historical precedent in antitrust cases, where removing barriers often spurs innovation in unforeseen directions.

Kovacic cautioned, however, that a Chrome divestiture – a more extreme remedy that has been floated – might have more symbolic than practical value.

“The big breakup has always been antitrust fascination,” he said. “But you can wonder whether that distracts you from solutions that have more to do with solving the competitive problem that you’ve identified today.”

Kovacic characterized a possible Chrome divestiture as “a flashy, shiny object” that may not directly address the core issue.

Rebecca Allensworth, an expert on antitrust law and Big Tech, emphasized that this isn’t necessarily a zero-sum game.

“You can have a very strong antitrust remedy … and then two, five, ten years later, that company is actually doing extremely well,” she said. “These are not existential threats to the company.”

Allensworth also argued that the payments don’t inherently keep people glued to Google and compared the strategy to “innovation insurance,” stunting the ecosystem to prevent rivals from even having an opportunity to compete.

“Google fought really, really hard to be able to make those payments,” said Allensworth, a law professor at Vanderbilt. “It makes the industry innovation-proof, in a way. Or at least, if there’s going to be innovation, it’s going to be by and for the benefit of Google.”

The DOJ, concerned that Google could replicate a similar strategy with its artificial intelligence platform, Gemini, is advocating for limitations on exclusive AI distribution agreements – and even proposing mandatory data-sharing policies.

These policies would compel Google to grant competitors access to anonymized data pertaining to user search queries and click-through patterns. This could potentially level the playing field, giving smaller AI search startups and existing tech giants a foothold.

Since 2003, predating both the iPhone and Chrome, Google’s default search partnerships with Apple have fundamentally shaped the internet’s evolution. In 2017, Sundar Pichai and Tim Cook were spotted enjoying red wine at Tamarine, a high-end Vietnamese restaurant in Palo Alto, while their respective teams finalized one of the most lucrative arrangements in the history of tech: ensuring Google’s position as the default search engine on Apple devices.

Eight years later, the same two CEOs remain at the helm, but the landscape has undergone a transformation. A new era of search is dawning, driven not by traditional contracts, but by generative AI. The key question now revolves around how the incumbents and a fresh wave of startups will jockey for position in this rapidly evolving competitive arena.

Wall Street analysts have speculated about the potential benefits if Google redirected the $20 billion it currently pays Apple annually into AI and cloud computing, boosting profits while retaining its market dominance. The move would signal to the market that they are serious about long term growth.

“Let’s then assume that Google is limited from paying for search distribution deals, and others can leverage Google’s search tech stack, then what other properties can Google prioritize that may fall outside the scope of these cases?” mused Bernstein analysts in April. “Gemini.” Translation: Could Google use more of its resources on generative AI and other new technology.

Niles suggests that with Gemini, the company has an opportunity to pivot from being perceived as an AI laggard to potentially delivering the industry’s most impressive product. That shift is beginning to show up in benchmark tests. The ability to move from defense to offense and show true innovation and performance could win over skeptical analysts and the market as a whole.

Alphabet CEO Sundar Pichai mentioned during the trial that he discussed integrating Gemini on Apple devices with Cook. In June, Apple unveiled its integration of OpenAI’s ChatGPT at WWDC, a move that sent shockwaves through markets looking for Apple’s official play in the space.

Apple’s Cue testified that other AI services, such as Perplexity and Anthropic, could potentially be added to Safari as options. By offering choices instead of simply sticking with Google, they may appease antitrust regulators with nominal risk to performance.

But none of these AI services approach Google’s sheer scale.

Perplexity reportedly handles 15 million searches a day, while Google processes 10 billion queries daily, underscoring Google’s massive search infrastructure.

And Pichai emphasized that Google isn’t stagnating; he testified in April that AI would “deeply transform” search.