Alphabet (NASDAQ:GOOGL) Inc. (NASDAQ:GOOG), the parent company of Google, is currently navigating through a challenging antitrust lawsuit. Despite a prediction from Barclays that the tech giant may face a defeat in the U.S. antitrust case, Alphabet's shares experienced an unexpected rise, increasing by 1.5% on Tuesday. This legal battle has been brought into sharper focus following expert testimony on Monday that disclosed Google derives a significant 36% of its search advertising revenue from Safari users.
The spotlight on Google's revenue-sharing agreement with Apple Inc. (NASDAQ:AAPL) could provide leverage to regulatory authorities like the U.K.'s Competition and Markets Authority (CMA). The authority may consider enforcing measures similar to those used in Europe, such as "choice screens" for search engines and limits on revenue sharing. These measures have been implemented on some Android devices in Europe but have had limited impact on Alphabet's market valuation.
The trial has revealed that Apple secures 36% of Google's search ad revenue through its browser Safari, resulting in Apple pocketing over 30% of Google’s search deal revenue. Google pays Apple up to $20B per year to remain the default iPhone search engine. The Information Services Agreement between the two tech giants is under scrutiny for potential anticompetitive practices, a situation that could also impact other players like Samsung (KS:005930) and Mozilla.
On Monday, Alphabet CEO Sundar Pichai confirmed Google's annual payout to Apple, which exceeds $10 billion but is contested by Epic Games' lawyer who claims it's closer to $18 billion. He also revealed that Google allegedly pays Samsung less due to carrier payments in their deal despite fierce competition with Apple and nearly $49 billion spent on traffic acquisition costs.
If the agreement is terminated, Apple might consider alternatives like Microsoft (NASDAQ:MSFT) Bing or DuckDuckGo - a privacy advocate, despite previously scrapped plans. This move could potentially enhance user privacy. Furthermore, Apple could also maintain its partnership with Google outside the US if domestic restrictions apply.
Despite these challenges, Wall Street maintains a positive outlook on Alphabet's financial prospects. Analyst Sacconaghi even forecasted a $19 billion revenue boost for Apple from the deal in 2023.
The case against Google has been gaining momentum since earlier in November 2023, when Barclays raised concerns about the formidable case built by the U.S. Justice Department. The unique market dynamics of iOS devices in the U.S., which are due to evolve in 2024, could exacerbate the impact if Google were to lose this legal dispute. This outcome could lead Apple to consider alternatives for its search service, potentially partnering with Microsoft's Bing or developing its own search engine.
Microsoft's CEO, Nadella, has criticized such deals for their detrimental impact on competition and the misrepresentation of the "open web." His comments add another dimension to the ongoing debate, reflecting broader industry concerns over these exclusive agreements.
The final decision due in 2024 could have serious implications for Apple, particularly if Google is deemed to have illegally maintained its dominance over the search engine and advertising markets. As of now, Apple has not issued any comments on these developments. Both Apple and Google remained silent today following the revelation of the revenue-sharing details in court on Monday. Google now also faces DOJ antitrust suits and monopoly allegations from Epic Games over its Google Play store.
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