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Google (GOOG, GOOGL) faced a significant setback in its search and advertising business as District of Columbia's Judge Amit Mehta ruled in favor of the Department of Justice in its antitrust suit against the tech giant. This ruling could have profound financial repercussions for Apple (AAPL) as well.
Impact on Google's Business Model
The ruling may compel Google to implement substantial changes to its core business operations. One potential consequence is the cancellation of a long-standing revenue-sharing agreement with Apple, which mandates that Apple use Google as the default search engine on its devices. This agreement, known as the Information Services Agreement (ISA), has been in place since 2002 and has evolved with technological advancements like the iPhone.
Under this deal, Google pays Apple 36% of the search revenue generated on Apple devices using Google’s services. In 2022, this arrangement was estimated to generate $20 billion for Apple, a significant increase from the $10 billion reported in 2020.
Financial Implications for Apple
The revenue from this agreement is likely included in Apple’s Services business segment, which reported $78.1 billion in revenue in 2022. If the $20 billion estimate holds, the deal would account for approximately 25% of Apple's Services revenue for the year. This segment has been one of Apple’s fastest-growing, bolstered by platforms like Apple Music+ and Apple TV+.
Overall, Apple generated $394.3 billion in revenue in 2022, meaning the Google agreement constituted about 5% of its total annual revenue. The loss of the ISA would not only impact Apple’s Services segment but also its overall financial health, especially as it seeks to mitigate slowing iPhone sales.
Consequences for Google's Market Position
The termination of the ISA would also significantly affect Google. Internal modeling by Google in 2020 indicated that losing default search engine status on Apple’s iOS devices could result in a 60% to 80% reduction in search volume. This decline could translate to a $28 billion to $32 billion hit to Google’s revenue, which was $182.5 billion in 2020, equating to a 15% to 17% loss in annual revenue.
Although Google is expected to appeal the DOJ’s victory, the potential financial impact on both Google and Apple is substantial. The broader tech industry will closely watch this legal battle as its outcome could set significant precedents for financial services, investment planning, and overall market competition.
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