A Google lawyer visibly cringed in court last week when his own expert witness revealed a closely guarded secret between two tech giants.
The witness, a professor at the University of Chicago, said that Google (GOOG, GOOGLE) pays Apple (AAPL) a 36% share of revenue generated by search advertising carried out via Apple’s Safari browser.
The number was supposed to be confidential, which probably explains the reaction of Google’s lawyer, John Schmidtlein. as reported by Bloomberg and other media. The professor testified for Google in one of the most consequential antitrust trials in decades.
The hair-raising secret that spilled in a Washington courtroom has reverberated across Wall Street and Silicon Valley, sparking new speculation about how much Apple stands to lose if the government wins this case and how much Google’s rivals stand to gain.
The Department of Justice argues in the trial that the deal making Google the default search engine on iPhones demonstrates how the search giant illegally stifles competition. Google said such contracts were normal in its industry.
Justice Department asks federal district court to preside Judge Amit Mehta for an order that would prohibit Google from continuing to engage in alleged anticompetitive practices. This could mean the end of the partnership if the government prevails.
A big number «
The benefits of this deal for Apple have been a source of speculation for years. It is clear from last week’s revelations that this amounts to billions per year.
How many billions exactly? Bernstein analysts estimate between $18 billion and $20 billion per year for Apple. The New York Times reported last month that the figure was around $18 billion in 2021.
It’s a “big number,” he says. DA Davidson analyst Tom Forte. And if compromised, it could have a « double negative impact » on the company’s stock price, he added.
If the figure still remains at $20 billion, that could wipe out nearly 7% of Apple’s total revenue if the judge in the Google case decides to revise how those contracts work in the future, or if they are allowed at all. In 2023, Apple’s revenue was $298 billion.
The revenue that Apple earns from its contract with Google – known in the industry as an information services agreement, or ISA – likely lands in a revenue category that Apple calls « services, » according to Martin Yang, analyst at Forte and Oppenheimer.
This service bucket also includes Apple Arcade, Apple TV+, Apple Music, AppleCare and iCloud storage subscriptions. Apple’s services revenue for the 12 months ending September 30 was $85 billion.
Apple has warned investors that its business relationships with technology companies – without naming specific names – could be jeopardized by legal and regulatory scrutiny.
“Some of these arrangements are currently the subject of government investigations and legal proceedings,” the company said in its latest statement. Annual Report.
“Double negative impact”
The risk the antitrust lawsuit poses to Apple is significant, said Forte, the DA Davidson analyst, both because of the billions at stake and the high value shareholders place on the revenue stream.
“I think this highlights a big, important revenue stream for Apple,” Forte said. “If those revenues were to decline significantly, it could have a double negative impact as it would be a multiple expansion.”
Google CEO Sundar Pichai said default placement agreements “can make a difference” and be “very valuable.”
The company also claims that Apple and other search partners enter into default deals because Google’s search engine is superior to its competitors.
In 2022, Google generated $224.47 billion in total advertising revenue, making up the majority of the company’s total revenue of $279.8 billion.
Google clearly did not want to share the figures behind its Apple contract. In a court filing, Google’s lawyers argued that further disclosure of the precise terms of its revenue-sharing agreement with Apple « would unreasonably harm Google’s competitive position relative to its competitors and the other considerations ».
How the trial ends could open new avenues for Google’s competitors, although it will still be some time before the outcome is determined. The evidentiary phase of the trial concluded this week and closing arguments are expected in May 2024.
If the DOJ prevails, separate court proceedings will be held to determine remedies for antitrust violations. Appeals are also expected, which could take the case until 2025.
« You do not have the choice »
Google’s competitors have made it clear, in more than two months of testimony, that the deal between Google and Apple is detrimental to them.
Microsoft CEO Satya Nadella said he had tried unsuccessfully for years to secure a default engine deal with Apple for Microsoft’s Bing.
“Everyone talks about the open web, but there is definitely the Google Web,” he said.
Kamyl Bazbaz, a spokesperson for search engine DuckDuckGo, told Yahoo Finance that Google uses its default placement contracts as leverage to prevent its search engine and others from competing.
“I think a lot of people assume that Google is there just because that’s what everyone uses, not that there’s a financial relationship that Google is exploiting,” he said.
If the government wins its case, he said, DuckDuckGo hopes that, among other changes, the judge will order Apple and other device and browser makers to offer a variety of search engines that use a screen of choice.
« It’s not just about how easy it is to switch search engines, it’s also about friction or lack thereof, » he said, adding that « you don’t you have no choice.”
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.
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