Alphabet’s Google (GOOG, GOOGL) is contending with what could be the most significant disruption to its core search and advertising businesses. A U.S. court recently ruled that the tech behemoth operates as an illegal monopoly, posing an existential threat to the company’s distribution agreements and overall market share. While Google plans to appeal, if unsuccessful, the ruling could force the company to terminate its lucrative deals with Apple (AAPL) and Samsung—deals that have been central to Google’s search dominance for years.
These agreements ensure Google Search is the default search engine on Apple and Samsung devices, effectively giving the company access to hundreds of millions of users globally. The data generated by these users feeds directly into Google’s massive advertising ecosystem, allowing the company to sell hyper-targeted ads at scale. Losing these agreements could significantly weaken Google’s ad power by cutting off a substantial portion of its data flow.
If Judge Amit Mehta’s decision stands, Google may face the daunting task of regaining lost ground in search volume by marketing itself directly to consumers—a path that could cost the company billions in revenue and reshape its relationship with advertisers and device manufacturers.
A $50 Billion Problem
The stakes are high. In 2022, Google paid Apple an estimated $20 billion to maintain its default search engine status across iOS devices. Samsung pocketed $8 billion over four years for a similar deal. These agreements have been vital in cementing Google’s search engine dominance across mobile devices.
By shedding these deals, Google could potentially save on traffic acquisition costs (TAC)—a line item that has grown to $50.8 billion in 2023, up from $45.5 billion in 2021. However, there’s a steep downside. Internal modeling conducted by Google in 2020 revealed that losing its default status on iOS devices could lead to a 60% to 80% reduction in search volume. This could translate into a $28 billion to $32 billion hit to its bottom line, slashing total revenue by 15% to 17%, based on 2020 numbers.
Google’s total revenue for 2020 stood at $182.5 billion, making the potential losses from disrupted search volumes significant enough to alarm investors and advertisers alike. The knock-on effects could reshape the landscape for digital advertising, as Google’s dominance has long depended on its unrivaled data collection capabilities, which are fueled by its prime position as the default search engine.
Fallout for Apple and Samsung
For Apple, the financial blow would also be severe. The $20 billion Google pays annually accounts for 5% of Apple’s total revenue, and up to 25% of its Services revenue, a key growth area for the tech giant. The loss of this cash flow would be a notable setback for Apple as it leans increasingly on its Services segment to offset slowing iPhone sales.
Samsung, while not as heavily reliant on Google’s payments, could still face challenges. The $8 billion paid by Google over four years represents about 1% of Samsung’s 2023 revenue, which hit $194 billion. While manageable, the loss could still impact Samsung’s profitability and its broader partnership strategies.
A Glimpse into the European Union’s Experiment
To gauge how U.S. users might react if Google loses its default status, investors can look to Europe. The European Commission already mandates that device makers offer users a choice of search engines, a measure introduced under the Digital Markets Act. Since March 2024, Google has been required to offer this option across European Android and iOS devices. Early data indicates that while Google’s search engine market share dropped slightly—falling from 96.08% in March to 95.82% in June—it quickly rebounded to 95.97% by July. This suggests that even when given a choice, many users stick with Google.
Yet the U.S. market could respond differently, and Google may need to invest heavily in a campaign to remind users why its search engine is superior. According to Lawrence White, an economics professor at NYU Stern School of Business, “Google could focus on advertising its ease of use and reliability, encouraging users to reinstall it even if their devices come preloaded with an alternative search engine.”
What’s Next for Google?
Traders and investors will want to keep a close eye on how this legal battle evolves. If the appeal fails and Google is forced to sever its distribution deals, the company will be pressured to reallocate significant resources towards direct consumer engagement—potentially a costly and uncertain pivot. For now, Google’s future in search and advertising remains in the hands of the courts, but the ramifications for the tech giant—and its partners—are potentially game-changing.
Key Takeaways for Investors:
- Revenue Risk: Google stands to lose up to $32 billion in annual revenue if forced to end its distribution deals with Apple and Samsung.
- Cost Savings: While Google could save on TAC, the savings may not offset the revenue losses tied to diminished search volume.
- Apple and Samsung Impact: Apple could lose 5% of its total revenue from the potential termination of Google’s payments, while Samsung would face a smaller but still notable loss.
- EU Precedent: The European experience suggests user inertia may benefit Google even with new search options, though U.S. consumer behavior remains uncertain.
- Advertising Repositioning: Google may pivot to more aggressive consumer marketing to maintain its market position if default deals fall through.
