Google vs. DoJ: What’s the worse potential outcome for Apple?

Investing.com -- The U.S. Department of Justice’s (DOJ) antitrust case against Google (NASDAQ:GOOGL) could have wide-ranging implications for Apple (NASDAQ:AAPL), whose lucrative deal with the search giant is now under scrutiny.

In 2020, the DOJ sued Google, alleging it maintained dominance in the search engine market through exclusive agreements—most notably its multibillion-dollar deal with Apple to be the default on Safari. The DOJ argues these arrangements are anti-competitive and limit competition among search providers.

Apple receives over $20 billion annually from Google for default search engine placement and traffic routed through Safari. The payment is a pure royalty and flows directly into Apple’s Services revenue, with minimal associated costs.

BofA outlines three possible outcomes of the case:

1) ’Google cannot pay to be the default search engine, but can pay Apple for search traffic:’ In this scenario, Apple could still earn revenue from Google based on the volume of search queries sent from Apple devices.

BofA expects the companies would renegotiate their current 36% revenue share, possibly agreeing on “multiple such take rates” depending on traffic levels. Although total payments may decline, the percentage rate could increase. Apple also has existing agreements with other search engines that command higher take rates.

1b) ’Apple implements a “choice screen” for search engines:’ Although the ruling targets Google, not Apple, the company may voluntarily introduce a screen allowing users to select their preferred search engine during setup.

In that case, Apple would no longer receive payment for default placement but would still negotiate traffic-based payments with various providers. BofA notes that “Apple likely has negotiated take rates with every search engine to which it directs traffic today.”

2) ’Google cannot pay anything at all related to search distribution:’ This is seen as the worst outcome for Apple. If all payments are prohibited, BofA estimates Apple could lose about half of the $20 billion+, assuming the ruling applies only in the U.S. That translates to more than $10 billion in lost revenue—roughly “8% of Apple’s annual operating profit dollars.”

"In this scenario, Apple could choose to retain Google as the default search engine for free. Or, it may be required to institute a choice screen where consumers could choose Google as the search engine, or choose a different search engine," BofA added. 

3) ’Other remedies (parts of Google are separated from the parent company, data-sharing mandates):’ Lastly, if Google is required to divest business units like Chrome or share search data with rivals, it could impact Apple indirectly.

The effect would depend on changes to browser market share or shifts in Apple’s ability to secure favorable revenue-sharing agreements, BofA said. 

While the ruling is expected to apply only in the U.S., BofA cautions that other jurisdictions could adopt similar measures.