Did you know Alphabet (NASDAQ:GOOG) pays Apple (NASDAQ:AAPL) an estimated $20 billion a year just to be the default search engine on iPhones and other Apple devices? That’s a staggering figure but there is a possibility that this highly lucrative partnership could be nearing its end.
Now the markets aren’t taking a potential breakup lightly. While Apple’s stock dipped about 1%, Alphabet’s shares fell by a steep 7%, underscoring the importance of the deal to both companies. Google once derived roughly half its mobile search volume from Apple devices. For Apple, the payments are booked under its Services segment and likely come with little to no associated cost, making them incredibly profitable.
AI Shaking Up Search Landscape
The agreement between the two companies has been under regulatory scrutiny since 2020. Now, a shift in technology and user behavior could speed up the demise of the deal. Apple just revealed that searches carried out on its proprietary web browser Safari dipped for the first time last month, a trend that could be attributed to the rising use of AI-powered search tools. According to Apple executive Eddy Cue’s testimony during the DOJ’s antitrust trial against Google, the company was “actively looking at” revamping Safari to integrate AI-driven search engines. Cue believes that generative AI applications, including OpenAI, Perplexity, and Anthropic, are becoming viable alternatives to traditional search, and Apple has already had discussions with some of these companies to come on board its iDevices.
To be sure, Apple’s testimony may serve another purpose. By hinting that Google’s dominance could be reduced by the rise of AI-driven search, Apple effectively downplays the significance of its $20 billion annual deal. This could potentially shield it from regulatory intervention, allowing its agreements with Google to continue.
What’s The Google Deal Worth To Apple?
So what happens if the deal ends? If we assume Google’s licensing payments total around $20 billion for FY’24, Apple’s Services revenue would fall by roughly 21%, and total revenue would drop about 5%. Moreover, considering that this income is almost pure profit, per our estimates, Apple’s operating profits would decline by an estimated 16%. The Services segment is becoming increasingly important as Apple’s hardware growth slows. Services grew by almost 13% over the first six months of the year, compared to the hardware business, which expanded by a mere 2%.
With or Without Google, Apple Holds Upper Hand
Overall, Apple still remains in a position of relative strength. With over 2 billion active devices worldwide, it continues to serve as the gatekeeper to a vast, premium user base – one that is generally more affluent and brand-loyal than users on rival platforms like Android. In many ways, Apple isn’t really search; it’s selling access to these high-value users. Given that Apple says that it actively exploring partnerships with emerging AI search and chatbot providers like OpenAI, Anthropic, and Perplexity, it should continue to monetize its ecosystem and even garner a potentially bigger slice of the upside.
Surely, markets can remain irrational for extended periods, particularly when fear dominates sentiment. For long-term investors with patience and conviction, the current AAPL and GOOG pullback may represent an opportunity. However, those uncomfortable with such volatility might consider a hedged approach or diversifying within a broader portfolio, such as the Trefis Reinforced Value (RV) Portfolio, which has outperformed its all-cap stocks benchmark (combination of the S&P 500, S&P mid-cap, and Russell 2000 benchmark indices) to produce strong returns for investors, or consulting a financial advisor with experience in bear markets could be beneficial. Remember, significant wealth can be generated in the market by those who maintain a calm and strategic approach during periods of volatility.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
