Apple's Future In Search: JPMorgan Evaluates Options After Google's Legal Setback

In a recent ruling against Google’s parent Alphabet Inc GOOGL GOOG, Judge Amit Mehta identified the tech giant’s practices with search partners, including Apple Inc AAPL, as monopolistic. The judgement pinpointed Google’s agreements that make its search engine the default on consumer devices like iPhones.

According to JPMorgan analyst Samik Chatterjee, the court's decision could significantly impact these exclusivity clauses.

Chatterjee notes, “Given the judgement it might be reasonable to assume that exclusivity clauses promising Google a default position…will be one of the areas that will be under the scanner for changes.”

Apple Faces A Trio of Tough Choices

Apple now faces three primary alternatives:

1. Google's Appeal: Chatterjee mentions, "Google's appeal of the verdict, which has been the basis for most investors in relation to buying Apple and Google time and also opening up the opportunity for less impactful remedies after the appeal."
2. Revenue Sharing Without Exclusivity: Apple might enter into non-exclusive revenue-sharing agreements with Google and other search engines, potentially resulting in lower revenue shares.
3. Building Its Own Search Engine: Developing a search engine could mean higher expenses and lower revenue compared to Google's leading advertising monetization.

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A Critical Revenue Stream For Apple

The revenue sharing agreement between Google and Apple has been highly lucrative. "As per the disclosures cited in the ruling, Apple received $20 bn of traffic acquisition fee from Google in 2022," Chatterjee highlights. This amount is more than the combined total for all other agreements and has likely increased to around $24 billion in 2024.

About 65% of queries on Apple devices flow through Google's default position in Safari, accounting for 28% of all queries in the U.S. The exclusivity of this agreement embeds its value, making it a critical revenue stream for Apple, the analyst says.

Lower Economic Benefits Of Using Microsoft’s Bing Or DuckDuckGo

Apple has considered alternatives like using Microsoft Corp‘s MSFT Bing or DuckDuckGo, but these options offer lower economic benefits.

“Internal study at Google estimated that, it would take Apple around $10 bn of capital investments to build an efficient General Search Engine (GSE),” Chatterjee explains.

Additionally, Apple estimated it would lose $12 billion in revenues over five years, even if it captured 80% of search queries on its devices.

The Android Angle

While Apple’s situation is precarious, Google’s agreements with Android OEMs operate differently.

Google's Mobile Application Distribution Agreement (MADA) requires pre-loading certain applications, benefiting OEMs by waiving fees for a GMS license.

The Revenue Sharing Agreement (RSA) follows a tiered structure based on device exclusivity, further complicating the search landscape.

What's Next For Apple?

Investors should brace for potential changes and strategize accordingly. As Chatterjee puts it, “While challenged economics from Search engines in the absence of an exclusivity arrangement does open up the opportunity for Apple to pursue development of an internal engine and forsake revenue sharing agreements, it would mean developing a leading search engine and advertising monetization offset by expenses borne to support it.”

The path forward for Apple in the wake of Google's antitrust ruling is fraught with challenges, but also opportunities. As the tech giants navigate this legal maze, the stakes for their search engine dominance couldn't be higher.

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