Investors “Discounting” Potential Loss of Apple Search Deal for Google – Oppenheimer

Investors in Alphabet, the parent company of Google, are beginning to anticipate the potential loss of the tech giant’s exclusive arrangement with Apple following a significant court ruling in the United States last month, according to analysts from Oppenheimer.

In a recent client note, the analysts highlighted that Google generates approximately 31% of its gross search revenue through Apple devices. Additionally, Google pays around $20 billion each year to Apple for the privilege of being the default search engine on iPhones.

However, following a federal judge’s ruling in August that deemed Google’s operations as part of an illegal monopoly, traders are now pricing in the likelihood that this lucrative partnership could be jeopardized. This ruling has raised concerns regarding Alphabet’s future, as it currently holds nearly 90% of the online search market and about 95% on smartphones.

Reports suggest that one potential strategy for Google to sidestep antitrust scrutiny after the ruling could involve terminating its agreement with Apple. Nevertheless, even if this contract were to be dissolved, Oppenheimer’s analysts estimate that Google might lose 36% of its business with Apple, yet its net revenue could remain unchanged. This assumption is based on the premise that traffic acquisition costs — the payments made to direct users to particular websites — would be set at 0%.

Furthermore, with a 15% traffic acquisition cost, which exceeds what is typically received by Android manufacturers, Google could potentially lose 25% of Apple-generated searches without impacting its net revenue.

Oppenheimer’s analysts also conducted a survey indicating that search still excels at meeting user needs, revealing that 75% of iPhone users would select Google as their default search engine if given the option. Additionally, if Apple were to set a different search engine as the default on iPhones, 78% of users indicated they would download Chrome, Google’s web browser, to continue using Google search.

Despite these findings, the analysts cautioned that the impact of the recent court ruling remains uncertain. Media reports suggested that the timeline for Google to address the ruling, which the company plans to appeal, could be protracted.