Google (GOOG, GOOGL) is facing the biggest threat to its search and advertising business after a U.S. court ruled that the company operates as an illegal monopoly. Google will appeal the ruling, but if the tech giant does not overturn it, Judge Amit Mehta could force the company to abandon its distribution deals with smartphone makers Apple and Samsung.
Google is currently paying billions of dollars to Apple (AAPL) and Samsung to make Google Search the default search engine on its devices. In return, Google gets its search platform accessible to hundreds of millions of users around the world.
Access to a huge amount of data allows Google to sell targeted advertising against the users that power its vast advertising empire. If Mehta lets these deals collapse, Google risks losing those users and their valuable data.
And if Google loses access to the data that underpins its dominant position in the advertising market, the company may have to resort to advertising itself again.
“I think they would launch a campaign advocating that people choose Google,” said Gene Munster, managing partner of Deepwater Asset Management. “I think they would save $25 billion. And I think the biggest potential losers in the whole discussion are Samsung and Apple.”
Google’s distribution contracts cost billions
According to information from Mehta’s ruling, Google paid Apple $20 billion in 2022 to make Google Search the default search option on its various devices. That’s twice what the company paid the iPhone maker in 2020. Samsung, on the other hand, pocketed $8 billion over four years as part of its exclusive contracts with Google, according to Bloomberg.
If Google were forced to abandon these agreements, it would immediately start saving on its Traffic Acquisition Costs (TAC), money it pays out through agreements like those with Apple and Samsung. Google paid out $50.8 billion in TAC in 2023, up from $48.9 billion in 2022 and $45.5 billion in 2021.
However, this may also have a downside.
According to Mehta’s ruling, Google conducted internal modeling in 2020 that found it would lose 60 to 80 percent of search volume on Apple’s iOS devices if its search engine was replaced as the default search option.
Losing that search volume would cut into the company’s bottom line by $28 billion to $32 billion. In 2020, Google’s total revenue was $182.5 billion. That means if Google were to lose that iOS traffic, revenue could drop by 15 to 17 percent.
For Apple, however, the story could be even more challenging.
A loss of $20 billion per year would hurt the company’s bottom line and cut up to 25% of Apple’s services revenue starting in 2022.
Apple generated revenue of $394.3 billion in 2022, making the deal with Google about 5% of the company’s revenue that year.
For Samsung, the damage would not be so great if it had to forego payments from Google: Over a period of four years, the company would be paid $8 billion, which corresponds to about 1% of the company’s total revenue in 2023 of $194 billion.
But a loss of this traffic volume and the associated revenue is by no means certain.
The European Commission, which is responsible for enforcing antitrust law in the European Union, currently requires Apple and Android device makers to offer European users special choice screens to select their default web browsers and search engines under legislation called the Digital Markets Act.
Google has been offering this option since March 2024, and according to Statcounter, the company’s search engine market share fell from 96.08% in March to 95.82% in June before rising again to 95.97% in July.
So what happens if Google is forced to provide similar choice screens in the US?
“I think Google would focus more on advertising that says, ‘We’re such a wonderful search engine’ and ‘See how easy it is to install us, even if your recently purchased device has something else installed by default,'” said Lawrence White, a business professor at the NYU Stern School of Business. “I can imagine a lot more advertising like that.”
After all, the company is by far the best-known name in the search industry and its product has become a verb – people google information on the Internet, no one looks for it on Bing.
Email Daniel Howley at [email protected]. Follow him on Twitter at @DanielHowley.
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