Apple’s blockbuster deal with Google could be in jeopardy after a US federal judge ruled that the Alphabet-owned search giant is operating an illegal monopoly.
On August 5, Judge Amit Mehta ruled that Google had violated antitrust laws, spending billions of dollars to create an illegal monopoly and become the default search engine worldwide.
This is the first major victory for the US federal government against the market dominance of big tech companies.
The ruling paves the way for a second trial to determine potential remedies, which could include a split from Alphabet (Google’s parent company), which would change the landscape of the online advertising world that Google has dominated for years.
The ruling also gives US antitrust enforcement agencies a green light to prosecute big tech companies.
“The court concludes that Google is a monopoly and has acted as a monopoly to maintain its monopoly,” said Judge Amit Mehta. The US search engine giant controls about 90% of the online search market and 95% of the smartphone market.
Alphabet said it plans to appeal Amit Mehta’s ruling. “This decision acknowledges that Google provides the best search engine, but concludes that we should not be allowed to provide it easily,” Google said in a statement.
US Attorney General Merrick Garland called the ruling “a historic victory for the American people”, adding that “no company, no matter how large or influential, is above the law”.
Judge Amit Mehta noted that Google paid $26.3 billion in 2021 alone to ensure that its search engine was the default on most smartphones and browsers, maintaining its dominant market share.
“Default placement on devices or browsers is an extremely valuable asset… While a good product may be competitive enough to become the default choice when the current contract expires, a new company can only do so if it is willing to pay partners a large sum of money and cover any revenue loss they experience as a result of the change,” writes Amit Mehta.
“Google of course acknowledges that losing the default position would have a significant impact on its bottom line,” he added. “For example, Google has predicted that losing the default position on Safari would result in a significant drop in queries and billions of dollars in lost revenue.”
The ruling is the first major decision in a series of lawsuits over alleged monopoly practices against big tech companies. The case, filed by the Trump administration several years ago, was set to go before a judge from September to November 2023.
“If forced to divest its search business, Alphabet would be cut off from its largest source of revenue. Even losing the ability to strike exclusive default search deals could be detrimental to Google,” said Evelyn Mitchell-Wolf, senior analyst at Emarketer. She said a lengthy legal process would delay any immediate impact on consumers.
One potential remedy for Google to avoid antitrust action could involve ending its agreement with Apple that would make its search engine no longer the default on Apple devices, Wall Street analysts said.
According to analysts from financial group Morgan Stanley, Google used to pay Apple around 20 billion USD annually, equivalent to about 36% of the money they earned from search advertising through the Safari browser, to become the default search engine.
Analysts estimate that if the deal is canceled, Apple could suffer a 4-6% drop in profits.
The agreement with Google is valid until at least September 2026, and Apple has the right to unilaterally extend it for another two years, according to media reports in May 2024, citing a document filed by the US Department of Justice in the antitrust case.
“The most likely outcome now is that a judge rules that Google no longer has to pay for default placement, or that companies like Apple have to proactively prompt users to choose a search engine instead of setting the default and allow them to change the settings if they want,” according to analysts at financial research and consulting firm Evercore ISI.
Apple shares traded flat on Aug. 6, underperforming the broader market’s recovery after a global tech sell-off on Aug. 5. Alphabet shares were little changed, after falling 4.5% in the previous session.
“The message here is that if you have a dominant market position in a product, you better avoid using exclusivity agreements and make sure that any agreement you do make allows buyers to freely choose alternatives,” said Herbert Hovenkamp, a law professor at the University of Pennsylvania.
The “fix” phase could certainly be lengthy, followed by potential appeals to the Court of Appeals, the District of Columbia Court, and the U.S. Supreme Court. The legal battle could stretch into 2026.
If the deal with Google is scrapped, Apple would have a number of options to offer customers an alternative like Microsoft Bing or potentially a new search product powered by OpenAI.
Analysts agree that the ruling will accelerate Apple’s move toward AI-powered search services. Apple recently announced that it would integrate OpenAI’s ChatGPT AI chatbot into its devices.
In a move away from exclusive deals that help avoid regulatory scrutiny, Apple said it is in talks with Google to add its Gemini chatbot and plans to add other AI models to its devices.
Apple is also improving Siri with AI, helping the digital assistant handle tasks it has struggled with in the past, like writing emails and interacting with messages.
While it’s not expected to bring in much money in the coming years, the effort could help Apple better prepare for the development and adoption of new technologies in the future.
“Apple may see this as a temporary setback, especially since it makes a lot of money from its search deal with Google, but it also presents an opportunity for them to move into AI solutions for search,” said Gadjo Sevilla, an analyst at Emarketer.
Over the past four years, US federal antitrust regulators have also sued Meta Platforms (the parent company of Facebook and Instagram), Amazon and Apple, alleging that the companies maintain illegal monopolies. All of those lawsuits began during the administration of former President Donald Trump.
When it was filed in 2020, the lawsuit against Google was the first in a generation that the US government had accused a major corporation of illegal monopolies. The US government argued that Google had an illegal monopoly in the search industry. The lawsuit focused on the deals Google made with platforms and device manufacturers to become their default search engine. The biggest of these deals was between Apple and Google.
Apple generates nearly $400 billion in revenue by 2024, so a $20 billion deal doesn’t seem like a huge deal for them. Even if Google is replaced by a competitor like Bing or continues to work with Apple, under other terms, the iPhone and iPad maker could still make a lot of money from its partner wanting to be the default search engine on its Safari browser.
But the current deal with Google is a key part of Apple’s services business. Increasing high-margin services revenue has become important for Apple as its core business, iPhone sales, slows or declines. In the second quarter of 2024, Apple’s hardware revenue increased by $1 billion and services revenue increased by $3 billion.
SearchGPT from OpenAI
OpenAI is moving into a Google-dominated space by launching SearchGPT, an AI-powered search engine that can access information from the internet in real time.
Announced on July 25, the move also pits OpenAI against its biggest investor, Microsoft, with its Bing search engine and upstart Perplexity, a search-focused AI chatbot backed by Amazon founder Jeff Bezos and chip giant Nvidia.
OpenAI says it has opened registration for SearchGPT, which is in its prototype phase and being tested with a small group of users and publishers. The company plans to integrate the best features from SearchGPT into ChatGPT in the future.
“AI-powered tools from OpenAI and Perplexity reaffirm search as a content engagement model, putting pressure on Google to do better in an area it dominates,” said analyst Kingsley Crane of Canaccord Genuity.
Google dominates the search engine market with 91.2% market share as of July, according to web analytics firm Statcounter. SearchGPT will provide summary search results with source links to answer users’ queries, OpenAI said in a blog post. Users can also ask follow-up questions and get contextual responses.
OpenAI will provide publishers with tools to manage how their content appears in SearchGPT results. News Corp and The Atlantic are two of SearchGPT’s publishing partners.
SearchGPT signals closer collaboration between publishers and OpenAI, after ChatGPT’s creator struck content licensing deals with major news outlets like the Associated Press, News Corp, and Axel Springer.
More and more news organizations are agreeing to work with OpenAI as the company looks for content to train its AI systems, but some publishers are resisting, including the New York Times.
“New AI-powered search engine providers may face their own challenges, with Perplexity facing pending legal action from publishers like Wired and Forbes and Condé Nast,” says Kingsley Crane.
Major search engines have been trying to integrate AI into search since ChatGPT launched in November 2022. Through a $10 billion-plus investment in OpenAI, Microsoft has applied the company’s technology to its Bing search engine, while Google has been rolling out AI features to its search engine since its I/O developer conference in May.
Google did not respond to Reuters’ request for comment on the potential impact of SearchGPT on its business.