Apple could take the biggest hit by a potential loss of ad revenue-sharing
A judge ruled Monday that Google illegally exploited its dominance in search to crush competition and stymie innovation by its rivals.
A major victory for the U.S. Department of Justice in its antitrust litigation against Google is likely to have wide-ranging ramifications across the tech industry, but the impact will take time to sort out.
On Monday, a federal judge ruled that Alphabet’s Google search business is a monopoly and that it is in violation of Section 2 of the federal Sherman Act through exclusionary contracts in its distribution agreements. The case had a few similarities to the government’s antitrust case against software giant Microsoft Corp. in the late 1990s, but could even be more far-reaching.
“It’s a whopper,” said Donald Polden, dean emeritus and professor of law at Santa Clara University’s School of Law. “It’s not just another antitrust case in which a tech company has been found in engaging in anti-competitive practices.” He said the case deals with the use of defaults, which are also used by many other tech giants. “It goes to the heart of some of the practices used by other companies in the tech industry.”
Google said Monday that it plans to appeal. “This decision recognizes that Google offers the best search engine, but concludes that we shouldn’t be allowed to make it easily available,” Kent Walker, Google’s president of global affairs, said.
What the court found problematic was the fact that Google paid “huge sums” to make sure it became the default search engine on many devices, and in 2021, paid its partners $26 billion, a percentage of the advertising revenue generated from queries run from the default search point.
Default placement by Google of its search engine was described in Judge Amit Mehta’s 286-page opinion as “extremely valuable real estate” because many users simply stick to searching with the default. “Google receives billions of queries every day through those access points,” he added. Google’s partners had also agreed not to preload any other search engine onto their devices.
It is not immediately clear what will happen next, because the judge did not specify remedies (although he did state where remedies were not necessary), or when he will rule on them. But one possibility could be that he rules the company can no longer pay for default placement, which could mean that many tech companies — including Apple Inc. and Samsung Electronics — will miss out on that ad-sharing revenue.
“The most likely outcome now is the judge rules that Google must no longer pay for default placement, or that companies like Apple must proactively prompt users to select their search engine rather than setting a default and allowing consumers to make changes in settings if they wish,” Amit Daryanani, an Evercore ISI analyst who covers Apple, said in a note.
Daryanani speculated that it will likely be late this year or early 2025 before the judge rules on a remedy, which will certainly be appealed, “regardless of what is proposed,” he said.
Apple gets by far the biggest revenue chunk from Google, Daryanani said, noting that Apple receives about $20 billion as a result of its deal with Google. “[The] payment falls almost entirely to pre-tax profit, so it would represent an about 15% earnings headwind if the payment goes away,” Daryanani wrote, adding that this was the one antitrust case involving Apple that he believes could pose a material risk.
It’s also too early to say what kind of impact the ruling will have on Google’s future market share in search, and whether it will benefit Microsoft’s Bing market share. Mehta quoted data indicating that Google’s market share in 2020 was nearly 90%, and even higher on mobile devices, at almost 95%. In second place, Bing saw roughly 6% of all search queries.
“In this case, Google is going to have to provide some benefits, opportunities, for their competitors,” said Polden of Santa Clara University, of the potential remedies that the judge could consider.
The only thing that is clear at this point is that most of Silicon Valley’s lawyers will be plowing through the lengthy and detailed opinion over the next few days, and trying to anticipate its potentially broad ramifications.
