Did you know Alphabet (NASDAQ:GOOG) provides Apple (NASDAQ:AAPL) with an estimated $20 billion annually just to be the default search engine on iPhones and other Apple devices? That’s a staggering amount but there is a chance that this extremely profitable partnership may be approaching its conclusion.
Presently, the markets aren’t treating a possible dissolution lightly. While Apple’s stock declined approximately 1%, Alphabet’s shares dropped by a substantial 7%, highlighting the significance of the agreement for both companies. Google previously obtained approximately half of its mobile search traffic from Apple devices. For Apple, the revenues are recorded under its Services division and probably come with minimal to no related expenses, rendering them exceptionally profitable.
AI Disrupting Search Ecosystem
The contract between the two firms has been subject to regulatory scrutiny since 2020. Currently, a shift in technology and user behavior might accelerate the conclusion of the agreement. Apple recently disclosed that searches conducted on its proprietary web browser Safari decreased for the first time last month, a phenomenon that could be credited to the increased usage of AI-enhanced search tools. As per Apple executive Eddy Cue’s testimony during the DOJ’s antitrust trial against Google, the company was “actively exploring revamping Safari to integrate AI-powered search engines. Cue asserts that generative AI solutions, including OpenAI, Perplexity, and Anthropic, are becoming viable alternatives to conventional search, and Apple has already initiated discussions with some of these companies to bring them on board its iDevices.
To be clear, Apple’s testimony might serve another function. By indicating that Google’s dominance might be diminished by the growth of AI-powered search, Apple effectively minimizes the importance of its $20 billion annual contract. This could potentially protect it from regulatory action, thus allowing its agreements with Google to persist. See – Google’s $1 Trillion Problem: Stock To Crash 40%?
What’s The Value of the Google Deal to Apple?
So what would occur if the agreement terminates? If we presume Google’s licensing compensations total around $20 billion for FY’24, Apple’s Services income would decline by approximately 21%, and overall revenue would drop about 5%. Additionally, considering that this revenue is nearly pure profit, based on our projections, Apple’s operating profits would drop by an estimated 16%. The Services division is becoming increasingly vital as Apple’s hardware growth decelerates. Services expanded by nearly 13% during the first half of the year, in contrast to the hardware division, which grew by a mere 2%.
With or Without Google, Apple Maintains Competitive Advantage
Overall, Apple remains in a position of significant strength. With over 2 billion active devices globally, it continues to act as the gatekeeper to a large, premium user base – one that is generally wealthier and more brand-loyal than users on competing platforms such as Android. In many respects, Apple isn’t focused on search; it’s offering access to these high-value users. Given that Apple claims to be actively looking into collaborations with emerging AI search and chatbot providers like OpenAI, Anthropic, and Perplexity, it should continue to monetize its ecosystem and potentially capture an even larger share of the growth potential.
Certainly, markets can remain irrational for extended periods, particularly when fear governs sentiment. For long-term investors with patience and conviction, the current pullback in AAPL and GOOG may represent a viable opportunity. However, those uncomfortable with such fluctuations might consider a hedged approach or diversifying within a broader portfolio, such as the Trefis Reinforced Value (RV) Portfolio, which has surpassed its all-cap stocks benchmark (combination of the S&P 500, S&P mid-cap, and Russell 2000 benchmark indices) to generate strong returns for investors, or consulting a financial advisor seasoned in bear markets could be advantageous. Keep in mind, substantial wealth can be created in the market by those who maintain a composed and strategic approach during turbulent times.
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