Apple's services revenue may take a big hit as its AI deal with Google is under scrutiny following a U.S. judge's ruling that said the latter's parent company, Alphabet, has been operating an illegal monopoly in the search engine market.
The lucrative deal between the two tech giants, known as the Information Services Agreement (ISA), mandates the use of Google as the default search engine on Apple devices, according to Reuters.
Google pays Apple 36% of the search revenue generated on Apple devices using Google's services. Though Apple doesn't disclose how much it makes from the deal, court documents cited the number at an estimated $20 billion in 2022, double what Google paid in 2020.
On Monday, District Court Judge Amit Mehta ruled in favor of Department of Justice and found that Google maintained a monopoly for search and for text ads through exclusive distribution agreements that made it the "default" option that people were likely to use on devices.
The ruling means Apple and similar companies might be required to prompt users to select their preferred search engine, rather than setting a default and allowing changes only through device settings.
One potential remedy to avoid antitrust actions could involve ending the agreement that designates Google's search engine as the default on Apple devices.
Should this deal be terminated, analysts estimate that Apple's profits could suffer a 4-6% decline.
Established in 2002, the ISA has evolved to include Apple's Safari browser, Spotlight Search, and Siri.
Revenue from this partnership is reflected in Apple's Services business segment, which reported $78.1 billion in revenue in 2022.
If the $20 billion estimate is accurate, this deal represents about 25% of Apple's Services revenue and approximately 5% of the company's total annual revenue of $394.3 billion.
Apple's Services segment, which includes platforms like Apple Music+ and Apple TV+, has been one of its fastest-growing areas, serving as a buffer against slowing iPhone sales. Despite this diversification, the Google deal remains a significant revenue source.
In a bid to avoid regulatory issues associated with exclusive deals, Apple is also in discussions with Google to incorporate the Gemini chatbot and is considering adding other AI models.
The potential termination of the ISA would impact Google's revenue as well.
Internal modeling by Google in 2020 suggested a loss of 60% to 80% of search volume on iOS devices if it were no longer the default search engine, translating to a revenue loss between $28 billion and $32 billion.
With Google's total revenue at $182.5 billion in 2020, this would mean a reduction of 15% to 17%.
Google is expected to appeal the ruling, but if upheld, both companies could face significant financial challenges. The ruling could force Google to make dramatic changes to its business practices, and Apple might have to seek alternative search engine partnerships.
