A secret about the riches Apple extracts from Google spills into the open


A Google trial lawyer visibly cringed in court this past week when his own expert witness revealed a closely held secret between two giants of the tech world.

The witness, a University of Chicago professor, said that Google (GOOG, GOOGL) pays Apple (AAPL) a 36% share of the revenue it earns from search advertising made through Apple’s Safari browser.

The number was supposed to be confidential, which likely explains the reaction from Google lawyer John Schmidtlein as reported by Bloomberg and other media outlets. The professor was testifying for Google in one of the most consequential antitrust trials in decades.

The cringe-inducing secret that spilled out in a Washington courtroom reverberated across Wall Street and Silicon Valley, prompting new speculation about how much Apple stands to lose if the government wins this trial and how much Google’s rivals stand to gain.

WASHINGTON, DC - SEPTEMBER 12: Google's top litigator John Schmidtlein departs federal court September 12, 2023 in Washington, DC. Google will defend its default-search deals in an antitrust trial against the Justice Department that began today.  (Photo by Win McNamee/Getty Images)

Google’s top litigator John Schmidtlein departs federal court in September in Washington, D.C. (Win McNamee/Getty Images) (Win McNamee via Getty Images)

The Justice Department is arguing in the trial that the contract making Google the default search engine on iPhones demonstrates how the search giant illegally stifles competition. Google has said that such contracts are normal in its industry.

The Justice Department is asking presiding federal district court Judge Amit Mehta for an order that would prohibit Google from continuing to engage in alleged anticompetitive practices. That could mean an eventual end to the partnership if the government prevails.

A ‘big number’

Just how much this agreement benefits Apple was a source of speculation for years. It’s clear from the revelation of this past week that it means billions annually.

How many billions exactly? Bernstein analysts have estimated $18 billion to 20 billion a year for Apple. The New York Times reported last month that figure was roughly $18 billion in 2021.

It’s a “big number,” said D.A. Davidson analyst Tom Forte. And if it’s compromised, that could have a “double negative impact” on the company’s stock price, he added.

If the number is still $20 billion, it might obliterate nearly 7% of Apple’s total revenue if the judge in the Google case decides to revise how such contracts work in the future, or if they’re permitted at all. In 2023 Apple’s revenue totaled $298 billion.

The revenue Apple earns from its Google contract — known in the industry as an Information Services Agreement, or ISA — likely lands in a bucket of revenue Apple calls “services,” according to Forte and Oppenheimer analyst Martin Yang.

That services bucket also includes Apple Arcade, Apple TV+, Apple Music, AppleCare, and iCloud storage subscriptions. Apple’s services revenue for the 12 months ending Sept. 30 was $85 billion.

Apple has warned investors that its commercial relationships with technology companies — without mentioning any specific names — could be compromised by legal and regulatory scrutiny.

“Certain of these arrangements are currently subject to government investigations and legal proceedings,” the company said in its most recent annual report.

‘Double negative impact’

The risk the antitrust trial poses to Apple is significant, said Forte, the D.A. Davidson analyst, both because of the billions at stake and the high value that stockholders ascribe to the income stream.

“I think that this shines a light on a large and important revenue source for Apple,” Forte said. “If this revenue were to diminish meaningfully, then it could have a double negative impact to the extent that it’s been a multiple expander.”

Google CEO Sundar Pichai testified that the default placement agreements “can make a difference” and be “very valuable.”

Google and Alphabet Inc. CEO Sundar Pichai arrives at the federal courthouse in Washington, Monday, Oct. 30, 2023. (AP Photo/Jose Luis Magana)

Google and Alphabet Inc. CEO Sundar Pichai arrives at the federal courthouse in Washington on Oct. 30. (Jose Luis Magana/AP Photo) (ASSOCIATED PRESS)

The company also argues that Apple and other search partners enter into the default contracts because Google’s search engine is superior to competitors.

In 2022, Google earned $224.47 billion in total ad revenue, a majority of the company’s total revenue of $279.8 billion.

Google clearly did not want to share the numbers behind its Apple contract. In a court filing, Google’s lawyers argued that further disclosure of the precise terms of its revenue-sharing agreement with Apple “would unreasonably undermine Google’s competitive standing in relation to both competitors and other counterparties.”

How the trial ends could open up new avenues for Google’s rivals, although it will be a while before the outcome is determined. The evidence phase of the trial ended this week and closing arguments are expected in May 2024.

If the DOJ prevails, separate court proceedings would be held to determine remedies for any antitrust violations. Appeals are also expected, which could take the case into 2025.

‘You are not given a choice’

Google’s competitors made it clear during more than two months of testimony that the arrangement Google had with Apple was damaging to them.

Microsoft CEO Satya Nadella said he tried unsuccessfully for years to work out a default engine deal with Apple for Microsoft’s Bing.

“Everybody talks about the open web, but there really is the Google web,” he said.

WASHINGTON, DC - OCTOBER 2: Microsoft CEO Satya Nadella arrives at federal court on October 2, 2023 in Washington, DC. Nadella is testifying in the antitrust trial to determine if Alphabet Inc.'s Google maintains a monopoly in the online search business, which is expected to last into November. (Photo by Drew Angerer/Getty Images)

Microsoft CEO Satya Nadella arrives at federal court In Washington, D.C., on Oct. 2. (Drew Angerer/Getty Images) (Drew Angerer via Getty Images)

Kamyl Bazbaz, a spokesperson for search engine DuckDuckGo, told Yahoo Finance that Google is using its default placement contracts as leverage to block his and other search engines from competing.

“I think a lot of people assume Google is just there because it’s what everybody uses, not that there’s a financial relationship that Google has leveraged,” he said.

If the government does win its case, he said, DuckDuckGo hopes that among other changes, the judge will order Apple and other device manufacturers and browsers to offer a variety of search engines using a choice screen.

“It’s not just about whether it’s easy to switch search engines, it’s about friction versus no friction,” he said, adding that “you are not given a choice.”

Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.

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