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Neither Alphabet nor Apple likes to talk about how much money changes hands annually to make Google the default search engine on iPhones and other devices. Bernstein analysts believe it could be up to $20bn. Both companies are keeping quiet. However large, the payment is at risk.
Alphabet is defending itself against a lawsuit from the US Department of Justice that accuses it of using anti-competitive agreements to gain a monopoly in online search and therefore digital advertising.
Alphabet is open about the payments it makes to distribution partners that help generate advertising sales — though it does not break out fees paid to make Google the default. These are expensive. Last year, it paid out close to $49bn. That was equal to more than a fifth of advertising revenue and was more than the company paid for R&D. But the deals have helped Google’s search engine to dominate the market with a near 90 per cent estimated share.
For Apple the so-called Information Services Agreement is genius. It receives billions of dollars for something it might do anyway. Google Search is popular with users. Even Microsoft Bing’s new AI features have not managed to change the leaderboard. Swapping Google for Bing or DuckDuckGo would be unpopular.
If Alphabet loses its case against the DoJ it may have to stop paying for default status. For Apple, replacing this near costless revenue will be hard. Losing $20bn per year would reduce predicted 2024 revenue by 5 per cent. That could cut operating profit by up to 16 per cent.
The knock-on effect could change investor payouts. Apple’s rising profit margins have helped to power huge share buybacks that have propelled stock performance even when top line growth has been middling.
Change is neither guaranteed nor immediate. Plus Apple could still charge for access to search engines, even if not for the default position. Still, losing access to the current search contract with Google would be an unwelcome development.
Listen to Lex deputy editor Elaine Moore talk to creators, companies and critics about the next era of social media in the FT’s new Tech Tonic podcast series.
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