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Alphabet’s $20 Billion Apple Partnership Faces Potential Disruption
Did you know that Alphabet (NASDAQ:GOOG) pays Apple (NASDAQ:AAPL) an estimated $20 billion a year just to be the default search engine on iPhones and other Apple devices? This figure is significant, but there are indications that this lucrative partnership could be nearing its end.
The markets are reacting to the possibility of a breakup. Recently, Apple’s stock dipped about 1%, while Alphabet’s shares experienced a 7% decline, highlighting the deal’s importance to both companies. Google previously relied on Apple devices for roughly half of its mobile search volume. For Apple, these payments fall under its Services segment and likely come with minimal costs, making them highly profitable.
AI Shaking Up Search Landscape
The agreement between Alphabet and Apple has faced regulatory scrutiny since 2020. A shift in technology and user behavior may hasten its potential termination. Recently, Apple announced that searches on its Safari web browser declined for the first time last month. This trend may be linked to the growing popularity of AI-powered search tools. According to Apple executive Eddy Cue’s testimony during the DOJ’s antitrust trial against Google, the company is “actively looking at” revamping Safari to incorporate AI-driven search engines. Cue stated that generative AI applications, including OpenAI and others, could be part of this transformation.
“`# Apple Positions Itself Amid Potential Shifts in Search Landscape
Anthropic and other AI-driven companies are emerging as viable alternatives to traditional search engines, prompting Apple to engage in discussions with these firms regarding integration on its iDevices.
Apple’s move could also serve a secondary purpose. By suggesting that Google’s market dominance might be diminished by AI-driven search developments, Apple may downplay the significance of its existing $20 billion annual deal with Google. This strategy could potentially protect the company from regulatory scrutiny, ensuring that its agreements with Google persist.
What’s The Google Deal Worth To Apple?
What are the implications if the deal ends? If we estimate that Google’s licensing payments amount to around $20 billion for fiscal year 2024, this could lead to a roughly 21% decline in Apple’s Services revenue. Additionally, total revenue might drop by around 5%. Since this income is largely profit, estimates suggest that Apple’s operating profits could fall by approximately 16%. The Services segment is increasingly critical as hardware growth slows, with Services experiencing a nearly 13% growth in the first half of the year. In contrast, Apple’s hardware sales have only expanded by 2%.
With or Without Google, Apple Holds the Upper Hand
Despite these challenges, Apple remains in a robust position. The company manages over 2 billion active devices globally, serving as a gateway to a premium user base characterized by higher affluence and brand loyalty compared to rivals like Android. Essentially, Apple operates less as a search entity and more as a seller of access to these valuable users. Given Apple’s ongoing exploration of partnerships with AI search and chatbot providers such as OpenAI, Anthropic, and Perplexity, it may continue to monetize its ecosystem and capture a more substantial share of future opportunities.
Market dynamics can remain irrational for extended periods, particularly during times of heightened anxiety. For long-term investors, the current pullback in AAPL and GOOG stocks may present an enticing opportunity. However, those wary of volatility might consider strategies such as hedging or diversifying within a broader portfolio. Consulting a financial advisor experienced in bear markets could also be advantageous. Remember, considerable wealth can be created by those who maintain a calm, strategic outlook during periods of market fluctuation.
The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Nasdaq, Inc.
