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The Justice Department’s conflicting lawsuits against Google centered on the company signing on mobile devices and web browsers to be the default search engine.
The largest of these default search deals is with Apple.
Through its placement as the default search engine in the Safari browser for the iPhone and iPad, Google covers 36% of search queries in the US, according to the lawsuit, with Apple devices accounting for nearly half of Google search traffic in 2019.
Google pays Apple well for that placement. The DOJ cited “public estimates” that Google pays Apple between $ 8 billion and $ 12 billion per year to make Apple the default search engine for products.
Apple saw Google Payments as part of its services business, with $ 46.2 billion in sales in fiscal 2019, accounting for 17.7% of the company’s total revenue.
Apple has attracted a lot of attention to this business in recent years, with Tim Cook promising to double its revenue in 2017 by 2020. (Apple fulfilled that promise). Apple’s services business has contributed to the company’s growing value, which passed $ 2 trillion this year, as it makes the iPhone maker look like a software company that typically has higher multipliers than hardware manufacturers .
When Apple discusses its services business, it focuses on subscriptions sold directly to consumers like Apple Music, Apple TV +, iCloud storage and its upcoming Apple One bundles that wrap them at a discount.
But the DOJ lawsuit said that “services” are a catch-all line item.
Service revenue includes sales from iTunes and Apple’s streaming services, but also includes revenue from distributing Apple and in-app purchases on the App Store, AppleCare warranty and licensing – including Google’s Traffic Acquisition (TAC) payments – According to Apple’s annual filing.
Assuming that the DOJ’s assessment of Google’s payments is correct, it made up between 17% and 26% of Apple’s services revenue.
In other words, a large component of the business representing Apple’s future is payment from a single partner, Google.
Given the regulatory pressure on both Apple’s licensing business with Google and varying pressure on App Store practices, due to congressional hearings and the Epic Games lawsuit, investors will likely take another look at Apple’s story of services.
“We don’t see the quality or consistency of Apple’s service business with many of these other companies,” Goldman Sachs analyst Rod Hall wrote last month. “For example, we speculate that Google TAC payments contributed more to overall services and services growth than many investors have appreciated.”
Now, some analysts worry that a focus on Google’s distrust could lead to changes that would make Apple’s services business less profitable, which could mean lower value for Apple stock.
Bank of America analyst Vasami Mohan wrote in a note this week, “Ultimately, any change in the rev share agreement could lead to a potential change / margin headwind in services, resulting in valuation multiple contracting.”