How AI Made Google's and Apple's Big Antitrust Win Possible

While Google got most of the credit for a federal judge's ruling that Google did not need to be broken up, that its payments to Apple could continue was a major victory as well. 

Both companies are under pressure, Google because of its search and ad - dare we say it...monopoly - and Apple because those Google payments generate significant profit. But ironically, although AI is believed to be a key to their growth, Google in search and Apple on its devices, the latest new, new thing also saved them because the judge believes AI, in its role as The Future, threatens both companies' dominance. Not that anyone would be wise to bet against them...JL

  
Dan Gallagher reports in the Wall Street Journal:

Google and Apple scored a victory from a federal judge’s ruling in the U.S. government’s antitrust case against Google in which he turned down the request to break up Google or force it to end payments it makes to Apple that have kept Google as the default search engine on Apple’s devices while providing a revenue stream to Apple of $20 billion a year. Google’s payments amount to only 5% of Apple’s annual revenue. But they are a large contributor to the bottom line, given that Apple incurs little incremental cost associated with that stream. AI browsers as competitors to Google helped stave off punishment. In declining a ban, the judge reasoned the competitive landscape was already threatening  Google’s dominant position, meaning the court didn’t need to intervene. “Apple didn’t dodge a bullet; they dodged a missile.”

Google and Apple AAPL 0.55%increase; green up pointing triangle are both breathing easier. For Apple, a deep sigh may be particularly appropriate.  

The two tech giants scored a notable victory late Tuesday from a federal judge’s ruling in one of the U.S. government’s two antitrust cases against Google. U.S. District Judge Amit P. Mehta essentially turned down the government’s request to break up Google or force the company to end the payments it makes to Apple.

Those payments have kept Google as the default search engine on Apple’s devices while providing a valuable revenue stream to Apple. It is one that now reportedly reaches more than $20 billion a year.

The government argued that those payments lessened competition, since few others in the search-engine business can afford to match the price Google pays. But Judge Mehta countered that banning the payments would actually strengthen Google’s hand by essentially giving the company free access to Apple’s huge base of users.

“So, for now, Google will be permitted to pay distributors for default placement,” Mehta wrote. “There are strong reasons not to jolt the system and to allow market forces to do the work.” 

Shares of Google parent Alphabet GOOGL 0.71%increase; green up pointing triangle jumped after the ruling while Apple’s stock also rose, albeit more modestly. “Apple didn’t just dodge a bullet; they dodged a missile,” Craig Moffett of MoffettNathanson said.

Google’s payments of $20 billion amount to only about 5% of Apple’s total annual revenue now. But they are a much larger contributor to the bottom line, given that Apple incurs little incremental costs associated with that revenue stream.

 

Apple’s services segment, which includes the licensing payments from Google, commanded gross profits of 75 cents for every dollar of revenue for the 12-month period ended in June. Gross margins on Apple’s hardware business were 37% for the same period.

Losing such a profitable revenue stream would have come at a difficult time for Apple. The iPhone still accounts for more than half the company’s annual revenue yet has averaged just 2% annual revenue growth over the past three years.

Apple’s slow start in generative artificial intelligence also means expectations are rather low for this year’s crop of new phones—expected to be unveiled next week. Analysts are projecting that iPhone revenue will grow less than 4% in Apple’s fiscal year that ends next September.

 

Apple is also now firmly in the crosshairs of the U.S.-China trade war. President Trump is openly pressuring the company to move its manufacturing back to the far more expensive U.S. Apple’s shares are down more than 8% this year—making it the only megacap tech stock to be in the red for that time.

The ruling was a major win for Google and its shareholders, too. The case had threatened to force the company to sell its Chrome web browser—an outcome AI startup Perplexity encouraged by making an unsolicited $34.5 billion offer for it. That was always a long shot, and the judge dismissed it as an overreach.

Ironically, the existence of Perplexity and other purveyors of AI-forward browsers as upstart competitors to Google helped stave off punishment on the payment-ban question. In declining to institute such a ban, the judge reasoned that the competitive landscape was already threatening Google’s dominant position—meaning the court didn’t need to intervene.

While the court did require Google to share data about search queries with certain competitors, that will likely have little impact, at least in the short term. By the time it could make a difference, AI may have changed the way people search so dramatically that it has no impact at all.

Google isn’t out of the legal woods. There are cases pending in the U.S. and Europe, as well as the lingering possibility that a body appointed by Judge Mehta to oversee the court’s remedies finds Google isn’t sticking to its obligations.

Apple, too, may not be home free. Mehta said he is prepared to revisit the idea of a payment ban “if competition is not substantially restored through the remedies the court does impose.”

But make no mistake, the ruling amounts to a major win for both companies.

Google’s parent has been undervalued by investors as it slogs through the legal challenges. Meanwhile, Apple has faced the prospect of losing a large chunk of its operating profits at a time when tech giants are having to pour many billions of dollars into AI investments.

For both companies, maintaining the status quo is about as good as it gets.