Google might lose its $26 billion search deals in antitrust trial

Any day now, a federal judge is expected to issue a landmark ruling that could upend some of the most lucrative deals in Silicon Valley: Google’s default search contracts.

At stake is more than $26 billion a year, $20 billion of which goes to Apple. That’s nearly a quarter of Alphabet’s operating income.

For decades, the Apple-Google pact has helped determine who controls the internet, which is exactly why it’s now in the crosshairs.

U.S. District Judge Amit Mehta ruled last year that Google held a monopoly in search and ads. He’s been weighing remedies since the final phase of the trial wrapped in May, with a separate case on Google’s ad business set to begin next month under a different judge.

While Google risks losing some search traffic and predictability, analysts say Apple could take a bigger financial hit. The impact will hinge on whether Apple lines up new deals and how broadly the ruling applies.

Jefferies analysts say the judge may block exclusive contracts but still allow some payments. Even so, Apple’s pre-tax profits could drop by as much as 7%.

Some economists and Wall Street analysts believe Google might come out ahead in the long run — freed from costly deals that no longer drive demand.

Barclays analysts said in an August 5 note that if Google were to unwind the payments and contracts, it would still be “nearly impossible” for smaller peers to compete.

Megacap rival Microsoft has poured $100 billion into Bing and hasn’t been able to catch Google’s Chrome.

Apple Senior Vice President of Services Eddy Cue testified during the antitrust trial that no price Microsoft could offer would be enough to justify switching to Bing, because Google delivered stronger results and a better monetization engine.

“I don’t believe there’s a price in the world that Microsoft could offer us. They offered to give us Bing for free. They could give us the whole company,” Cue said.

Apple executives contend that it’s easy for users to switch search engines. Currently, Apple allows Americans to switch to Yahoo, Bing, DuckDuckGo, or Ecosia as their default search engine, but few do.

“I think their search engine is the best,” Apple CEO Tim Cook said about Google in 2018.

Economist Lones Smith, who modeled how people decide which search engine to use, described the phenomenon as a natural monopoly, where scale breeds quality, and quality reinforces scale.

“I don’t understand this deal it has with Apple, because if they didn’t pay Apple $20 billion, do they think that people would really be using another search engine? I don’t see that,” Smith told CNBC.

Smith likened Google to a utility: Breaking it up makes little economic sense.

“How do we get our water, electrical, and all that? We have a regulated monopoly. We don’t go and break it up,” he said. “We understand that there’s an efficient outcome for society, and we just don’t want the water company to be exploiting us.”

From a pure economics perspective, some on Wall Street would argue that…