When the Department of Justice filed its antitrust suit against Alphabet Inc. (NASDAQ: GOOGL) it was initially thought that things would never get too bad for the online search and advertising leader. The August 5 ruling against Alphabet may go very unfavorably for Apple Inc. (NASDAQ: AAPL) as well — assuming it does not open a door for another rival to swoop in at similar or better terms.
Alphabet has been paying Apple $20 billion per year for Google to be the exclusive search provider on the iPhone. And if Alphabet and Google own Android, they own that search market as well.
A report from Evercore ISI is warning that the market is not factoring in the worst-case scenario where the DOJ would rule that Google would no longer be allowed to bid for exclusive search deals in the United States. Whether or not this occurs remains to be seen as the remedies phase of the trial is not yet over. And if that “remedy” is the answer, it is a foregone conclusion that Alphabet will appeal.
As for Apple, it is possible that Microsoft Corporation (NASDAQ: MSFT) would step in with Bing to fill the gap if Google has to be removed in the exclusive deal. Again, this is yet to be determined. And the amount of payments or consideration is mere speculation at this point. At issue over any rivalry to this deal is that there are only so many search providers out there — and there are less than a few which can actually write billions of dollars to Apple to hold the search position.
Mark Mahaney of Evercore ISI lowered Alphabet’s price target down to $200 from $225 based on the possibility of a worst-case scenario being more likely than markets are factoring in. Evercore ISI still maintains its Outperform rating on Alphabet.
Another antitrust case is also pending against Google’s ad market dominance alleging that advertisers and content creators alike have suffered from the ad market dominance under Google and DoubleClick which it acquired more than a decade ago.
While all of this is in the air, other firms are not exactly calling out the worst-case scenario as likely. And, again, any adverse ruling can be and almost certainly will be appealed. BMO Capital Markets has also reiterated its Outperform rating and its $222 price target on Alphabet.
It seems possible that Apple could preempt some of the negative news by allowing its iPhone customers to install other search services. Windows devices allow users to pick or designate their default browsers, and Apple is already expected to be partnering with multiple providers when it comes to artificial intelligence. Then again, Apple doesn’t want to throw in the towel on a $20 billion revenue source — and realistically, why would it? And if it preempts any ruling in any way that violates its contract with Alphabet, then it could be in breach even if the company said it was trying to “do the right thing” in light of the pending case.
Government cases can result in outcomes ranging from game-changing all the way down to a nothing burger. The verdict is still out here, and the DOJ announcement showed no remedies to expect yet, but investors who have strong conviction in certain outcomes certainly have the ability here to make strategic investments based on their anticipated outcomes.
