Apple is the big winner in Google antitrust penalty ruling

Wall Street analysts believe the favorable antitrust ruling won by Alphabet could benefit Apple even more, by letting the iPhone maker license generative artificial intelligence products outside of the Google ecosystem. After Google was found to hold an illegal monopoly in its core market of internet search last year, the U.S. Department of Justice suggested Alphabet divest some of its assets, including selling off its Chrome browser. But the company avoided a worst-case scenario on Tuesday after a U.S. District judge ruled against some of the more severe proposed consequences, including a potential breakup. In the decision, the court said Alphabet won’t be forced to sell Chrome, but will be barred from exclusive contracts that condition payments or licensing. In response, Wall Street sent both Alphabet and Apple higher, with investors viewing the decision as an even bigger win for the iPhone maker. Alphabet and Apple gained anywhere from 3.5% to 8.5% each in early trading. “In what we’d describe as a near best-case scenario, AAPL can still collect [traffic acquisition costs] from GOOGL (with conditions) and can renegotiate the default search socket annually, better than our prior ‘Scenario 4’ framework & likely resulting in an immaterial, to potentially positive, financial impact,” Morgan Stanley wrote in a Wednesday note. While Google will have to stop exclusivity payments for using its search function, the company can still pay for distribution on iPhones, including as the default search engine, Baird said. The bank estimated Google’s annual payments to Apple at roughly $20 billion, or about 20% of Apple’s Services revenue — 5% of its total revenue — and include “disproportionately high margins.” Analysts also highlighted Alphabet’s loss of exclusivity as a major catalyst for Apple, since this will allow it to license other non-Google AI products even though Google’s payments will continue to Apple. “Non-exclusivity remedies allow AAPL to license non-GOOGL GenAI products (e.g. OpenAI),” TD Cowen wrote. “AAPL’s Safari browser has the option for alternative [generative search experiences] for many years and AAPL currently licenses OpenAI’s ChatGPT product.” TD Cowen added that Google’s revenue share payments could be a benchmark and “valuable pricing reference” to negotiate future revenue sharing from various generative AI partnerships, especially once Apple begins planning to offer a generative AI search option in its Safari browser. This will likely become more relevant as chatbots grow more popular as an alternative to the traditional search engine experience. Tuesday’s positive decision helped reinforce Wall Street’s bullish view on shares of Apple, with most analysts maintaining their buy-equivalent rating. Here’s what analysts at some of the biggest investment banks had to say after the ruling. Bank of America: Price target raised to $260 Bank of America lifted its price target to $260 per share from $250, implying upside of about 13%. “While details and nuances of the ruling and their implication on Apple are still to be determined, and Google has the option of appealing this decision, in our opinion, we do not see an immediate material change to the current Apple-Google relationship and payment structure. Longer-term, data sharing with other search engines/Gen AI providers could pose headwinds to Apple from lower Google TAC payments … This ruling gives us more confidence in our Services revenue estimates which we model to grow 12% y/y in F26/F27. We est. 37% of Services revenue comes from Licensing of which Google TAC is a major contributor (22% of overall Services revenue).” Morgan Stanley “What we learned from Judge Mehta tonight should be viewed as the best-case outcome for Apple, and better than the ‘most likely’ Scenario 4 we highlighted in our prior analyses. Why? Because (1) GOOGL can continue to pay Apple to distribute search, (2) Apple can still set a default search engine (incl GOOGL) and receive payments for that, so long as Apple promotes other search engines and the default search engine is changed annually, and (3) Apple can — but is not required to — introduce a search choice screen to help recoup any change in payment terms related to the prior default search exclusivity Apple had with Google. Effectively, Apple needs to offer a bit more flexibility in distributing search to users, but the remedies are even more watered down than we expected.” Baird “For AAPL, we suspect it could continue to receive significant distribution payments from Google and of course over time could also evaluate opportunities with emerging platforms like OpenAI, Perplexity and others as they build broader ad platforms.” TD Cowen “We view the remedies as largely favorable for AAPL’s advertising…