by Morgan Stanley Research

The U.S. Department of Justice (DoJ) vs. Google trial will begin on September 12 and the key focus for investors is whether we’ll see changes to Google’s Search contracts.

We quantify the risk to Google (GOOGL) and Apple (AAPL) in three potential scenarios, which suggests limited risk to Google’s profit and loss (P&L) and a wider range of potential outcomes for AAPL.

What’s at Stake?

The DoJ alleges that Google illegally obtained its dominance in search and search advertising with the key question being whether a final ruling could result in changes to Google’s Search contracts with hardware original equipment manufacturers (OEMs) i.e. Apple, Samsung, etc., wireless carriers, and web browser companies.

We would expect the judge to focus on Section 2 of the Sherman Act which makes it illegal to acquire or maintain a monopoly through improper means.

Initial ruling possible by year-end ’23, but appeals process could push the final decision into mid-to-late ’24.

Three Potential Scenarios

Status Quo, Structural Contract Changes, Full traffic acquisition costs (TAC) Removal.

Scenario 1: Status Quo

If the Court rules that there is legal basis for Google’s TAC payments to Apple, Samsung, and others, then there likely won’t be a material change to the nature of these contracts and as a result no change to Google or Apple’s P&L.

This represents the best case scenario for Apple and all those that receive TAC payments from Google and would be viewed positively for Google too.

Scenario 2: Structural Contract Changes Such as Removal of Exclusivity Clauses.

In this scenario, the Court could rule that Google cannot pay for default search engine placement, but that Apple and others are still allowed to charge variable TAC based on search revenue generated.

TAC payments would fall, but the removal of exclusivity could cause some users to switch away from GOOGL.

We estimate that GOOGL’s average U.S. distribution TAC is 37% of U.S. mobile revenue.

Taking TAC down to 15% of mobile revenue shows that GOOGL would have to lose 15%+ of traffic in order to create a net revenue headwind.

Scenario 3: Full Restriction of TAC Payments

In this (most extreme) scenario, Google would be unable to make any payments for TAC to OEM partners.

On the plus side, this would remove an estimated ~$28 billion of annual U.S. distribution TAC from GOOGL’s P&L in ’25.

On the risk side, it again may cause some U.S. users to switch to other search engines (i.e. Bing, Yahoo, DuckDuckGo, etc.).

But our math suggests that more than 37% of current U.S. users would have to switch to an alternative search engine for there to be a drag on Google net revenue.

This would represent the worst case scenario for AAPL because they would no longer be paid TAC for making Google the default search browser on Safari or directing traffic to Google’s search engine on an exclusive basis.

Nevertheless, a complete elimination of Google’s global TAC payments to Apple (estimated at ~$23 billion in fiscal 2025 would reduce full-year 2025 earnings per share (EPS) by ~$1.20 (or 15%), while just U.S. enforcement would reduce full-year 2025 EPS by ~$0.70, or 10%.


Image source: Tech Policy Press