(Ped30) – The DOJ in its complaint noted that part of the potential search monopoly comes from having default status on iOS devices.
As background Google pays a significant licensing fee (est. $10bn) based on a revenue share agreement to Apple for access to various search access points including preset default search engine on Apple’s Safari Browser, Siri, and Spotlight (Apple’s system-wide search feature).
Apple recognizes this revenue (~15% of total services) in its licensing revenues. Given that this revenue translates directly to profit, we est. almost all the rev flows to Apple’s net income and can account for up to $0.50 in EPS or approx. 10% of EPS…
In our view, a potential response (although we do not claim to know this would satisfy the regulators or if either company would agree to this) could be to no longer retain the revenue sharing agreement. In effect users would have to “opt-in” to using the Google search feature on Apple devices that would put other competitors on equal footing as a gateway to search. Ultimately any changes to the rev share agreement could lead to a potential rev/margin headwind in services that may result in the valuation multiple contracting.
Maintains Neutral rating and $140 price target.
My take: The wheels of antitrust law grind slow. Apple’s got time to prepare