Google Pays Apple Billions a Year to Use its Search Engine. Now Executives must Testify.

The Washington Post

14:57 JST, September 22, 2023

Lucrative, closed-door dealings between two of the world’s most powerful tech companies are under scrutiny at the Google antitrust trial in Washington, as senior Apple executives prepare to take the stand.

The pair of tech giants have been tight-lipped about the estimated $19 billion that Google pays Apple per year to ensure its search engine remains the default on iPhones and other Apple devices – a deal that spans 18 years. Both companies have sought to keep details of the transactions out of the public eye, with filings in the case heavily redacted.

Even so, the public parts of the case are shedding new insight into how a once-furious rivalry between Apple and Google over smartphones – what Steve Jobs once declared “thermonuclear war” – has mellowed into a peaceful partnership that analysts describe as a duopoly.

“Our vision is that we work as if we are one company,” a senior Apple employee wrote a Google counterpart in a 2018 email, cited in the Justice Department complaint.

These deals ensure that virtually all smartphones sold in the United States, both iPhones and Android, come out of the box with Google search pre-installed front and center. At issue is whether this agreement is monopolistic and shuts out Google’s competition from having automatic access to Apple’s billions of users.

“It’s playing both sides of the street,” Justice Department attorney Kenneth Dintzer declared in his opening argument last week, about the contracts Google used to land its search engine as the default.

Apple AI chief John Giannandrea, who headed Google’s search business until 2018, is expected to be called to testify as early as Thursday afternoon. On his heels is Eduardo Cue, Apple’s services chief, who previously led Apple’s negotiations to update their contract with Google. Apple unsuccessfully fought to keep them off the stand.

In a blog post published ahead of the trial, Google president of global affairs Kent Walker said that the Justice Department’s lawsuit is “deeply flawed” and that the deal with Apple does not keep consumers from using other search engines if they prefer.

“Making it easier for people to get the products they want benefits consumers and is supported by American antitrust law,” he wrote. “In sum, people don’t use Google because they have to – they use it because they want to.”

Prosecutors are expected to grill both executives about the Apple-Google accords, seeking evidence that Google used its monopoly power to accumulate 90 percent market share in general search, dictate terms and prevent Apple from experimenting with other search engines. Google is expected to try to elicit evidence from the executives that Apple chose Google search freely, simply because it was the best product.

Apple declined to comment.

The case marks the first time in nearly two decades that the Justice Department is taking a major tech company to court on antitrust charges. The decision could have broad effects on the high-tech landscape for the next decade and beyond, if it curbs Google’s reach amid an industry scramble for emerging AI technologies.

Judge Amit Mehta will consider legal questions that are both wonky and technical. Being a monopoly is not illegal, but abusing such power to quash competition is. The Justice Department is arguing that Google strong-armed Apple and other smartphone makers into these deals. “The exclusive default was not Apple’s choice,” Dintzer told the court last week, citing Apple’s interest in also dealing with Yahoo, before Google demanded exclusivity.

Rebecca Haw Allensworth, a Vanderbilt antitrust law professor, said Apple’s testimony will hopefully clarify the intent behind Google’s payments: Was it an aboveboard business deal, or a scheme to shut out competition?

“Google is paying billions of dollars to Apple to have that privileged status,” she said. “Any competitor to Google would also want access.”

Equity research firm Sanford Bernstein estimates Google will pay Apple between $18 billion and $19 billion this year for default search status, more than the market capitalization of Best Buy or the GDP of Mongolia, and nearly 5 percent of Apple’s 2022 revenue.

Neil Shah, vice president of research at Counterpoint Research, points out that while Apple has 52 percent of the U.S. smartphone market overall, it commands a whopping 80 percent of the premium smartphone market. Google is paying to get its ads in front of these high-rollers using iPhones, and it is splitting the profits with Apple.

“These ‘premium eyeballs’ which Apple has access to are very lucrative but hard to target for advertising companies such as Google due to Apple’s walled garden,” he said.

This arrangement has been one Apple has been loath to discuss in public.

“We actually went back and looked at earnings calls in the past, and Apple never once mentioned this relationship,” Bernstein tech analyst Toni Sacconaghi told investors when the Justice Department filed the lawsuit in 2020. “In the previous 10 years, Apple had actually never talked about this.”

Apple unsuccessfully attempted to quash the subpoenas seeking executive testimony ahead of the trial, saying that the company – a third party in the case – has been “the subject of uncharacteristically overbroad and burdensome demands throughout this case.”

Apple said it has provided the Justice Department with more than 125,000 documents and over 21.5 hours of executive depositions. The information, the company said in court filings, reflects “its most sensitive internal commercial deliberations.”

Adrian Perica, Apple’s vice president of corporate development, was also deposed but is not expected to appear in person.

As for Google’s deal with Apple, Mehta would have the power to order the terms changed or even scrap it if he judges Google acted illegally through it. When the European Union reviewed a similar case against Google, it ordered devices to have a “choice screen” out of the box so consumers had a chance to pick which search engine they wanted.

In his opening statement last week, Justice Department attorney Dintzer cited an email a Google executive sent internally in 2007 to recount a meeting with his counterpart at Apple.

“I then told him we have two options,” the Google executive, Jeff Shardell, wrote. “1) No default placement – no revenue share on Safari/Windows. 2) Yes default placement – we will share in revenue under the current contract.”

Dintzer argued that the email showed Google was the one calling the shots.

“This is not a negotiation, Your Honor,” Dintzer told Mehta. “This is Google saying, ‘Take it or leave it.'”