By Rob Copeland and Tim Higgins
Inside Google, they called the scenario "Code Red," so stark was
the prospect of losing the search engine's lucrative pipeline from
Apple Inc.'s iPhone.
Now that possibility is officially on the table.
Google's partnership with Apple is at the heart of the U.S.
Department of Justice antitrust lawsuit claiming that the Alphabet
Inc. unit misused its power in an anticompetitive manner,
potentially threatening a major revenue stream for both tech
It has long been known that Google relies on search traffic from
Apple's popular line of phones. Google's flagship search engine is
the preset default on Apple's Safari phone browser, meaning that
when consumers enter a term on their phone, they are automatically
fed Google search results -- and related advertising.
What's new is just how central it is to both companies, and to
the antitrust case. While the government stopped short Tuesday of
asking for specific remedies, the prominence of the Apple
arrangement in the lawsuit leaves little doubt that the Justice
Department will seek to intercede.
The government says that Apple CEO Tim Cook and Google's CEO
Sundar Pichai -- neither of whom are named in the lawsuit -- met in
2018 to discuss how the companies could work together to drive
Afterward, according to the lawsuit, a senior Apple executive
followed up with a Google counterpart with some encouraging words:
"Our vision is that we work as if we are one company."
The companies declined to comment on the alleged meeting. The
apparent friendliness is a change -- Apple's late co-founder Steve
Jobs and former Google Chief Executive Eric Schmidt famously fell
out over Google's launch of competing mobile software.
Though Google and Apple have been tight-lipped on how much their
deal is worth, the lawsuit projects that it accounts for between
15% and 20% of Apple's annual profits.
That means Google pays as much as $11 billion, or roughly
one-third of Alphabet's annual profits, to Apple for pole position
on the iPhone. In return, Apple-originated search traffic adds up
to half of Google search volume, the government says. Google
declined to comment on that statistic, and representatives said
they weren't aware of the "Code Red" language included in the
Google said it plans to challenge the lawsuit, and the
litigation is expected to drag on for years.
"This lawsuit would do nothing to help consumers," said Kent
Walker, Google's chief legal officer, in a blog post. "To the
contrary, it would artificially prop up lower-quality search
alternatives, raise phone prices, and make it harder for people to
get the search services they want to use."
On the Apple partnership he said it was "no different from the
agreements that many other companies have traditionally used to
The threat to the arrangement between Apple and Google didn't
spook investors. Shares in both companies climbed about 2% on
Tuesday after the lawsuit was filed, beating the broader market, as
they have done most of the year.
Securing the prime piece of real estate in the Apple ecosystem
has had the effect of denying competitors the ability to compete,
the government alleged. "Google has almost completely shut out its
competitors from mobile distribution," the lawsuit said.
The inclusion of Apple in the government lawsuit follows a House
subcommittee report that examined Big Tech's anticompetitive
practices that claimed Apple, too, was misusing its power it holds
over its iPhone ecosystem, hurting rivals and benefiting itself.
Apple disputed the report.
Scrutiny of the business arrangement comes as Mr. Cook has been
trying to build out the company's services business as revenue from
its iPhones, which make up about half of its sales, have stagnated
after falling from a peak two years ago.
The scope of the deal has long been a mystery among analysts. In
June, Toni Sacconaghi, an analyst for Bernstein, estimated Google
pays Apple as much as $8 billion annually to be the default search
engine for its mobile operating system and Siri, a voice assistant.
Other analysts have pegged it as higher, closer to the figures
cited in the government lawsuit.
Mr. Sacconaghi suggested in a note to investors that Google was
motivated to spend the money in part to block rival Microsoft
Corp.'s Bing search engine from gaining a foothold. "Is Google
really willing to risk a resurgence of Bing to save a few billion
dollars?" he asked.
Bing currently holds about 7% of the search market, compared
with 88% for Google, the lawsuit says, citing public data
The government alleged in the lawsuit that Google also took
steps to freeze out competition in phones that run its Android
software, which account for 40% of mobile device usage. Unlike
Apple's operating system, Android can be licensed by third-party
device manufacturers, but the lawsuit alleges that Google steers
those companies to make its search engine the default through
strict contractual agreements and other measures.
The lawsuit notes that getting the default position on phones is
critical because most users never change the setting after their
"On Android devices, we have promotional agreements with
carriers and device makers to feature Google services," Mr. Walker
of Google said in the blog post. "These agreements enable us to
distribute Android for free, so they directly reduce the price that
people pay for phones."
Write to Rob Copeland at email@example.com and Tim Higgins at
(END) Dow Jones Newswires
October 20, 2020 16:04 ET (20:04 GMT)
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