Google might lose its $26 billion search deals. Analysts say that could fuel its AI growth

Any day now, a federal judge is expected to issue a landmark ruling that could upend some of the most lucrative deals in Silicon Valley: Google's default search contracts.

At stake is more than $26 billion a year, $20 billion of which goes to Apple. That's nearly a quarter of Alphabet's operating income.

For decades, the Apple-Google pact has helped determine who controls the internet, which is exactly why it's now in the crosshairs.

U.S. District Judge Amit Mehta ruled last year that Google held a monopoly in search and ads. He's been weighing remedies since the final phase of the trial wrapped in May, with a separate case on Google's ad business set to begin next month under a different judge.

While Google risks losing some search traffic and predictability, analysts say Apple could take a bigger financial hit. The impact will hinge on whether Apple lines up new deals and how broadly the ruling applies.

Jefferies analysts say the judge may block exclusive contracts but still allow some payments. Even so, Apple's pre-tax profits could drop by as much as 7%.

Some economists and Wall Street analysts believe Google might come out ahead in the long run — freed from costly deals that no longer drive demand.

Barclays analysts said in an August 5 note that if Google were to unwind the payments and contracts, it would still be "nearly impossible" for smaller peers to compete.

Megacap rival Microsoft has poured $100 billion into Bing and hasn't been able to catch Google's Chrome.

Apple Senior Vice President of Services Eddy Cue testified during the antitrust trial that no price Microsoft could offer would be enough to justify switching to Bing, because Google delivered stronger results and a better monetization engine.

"I don't believe there's a price in the world that Microsoft could offer us. They offered to give us Bing for free. They could give us the whole company," Cue said.

Apple executives contend that it's easy for users to switch search engines. Currently, Apple allows Americans to switch to Yahoo, Bing, DuckDuckGo, or Ecosia as their default search engine, but few do.

"I think their search engine is the best," Apple CEO Tim Cook said about Google in 2018.

Economist Lones Smith, who modeled how people decide which search engine to use, described the phenomenon as a natural monopoly, where scale breeds quality, and quality reinforces scale.

"I don't understand this deal it has with Apple, because if they didn't pay Apple $20 billion, do they think that people would really be using another search engine? I don't see that," Smith told CNBC.

Smith likened Google to a utility: Breaking it up makes little economic sense.

"How do we get our water, electrical, and all that? We have a regulated monopoly. We don't go and break it up," he said. "We understand that there's an efficient outcome for society, and we just don't want the water company to be exploiting us."

From a pure economics perspective, some on Wall Street would argue that the payments look like unnecessary insurance and that Google's dominance is sticky enough without them.

Data suggests users opt for Google even when there is a choice.

In Europe, where regulators forced users to pick their own default after a European Commission ruling against Google, the company's market share barely budged, with StatCounter data showing it still hovers around 90%.

Dan Niles, founder of Niles Investment Management, told CNBC that while Europe proves Google can thrive without these payments, the U.S. market moves faster, and what's next matters more than what's lost.

"Google to me, quite honestly, once this is done … next year, if they continue down this path, it could be one of the best-performing stocks out there," Niles said.

Even Google's proposed remedy points in that direction, allowing shorter default contracts and multiple providers instead of blanket exclusivity, while warning that the bigger risk comes from the DOJ's push for search data-sharing.

Former FTC Chair William Kovacic told CNBC that the Justice Department is essentially betting that limiting Google's exclusivity deals will open the door for new competitors to emerge.

"In part, it's an act of faith," he said, though past cases have shown that once barriers are removed, innovation often follows in unexpected ways.

Rebecca Allensworth, a scholar of antitrust and Big Tech, said the payments aren't necessarily what keep people using Google and likened it to "innovation insurance," freezing the ecosystem so that rivals don't have a chance to compete.

"Google fought really, really hard to be able to make those payments," said Allensworth, a law professor at Vanderbilt. "It makes the industry innovation-proof, in a way. Or at least, if there's going to be innovation, it's going to be by and for the benefit of Google."

Kovacic warned that a Chrome divestiture — one of the more extreme remedies floated — might be more symbolic than effective, calling it "a flashy, shiny object" that wouldn't do much to solve the issue.

"The big breakup has always been antitrust fascination," he said. "But you can wonder whether that distracts you from solutions that have more to do with solving the competitive problem that you've identified today."

The DOJ, concerned that Google could repeat its playbook with its artificial intelligence platform Gemini, is also pushing for restrictions on exclusive AI distribution deals — and even proposing data-sharing mandates.

These would force Google to give rivals access to anonymized data about what users search for and which results they click.

But Allensworth emphasized that it's not a zero-sum game.

"You can have a very strong antitrust remedy … and then two, five, ten years later, that company is actually doing extremely well," she said. "These are not existential threats to the company."

Since 2003 — before the iPhone or Chrome existed — Google's default search deals with Apple have helped shape the internet. In 2017, Alphabet CEO Sundar Pichai and Cook were spotted sipping red wine at Tamarine, an upscale Vietnamese restaurant in Palo Alto, while their teams finalized one of the most lucrative arrangements in tech: keeping Google the default on Apple devices.

Eight years later, the same two CEOs are still at the helm — but the dynamics have changed. A new era of search is emerging, driven not by contracts, but by generative AI.

Wall Street analysts have considered the upside if Google stopped writing Apple a $20 billion check and redirected that money into AI and cloud, lifting profits while keeping its dominance intact.

"Let's then assume that Google is limited from paying for search distribution deals, and others can leverage Google's search tech stack, then what other properties can Google prioritize that may fall outside the scope of these cases?" mused Bernstein analysts in April. "Gemini."

Niles said that with Gemini the company has a chance to shift from being seen as lagging in AI to potentially offering the strongest product on the market, a change already showing up in benchmark tests.

Pichai said during the trial that he spoke to Cook about adding Gemini to Apple devices but that integration hasn't yet materialized.

In June 2024, Apple announced the integration of OpenAI's ChatGPT at WWDC. Apple's Cue testified that other AI services like Perplexity and Anthropic could also be added to Safari as options.

But neither can touch Google's scale.

Perplexity reportedly handles 15 million queries per day, compared to Google's 10 billion.

And Pichai said Google isn't standing still, testifying in April that AI will "deeply transform" search. Whether that transformation cements Google's dominance or finally opens the door to rivals is the real test now.

WATCH: Alphabet hits intraday record high on $10B Meta cloud deal, Apple Gemini talks