Google’s $20bn Safari deal in jeopardy as Apple eyes AI-powered search rivals

Why Did Google’s Stock Drop Over 9% on May 7?

Alphabet Inc. (NASDAQ: GOOGL) witnessed a sharp sell-off on May 7, 2025, as its stock tumbled more than 9% to close at $151.66. The drop followed high-stakes courtroom disclosures from a U.S. Department of Justice antitrust trial, where Apple Inc. executives indicated that the company is actively evaluating artificial intelligence-based search engines as potential alternatives to Google in its Safari browser. The implications of this development go beyond mere competitive experimentation—it threatens a cornerstone of Google’s search dominance and advertising business.

Apple’s Senior Vice President of Services, Eddy Cue, testified that the company had observed a marked decline in Safari-based searches during April 2025, attributing the trend to the rapid adoption of generative AI tools such as OpenAI’s ChatGPT. He confirmed that Apple is now considering integrating AI-driven search platforms from emerging players like Perplexity AI and Anthropic into Safari, a move that would alter the default search dynamics in one of the world’s most used browsers.

What Is the Strategic Importance of Google’s Deal with Apple?

For Alphabet, the default search status in Apple’s Safari browser has long been a high-value strategic asset. According to filings disclosed during the antitrust proceedings, Google has been paying Apple up to $20 billion annually to maintain its privileged position on iPhones, iPads, and Macs. The deal not only ensures Google Search remains the default engine for hundreds of millions of Apple device users globally, but also helps Google retain a dominant share of the mobile search advertising market.

This lucrative arrangement has become central to the U.S. Department of Justice’s broader antitrust case, which accuses Alphabet of maintaining a monopoly in the search market through exclusive contracts that suppress competition and limit consumer choice. By potentially moving away from Google, Apple could dramatically shift the balance of power in the digital advertising and search ecosystem.

How Could Apple’s AI Search Plans Impact the Broader Market?

Apple’s consideration of generative AI search integrations reflects an industry-wide shift where traditional keyword-based search is being challenged by conversational AI platforms. Apple’s openness to replacing or supplementing Google Search suggests that generative AI tools are no longer fringe technologies, but credible alternatives for mainstream information retrieval.

Perplexity AI and Anthropic, the two start-ups reportedly under consideration by Apple, have developed AI search interfaces that answer user queries directly, rather than serving up ranked web links. These platforms leverage large language models (LLMs) to deliver concise, contextual answers, a feature that is increasingly attractive to users who prioritise efficiency and relevance.

Should Apple implement such AI-based search capabilities natively in Safari, it would mark one of the most high-profile departures from traditional search models since the rise of Google itself. For Alphabet, this threatens not only user volume but also ad revenue, as conversational AI currently lacks an established monetisation framework comparable to Google’s pay-per-click search advertising.

What Are the Implications for Alphabet’s Search and Ad Businesses?

Google’s core advertising business is heavily reliant on search traffic, particularly mobile traffic from Safari users. Losing this traffic source—or even facing reduced query volumes—could materially impact Alphabet’s revenue. Analysts estimate that nearly 15% of Google’s total search ad revenue originates from Safari-powered queries on Apple devices. The risk of default search displacement could result in significant revenue and margin pressure in subsequent quarters.

Institutional investors responded sharply to the perceived revenue risk, triggering a broad-based sell-off in Alphabet stock. Market watchers noted elevated volumes during the trading session on May 7, with the decline reflecting heightened sensitivity to Apple’s strategic intentions in the post-LLM AI era.

How Are Investors Interpreting the Risk?

Sentiment around Alphabet Inc. turned negative following the trial testimony, with analysts raising concerns about Google’s long-term resilience in a world where AI agents and chatbots could become dominant entry points for online information. The stock’s 9% drop was accompanied by a shift in options market activity, indicating that institutional investors were repositioning to hedge further downside risks in the short term.

Sell-side analysts from several investment banks issued notes lowering near-term price targets for Alphabet, citing the possibility of Apple curtailing or terminating its default search deal. While no final decision has been announced by Apple, the uncertainty alone is expected to affect Alphabet’s valuation multiples, especially given its reliance on stable ad revenue streams.

Meanwhile, Apple’s own shares also dipped modestly—by up to 2.5%—on the same day, suggesting that investors may be cautious about any technology transition that could disrupt user habits or result in costly implementation challenges. However, some market participants also interpreted Apple’s move as a signal of its ambition to deepen its AI integration across products and services, potentially enhancing its long-term value proposition.

Could Apple Trigger a Larger Shift in Search Market Dynamics?

The prospect of Apple abandoning Google as its default search provider has opened a broader conversation about the viability of new AI search competitors. If Apple were to fully back platforms like Perplexity AI or Anthropic, it could accelerate the development of alternative search ecosystems and potentially encourage other device manufacturers or software platforms to explore similar changes.

This would have a profound effect on the overall digital advertising landscape, possibly reducing Google’s ad targeting scale while increasing fragmentation in the search ad market. It also presents an opportunity for AI startups to scale quickly by securing large distribution partnerships—an opportunity that has historically been out of reach due to Google’s dominance and existing contracts with OEMs.

What’s Next for Alphabet and Apple Amid This AI Search Disruption?

With regulatory scrutiny increasing and technology models evolving rapidly, Alphabet and Apple now find themselves at a pivotal juncture. For Alphabet, maintaining search leadership may now depend not only on regulatory outcomes but also on its own AI development capabilities. The company has invested heavily in Bard and Gemini, but has yet to deploy them as default search interfaces at scale. The pressure to innovate will likely intensify.

For Apple, the move to explore AI-powered search aligns with its broader push to infuse generative AI across its ecosystem. Reports suggest that Apple’s upcoming operating system updates will feature deeper AI integration, possibly including AI agents and enhanced voice assistants. While the transition may not happen overnight, the fact that Apple is publicly considering alternative search partnerships signals a significant strategic shift.

Investor Outlook and Institutional Flows

Following the sharp drop in Alphabet’s share price, market sentiment has shifted to caution, with analysts largely recommending a “Hold” rating pending further clarity from Apple. The stock’s Relative Strength Index (RSI) entered oversold territory intraday, reflecting a near-term overreaction but also signalling broader structural concerns around Alphabet’s search revenue dependency.

Institutional flows on May 7 showed net outflows from Alphabet’s large-cap tech ETFs, including QQQ and XLK, indicating broad portfolio-level adjustments by asset managers. Conversely, minor inflows were observed in AI-focused thematic ETFs, particularly those holding early-stage stakes in AI-native companies like Anthropic.

The coming weeks are expected to bring further volatility as investors await additional disclosures from the DOJ trial and any public confirmation from Apple regarding AI integration timelines or search engine transitions. Until then, Alphabet’s valuation may remain under pressure, driven as much by perception risk as by any immediate financial loss.