By Aditya Soni

Aug 6 (Reuters) - Apple's ( AAPL ) lucrative deal with

Google could be under threat after a U.S. judge ruled

that the Alphabet-owned search giant was operating an illegal

monopoly.

A potential remedy for Google to avoid antitrust actions

could involve terminating the agreement, which makes its search

engine a default on Apple ( AAPL ) devices, Wall Street analysts said on

Tuesday.

Google pays Apple ( AAPL ) $20 billion annually, or about 36% of what

it earns from search advertising made through the Safari

browser, for the privilege, according to Morgan Stanley

analysts.

If the deal is undone, the iPhone maker could take a 4-6%

hit to its profit, the analysts estimated.

The pact runs until at least September 2026 and Apple ( AAPL ) has

the right to unilaterally extend it for another two years,

according to media reports in May that cited a document filed by

the Department of Justice in the antitrust case.

"The most likely outcome now is the judge rules Google must

no longer pay for default placement or that companies like Apple ( AAPL )

must proactively prompt users to select their search engine

rather than setting a default and allowing consumers to make

changes in settings if they wish," Evercore ISI analysts said.

Apple's ( AAPL ) shares were trading flat on Tuesday, underperforming

a recovery in the broader market after Monday's global selloff.

Alphabet was little changed, after falling 4.5% in the previous

session.

"The message here is that if you've got a dominant market

position with a product, you'd better avoid the use of exclusive

agreements and make sure any agreement you make gives the buyer

free choice to substitute away," said Herbert Hovenkamp, a

professor of law at the University of Pennsylvania.

To be sure, the "remedy" phase could be lengthy, followed by

potential appeals to the U.S. Court of Appeals, the District of

Columbia Circuit and the U.S. Supreme Court. The legal wrangling

could play out into 2026.

AI TILT

Still, if the tie-up is scrapped, Apple ( AAPL ) will have several

options including offering customers alternatives such as

Microsoft Bing to customers, or potentially a new search product

powered by OpenAI.

Analysts agree that the ruling will speed up Apple's ( AAPL ) move

towards AI-powered search services. It recently announced that

it would bring OpenAI's ChatGPT chatbot to its devices.

In a shift away from exclusive deals that would help Apple ( AAPL )

ward off regulatory scrutiny, the company has said it is also in

talks with Google to add the Gemini chatbot and plans to add

other AI models as well.

Apple ( AAPL ) is also revamping Siri with AI technology, giving it

more control to handle tasks that had proven tricky in the past

such as writing emails and interacting with messages.

While those efforts are expected to make little money in the

coming years, they could help capitalize on the new technology.

"Apple ( AAPL ) could see this as a temporary setback, especially

since it earns a lot from the Google search deal, but it is also

an opportunity for them to pivot to AI solutions for search,"

said Gadjo Sevilla, analyst at Emarketer.