People walk past an Apple store in Shanghai in October.
Hector Retamal/AFP via Getty Images
How ironic it would be if Apple was the next great online advertising sales business.
Apple (ticker: AAPL) certainly has been playing an important role in the online advertising market in recent months, rolling out new rules for iPhones that make it harder to track consumer behavior. The move has created issues for companies—in particular, Facebook parent Meta Platforms (FB)—that rely on data about consumers’ behavior to precisely target advertising.
Meanwhile, Apple itself has quietly built a small but growing ad business. Bernstein analyst Toni Sacconaghi estimates that Apple had ad revenue of about $4 billion in calendar 2021, up from an estimated $300 million in 2017, but well under 2% of the company’s overall revenue.
Most of that ad revenue, he says, comes from ads in the App Store. Apple also generated modest revenue from display ads in its Apple News and Stocks apps.
Sacconaghi also points out that the company indirectly generates an even larger stream of ad revenue from its deal that makes Google the default iOS search engine. He estimates that revenue from that relationship this year could approach $20 billion. On a combined basis, he says, revenue from the Google deal and directly sold ads account for 30% of Apple’s services revenue and more than 40% of gross profits from the services business.
But in a research note, Sacconaghi says there is potential for Apple to take a more aggressive approach. In particular, he thinks Apple can build an “audience network” business that would place display ads inside third-party apps. He points out that Google’s parent Alphabet (GOOGL) already does this for Android apps, generating an estimated $14 billion to $18 billion a year in revenue. Sacconaghi theorizes that Apple could generate $10 billion in incremental revenue over time selling ads on iOS apps.
As Sacconaghi notes, Apple tried this before with a service called iAds, which launched in 2010. The company shut it down in 2016 due to “low fill rates” for its ads.
“Apple’s failure with iAd can be attributed to a confluence of factors, including Apple wanting to maintain a tight grip over the network, creative process and user data, which we believe are less likely going forward,” the analyst writes.
Sacconaghi says that as Apple expands its services offerings, it has more information about users, which allows it to more effectively target advertising. “Apple knows a user’s age, gender, exact device (registered to your Apple ID account),” he points out. “It also knows what topics interest a user (based on interactions with Apple News and Stocks) what music users listen to, what books they read, what shows [and] movies they watch, and what subscriptions a user has. Additionally, Apple has data on a user’s interactions with Ads delivered by Apple’s advertising platform.”
If Apple actually takes this approach, Sacconaghi notes, it would have obvious negative implications for other ad networks — in particular those from both Meta (FB) and Alphabet (GOOGL), but also smaller ad network players like Unity Software (U) and IronSource (IS) that sell ads inside apps.
Apple shares were down 0.3% to $163.43 on Monday.
Write to Eric J. Savitz at [email protected]
