The first rule of corporate culture is to press every competitive advantage, and Apple is doing exactly that with digital advertising.
Apple changed the rules in April for ad companies targeting iPhone and iPad users. Now, its internal ad business has tripled and is on track to do $5 billion in revenues in 2021.
It’s totally unfair, but Apple is doing what’s best for its shareholders.
• Many investors might be surprised that Apple has an advertising business at all. Newsflash: It’s thriving.
Executives abandoned iAd in 2016 when it became clear digital ad buyers favored Alphabet and Facebook …
And, avoiding ads was totally on-brand for Apple.
In January, CEO Tim Cook appeared at the International Data Protection and Privacy Conference in Brussels and delivered a scathing rebuke of what he called “surveillance capitalism.”
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Cook said that companies were tracking users all over the internet and selling their personal information, and he urged legislators to intervene to protect consumers’ privacy.
• Then Apple made its move.
The Cupertino, Calif.-based company implemented big changes in April to iOS 14.5, the operating system governing the way iPhones and iPads work.
First, users were opted out of advertising tracking by default. Other changes made it impossible for ad sellers like Facebook and Google to provide real-time data about how users were responding to ads.
Details that were once instantaneous became delayed up to 72 hours, according to a report last week in the Financial Times.
This development seemed like a victory for privacy, at least on iOS.
Except, Apple Search Ads — its in-house ad selling business — is immune from those changes.
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The Financial Times noted that Apple Search Ads now accounts for 58% of all app downloads that are the result of clicking on an ad — up from only 17% before the operating system changes.
Analysts at Evercore ISI said Apple significantly altered the landscape for mobile app advertising. Researchers at the investment firm now expect Apple to earn $5 billion this year, and $20 billion within three years as a result.
• It’s a business that was created out of thin air. Better still, there is no competition on the horizon.
But there are some problems arising, as some ad buyers are refusing to spend on iOS.
The Wall Street Journal reported in July that ad rates for Android operating system devices have surged. Rates in July earned a 30% premium over iOS. And overall, Android comprises 72.8% of the global smartphone market, versus 26.4% for iOS.
However, this isn’t overly concerning...
For starters, iOS users are typically more affluent. In the U.S., active iPhone users spent a whopping $138 during 2020 on in-app purchases, up 38% from 2019, according to research from Sensor Tower.
To target those users effectively, ad buyers must use Apple Search Ads. Only Apple has access to a user’s Apple ID, a unique set of data points that contains all of that member’s personal information.
• And only Apple knows what apps that member has installed.
Moreover, Apple Search Ads provides near real-time data and so-called retargeting for tracking purposes. That’s a considerable advantage over third parties that must adhere to Apple’s app tracking transparency framework.
• Fairness aside, investors should see opportunity.
The power of Apple’s business model is its dominion over the ecosystem. Apple product owners are fiercely loyal, often ignoring innovative products and services offered by other companies. Taking market share in digital ads is the logical extension of the ecosystem.
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Apple shares trade at 28.3 times forward earnings and 6.9 times sales. Those metrics certainly don’t reflect the growth potential in digital ads.
Longer-term investors should consider buying Apple shares into any near-term weakness.
At the time of this writing, AAPL is trading at $145.40.
Best,
Jon D. Markman
