June 4, 2023

Enterprise JM

Do the Business

Apple’s ad business is likely doing more harm than good

Apple’s ad business generated around $4B in the company’s last fiscal year. That’s a lot of money, of course, but I think there’s a risk that ad sales are doing more than $4B’s worth of damage to the company.

Let’s start by putting that number into context. By most standards, it’s a huge sum of money. It’s as much as AstraZeneca made from a year’s worth of COVID-19 vaccines, for example. But for Apple, it represents around 1% of its annual revenue for the year …

Still, if it were “free money” – money the company can simply hold out its hand and take, without any downside – then of course Apple would be crazy not to take it.

But I’d argue that’s not the case. It’s becoming increasingly clear that the money is anything but free: It comes at the cost of a growing level of reputational harm.

Apple does seems to be realizing this. While earlier reports suggested that Apple was seeking to triple its ad revenue, a fresh one yesterday indicated that the company is now taking a more cautious approach.

That’s a step in the right direction, but I honestly think there’s a good case for Apple to exit the ad business altogether – for three reasons.

The ad business is risky

In the print days, the ad sales model was simple. A newspaper or magazine offers to sell ad slots, companies buy them, and submit their ads. The publisher knows who they are selling to, so can turn down ads from sketchy companies, and they get to see the ad artwork before publication.

Online advertising is a very different business. Some direct sales are made, but most ads are sold through ad networks, like AdRoll. A web publisher does a deal where ad networks can sell space on their websites. The publisher doesn’t know who is buying those ads, or what the ads are for.

Indeed, with programmatic advertising, not even the ad network may know who is buying a particular ad slot. It’s an automated process where advertisers’ computers make offers of how much they will pay, and publishers’ computers make offers of how much they will accept, and matches are made without human intervention. In some cases, an ad slot can be sold a fraction of a second before it is displayed.

The best a publisher can do is partner with respectable networks. Even so, some sketchy ads will make it through, and require manual removal.

Apple has already suffered from this. When the company offered two new ad slots in the App Store, developers quickly found that ads for gambling apps were being shown alongside their own, unrelated apps. In at least one recent case, an ad for a gambling app was shown alongside RecoverMe, an app to help gambling addicts escape their addiction.

If you’re a publisher, and ads are what pay the bills, this is an occupational hazard. But if you sell premium hardware, and ad revenue is just a very small drop in a very big ocean, it seems an entirely unnecessary risk.

It opens up new antitrust actions

When Apple introduced App Tracking Transparency – which obliges app developers to ask permission before collecting the data needed to display personalized ads – that was widely welcomed by the company’s customers.

Developers objected, however, as free apps paid for by in-app ads, saw a sharp drop in income. This is because generic ads are worth substantially less money than targeted ones. Facebook owner Meta was particularly vocal, claiming that not only was this damaging its own ad business, but that Apple was harming small businesses, by making their ad spend far less effective. Nobody believed Facebook cared about anything other than its own business, but the accusation was out there.

So far, no problem. But when Apple launched App Tracking Transparency and then started boosting its own ad sales, it left the company vulnerable to accusations that it was deliberately making in-app ads less attractive in order to give its own ad business an unfair advantage. All the more so when Apple doesn’t ask permission for tracking within its own apps.

Unsurprisingly, this has led to the company facing antitrust investigations on yet another front. This is really the last thing Apple needs.

Worst of all, Apple loses a USP

A unique selling point for Apple used to be that the company served the interests of its customers, not advertisers. CEO Tim Cook made this point on more than one occasion:

When an online service is free, you’re not the customer. You’re the product.

That’s a powerful selling point when compared to companies like Meta and Google.

But now it’s true for Apple too. Apple may use you as a product far less frequently than its competitors, but it still does so. That turns a black-and-white difference into more of a gray area.

“What happens on iPhone, stays on iPhone” is a powerful message. “What happens on iPhone, mostly stays on iPhone” not so much.

Now, personally, I do broadly believe Apple’s privacy promises. But that’s not the point. Now Apple customers have to decide for themselves whether the company is truly different to companies like Google, or whether it’s just a matter of degree – that Apple is merely less worse than Google.

A report in The Information yesterday didn’t help. It describes how Apple’s ad sales business does the same thing as competitors – like selling targeted ads, and allowing companies to sell ads in searches for competitor products – but uses softer language to describe that fact.

Instead of using the term “targeting” to describe the company’s ability to deliver Apple search ads tailored to users’ tastes, Apple asks its ad sales reps to say “audience refinement,” according to three people familiar with the business […]

Also out is “conquesting,” referring to the practice of an advertiser buying ads that show up whenever users search for rival brands, the people said. “Competitor keywords” and “brand defense” are acceptable substitutes.

That just makes Apple look hypocritical.

Apple’s ad business is just not worth it

All this for 1% of additional revenue? It’s just not worth it. And the more Apple grows its ad revenue, the worse the problem becomes.

Ultimately Apple is putting its brand reputation on the line by criticizing ad-driven business models like those of Facebook, while at the same time doing exactly the same thing, just on a smaller scale.

If I were running Apple, I’d close down the ad business altogether. Get back to being the company that safeguards customer data completely – not just mostly, in the pursuit of a bit more cash.

That’s my view; what about yours? Please take our poll, and share your thoughts in the comments.

Photo: Rishi/Unsplash

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