Hi, everyone. It's Shira. I wrote recently about Amazon.com Inc.'s advertisements tied to people's product searches, and how those are an additional fee levied on the companies that rely on the e-commerce king for sales. Apple Inc. is increasingly wading into similar waters.
Type in "maps" or "football" in the search bar of Apple's iPhone app storefront, and you might see a result for Google Maps or a shoot-'em-up video game shaded in blue and labeled as an ad. Developers pay Apple when someone clicks on those promotions. Apple has been selling those ad spots for several years as a way for developers to stand out in the sea of iPhone apps.
On its quarterly earnings call on Tuesday, Apple said that revenue from these search ads doubled or more in the company's third quarter ended in June. "It's definitely a business that is big and getting bigger," Chief Executive Officer Tim Cook told financial analysts in April.
Remember, though, that some prominent app developers have been complaining about Apple's up to 30% commission on in-app digital purchases, or other terms that those developers believe are unfair. A group of app buyers is pursuing a lawsuit that claims Apple's commissions ratchet up app prices for consumers.
Apple's search ads for apps—like the product search promotions on Amazon—are effectively an additional commission on top of what developers may already be paying. Developers don't need to pay for ads, of course, but some may feel they have little choice.
Bernstein Research analyst Toni Sacconaghi has estimated Apple could eventually generate $3 billion to $4 billion a year from those App Store search promotions and other advertising. That's roughly on par with the revenue Sacconaghi has been expecting from Apple's coming online entertainment service, Apple TV+, which is getting far more attention than those little search ads. Those ads are probably highly profitable to Apple, too.
Developers may believe that buying ads from Apple is more than worth the cost. Developers are used to paying for promotions to nudge people to download mobile games or other apps. For Apple, those ads are a fresh way to make money from a captive audience of roughly 900 million iPhone owners. Apple needs new revenue streams as much of its sales are tied directly or indirectly to the sagging smartphone market.
As with Amazon's advertising business, Apple's app ads expose the company to questions about possible conflicts of interest and price-gouging. Developers may feel they need to pay to promote their apps, or risk a competitor grabbing a top spot instead—or take the chance that Apple's own apps are more prominent. Apple says 84% of apps distributed through its App Store don't pay any commissions to the company. All of those, however, could pay Apple for ads. If developers have to pay more for their apps to get noticed, they may have to charge consumers more.
Some lawmakers such as Elizabeth Warren also have questioned whether Apple's hold over the iOS operating system and the App Store gives the company too much power, and possibly lets Apple give its own apps a leg up. (Apple has said that the App Store has been a boon to many developers, and that Apple doesn't treat its own apps any differently from those of competitors.)
Muscular companies like Apple are now being watched more closely in how they profit from their powerful distribution platforms. There could be a high cost for Apple's fresh stream of app advertising revenue.—Shira Ovide
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