Concerns about Apple’s potential advertising business

Ad expansion rumors

Usually when many sources are aligned on an Apple rumor the week before an event, they’re at least somewhat on track. Never believe an analyst (except Ming Kuo-Chi, who continues to absolutely kill it), but “sources” were aligned on the announcement of big things like the iPhone, and small, like Siri.

Putting the years of iTV and months of iWatch rumors to the side, there seems to be some consensus that Apple will launch additional advertising products next week, either as part of a music service dubbed “iRadio” or other expanded iAd functionality like an ad network – maybe both.

This would be big news

This is not the consumer product type of big news we’re accustomed to from Apple, but rather big news about Apple’s strategy. In Apple’s 30-year history, it appears that less than 0.02% of their revenue has come from anything other than commerce (people paying for stuff). By all indications, iAd revenue is well less than $1 billion total over the 3 years since its launch,* while Apple has over $500 billion in all-time revenue – nearly $156 billion in 2012 alone.

Among competitors like Google, Facebook, Microsoft, and even Amazon, Apple is the only company that makes nearly all of its money from selling things to people. Call me old fashioned, but I appreciate the simplicity – dare I say purity – of that business model.

You could argue that diversification of revenue sources is a good sign for a dividend-issuing, stable company – in a way that might not be so necessary for a company with explosive growth. Maybe it is, but it makes me uneasy. Apple has always optimized for just one thing: the experience for end users.

Paying developers benefits users

I’m sure Apple’s party line is that their mobile advertising business indirectly does optimize the user experience by ensuring the most and the best developers make software for iOS. Here is Tim Cook’s response to Walt Mossberg’s question about how important mobile advertising is to Apple, from last week’s D11 conference:

We got into it to make money for developers, not for us. It’s still important…we want developers to make money. In March, iOS developers were drawing three times more than on Android. If we can help in advertising, I’m interested in that.

It makes sense Apple wants to help developers make money to ensure iOS has the best software experience. But I’m not convinced that’s the best thing Apple can do for the user experience.

Why Apple’s ad business expansion worries me

Three reasons:

(1) Ads directly compromise the user experience, even if they indirectly enhance it (and even if iAds are the best ad experience possible, they’re still ads). Simply put: ads, no matter how good or relevant, are not the reason people open apps or use services. They distract from the purpose.

(2) The advertising business could become distracting for Apple if it becomes a revenue pillar. Hear me out: Apple has always had behavioral data about its users that could build an exceptional ad targeting business. But privacy (more importantly perceived privacy –see below), and simplicity of user experience has always been worth more to Apple than the potential of an advertising revenue stream. As crazy as it might seem, my concern is that Apple’s ad business could be too successful, and therefore become a pillar of Apple’s business. Developers do make 70% of the iAd sales dollars, but that’s the same portion as they receive from App Store sales – which contributes to the $20 billion per year iTunes business. iTunes is a service for users that enhances the hardware experience and also makes money through commerce – selling stuff to people. At $20 billion,it has most certainly become a 4th pillar of Apple’s business (Mac, iPhone, iPad, iTunes) and there’s no reason iAds couldn’t follow the same path.

(3) Leveraging user data to target ads compromises one of Apple’s key differentiating propositions versus their hardware and software competition: privacy. Anecdotally I can attest that there are still many people who want Internet services at their fingertips but also want to feel like their location, contact information, and other personal data is protected. Apple devices are really the only option for someone with that desire. There’s a reason Apple is trusted with over 500 million credit card numbers – 300 million more than second-place Amazon.

It’s not all bad

From the marketer and economist points of view I can see the benefits of an expanded Apple advertising program:

(1) Growing the overall app economy

(2) Lowering app prices for users

(3) Expanding the “ads that don’t completely suck” sector – which is a small but growing slice of digital advertising

These are largely macro-economic or macro-cultural benefits. The only benefit to Apple would be improvement of the Apple ecosystem through developer support and lower cost apps. Developer support may be lower than it used it be, but as Tim Cook said, iOS developers still make 3x more than Android developers.

99.98% of Apple revenue can be attributed directly to the end user experience

I’m not convinced the potential increase in developer support is worth even the smallest risk of compromising the end user experience that drives their core business. And the risk doesn’t seem all that small.

Ads never enhance the user experience. At best, they avoid ruining it.

*The only non-hardware product line Apple reports financials for is called “iTunes/Software/Services.” This is the only reasonable place to believe iAd revenue is reflected. As a whole, that product line accounted for $4.1 billion in revenue in the most recent quarter reported (Q2 2013). By Horace Dediu’s calculations, $4 billion of that $4.1 billion is generated through selling content: Apps, Music, Videos, Books, and Apple’s Software. He therefore calculates that the remaining $100 million is from “services,” which must include iAd sales, in addition to iCloud storage additions.