How Apple Plans to Devalue the Internet
TL/DR:
Apple’s struggle to provide big-data services like the AIs recently presented by Google and Facebook have led to concerns that Apple could be destined for a similar fate to BlackBerry maker RIM. In this post, I wanted to present an alternative version of how the next iteration of the web might unfold. Apple definitely has a plan. Apple’s focus on privacy and ad-blocking is its attempt to transition value from the web towards its own iOS platform by undercutting the feasibility of targeted advertising. The value of Facebook and Google is predicated on the value of their underlying data. If Apple can devalue that data, then it can potentially turn the entire industry on its head. If Facebook and Google’s bet on AI is considered a “big if”, then Apple’s bet that it can devalue the web should be considered a titanic if. The most probable outcome is assuredly somewhere in the middle, but it’s always fun to play devil’s advocate.
On April 26th, 2016, Apple reported its first quarterly revenue decline in 13 years. During the quarter, Apple sold 10mm fewer iPhones than it did in the previous period, leaving analysts questioning how the company would grow in the future. The future of Apple’s competitors is much more well defined. Two weeks before Apple reported, Facebook enabled AI based chat bots on its messenger platform[i], and two weeks after Apple’s announcement, Google unveiled its own conversational AI assistant[ii].
The primary difference in strategy between Apple and its competitors is data. Whereas Google and Facebook actively seek more data from users to sell ads and build better services, Apple actively avoids it. Apple’s own “AI” assistant, Siri, must make its recommendations based on local data, which limits its capabilities. Apple believes its products, not its customers are “the product”[iii], and as such has chosen not to leverage customer data to the same degree as Facebook and Google.
This approach puts Apple at a disadvantage in providing the big-data services that are the future of the web, which has resulted in comparisons to RIM[iv]. Given the importance placed on possessing data in the networked economy, the prospects of Apple becoming RIM seem surprisingly realistic. Of course, Apple is not standing by idly. Apple is laying the foundation for what will become a full scale assault on the value of the web and the fundamental business models of its competitors.
In 2015, iOS 9 introduced an extension to Safari that allowed third party apps to block advertisements and trackers on all web-sites. Though advertised as a way to speed-up web-browsing that had become slowed down by adtech scripts, the real purpose of this feature was to “devalue” the web[v]. Ad-blockers reduce the number of ads than can be sold by companies like Google and Facebook. Less than 15% of browsers have ad-blockers installed, but the advertisements they eliminate still cost Google an estimated $3.1 billion in annual revenue[vi]. Apple’s Safari browser represents a majority of all mobile web-traffic[vii], which means Apple’s enabling of ad-blockers could cost companies like Google and Facebook billions. Blocking web based ads also has positive effects for and OS based company like Apple.
By blocking ad revenue on the web, Apple is enticing content providers to steer traffic towards either apps downloaded from Apple’s own app store or Apple’s own content publishing app “Apple News”, which are all immune to ad-blockers. Within the Apple News app, publishers can receive 100% of ad revenue for advertisements they sell themselves, or receive 70% of ad revenue for advertisements that Apple sells for them[viii]. Most importantly, advertisements in the Apple News app are not targeted, which makes them much less effective and therefore much less valuable to companies like Google.
The benefits of this strategy are relatively straightforward. For every ad that Apple is able to block outright or shift to iOS, it directly reduces the revenue of its competitors, which has a real impact on the viability of their business models. When Apple announced its ad-blocking technology in 2015, targeted ad seller Criteo saw a 7% single day drop in its stock price[ix]. There is also the more intangible benefit that Apple could receive if it is able to shift the demands of customers towards a more private, ad-free internet. Apple actively maintains a website that explicitly states how it uses and protects customer information while simultaneously contrasting its practices to those of its competitors[x]. If Apple can persuade its customers to demand a more private internet, content publishers will be forced to move away from targeted ads and the companies that enable them.
Of course, Apple is facing resistance to this strategy. In response to the growth of ad-blocking users, many major publishers and content providers are restricting users who use ad-blocking technology from accessing their content[xi]. Though much remains to be seen, it appears that an ad-blocking strategy could be successful. Companies that restrict ad-blockers appear to see a concurrent drop in Alexa ranking[xii]. While these findings are not empirical (and are based on an imperfect metric), it is not far-fetched that consumers would rather seek an alternative site than turn off ad-blockers much in the same way they seek alternative sites when confronted with pay-walls.
This could be an excellent strategy for Apple. Instead of playing a game it can’t win (the web), Apple is shifting value towards the game it dominates (OS). Apple has had success rewriting the rules before and its strategy with web publishers is quite reminiscent of its strategy with music publishers. At the time the iTunes music store was released, music publishers were desperate to stop the pain inflicted by piracy and the digital revolution. They accepted a deal that allowed Apple to sell their valuable singles for only $0.99[xiii]. The deal ultimately proved unsustainable for music publishers, which allowed Apple to re-negotiate its terms to eliminate DRM and gain the right to distribute music over 3G for its newest product — the iPhone[xiv].
Today, Apple is recognizing the similar plight of web publishers and is deciding to twist the knife with ad blockers while simultaneously offering salvation with blocker-free Apple News. Like with piracy and iTunes, Apple is offering a viable way for content owners to charge for content that consumers wish to have for free. The system is not perfect however as it still allows competitors like Google to generate ad revenue through the platform. I believe that once Apple has made web publishers, who are not the enemy, dependent enough on the News platform, it will offer publishers a way out of the ad based web platform that has crushed their profits over the last decade. Apple will allow publishers to charge for content the same way it allowed music publishers to charge for music, and in exchange, it will require that content publishers eliminate the targeted ads that currently sustain Apple’s chief competitors. If Apple is able to pull this move off, Google and Facebook will be required to rethink their own visions of the future lest they become RIM themselves.
[i] The Verge, http://www.theverge.com/2016/4/12/11395806/facebook-messenger-bot-platform-announced-f8-conference
[ii] The Verge, http://www.theverge.com/2016/5/18/11699122/google-allo-messaging-app-announced-io-2016
[iii] Business Insider, http://www.businessinsider.com/tim-cook-on-apple-pay-you-are-not-our-product-2015-2
[iv] Marco Arment, https://marco.org/2016/05/21/avoiding-blackberrys-fate
[v] Wired Magazine, http://www.wired.com/2015/06/apples-support-ad-blocking-will-upend-web-works/
[vi] Pagefair, https://pagefair.com/blog/2015/google-losing-billions-adblock-devils-deal/
[vii] Wired Magazine, http://www.wired.com/2015/06/apples-support-ad-blocking-will-upend-web-works/
[viii] Wired Magazine, http://www.wired.com/2015/09/apple-taunting-publishers-ad-blocking-apple-news/
[ix] Fortune Magazine, http://fortune.com/2015/06/11/apple-ad-blocker-criteo/
[x] Apple, http://www.apple.com/privacy/approach-to-privacy/
[xi] Mashable, http://mashable.com/2015/09/12/passive-agressive-ad-blockers/#8B_FUMMoBSqd
[xii] Alexa via The Stack, https://thestack.com/world/2016/04/21/sites-that-block-adblockers-seem-to-be-suffering/
[xiii] CNN, http://www.cnn.com/2013/04/26/tech/web/itunes-10th-anniversary/
[xiv] NYT, www.nytimes.com/2009/02/02/business/media/02apple.html