This Small Apple Business Has Massive Potential

Apple‘s (AAPL -1.07%) services business is getting a shakeup. Specifically, the company is putting a bigger focus on advertising, promoting an executive to head the business and report directly to Eddy Cue, senior VP of services. The bigger push into advertising could help Apple continue to grow the services segment as it faces a challenging environment for its device business.

Advertising is still a small part of services

Apple has attempted to push into advertising for a long time. After its 2010 acquisition of Quattro, it launched the iAd network, but it shut it down in 2016 after minimal success. Still, Apple has grown its advertising business, showing ads in the App Store, News, and Stocks apps. It collected just over $1 billion in ad revenue in 2020, but that grew to $3.7 billion in 2021, according to research from Omdia. That number could climb to $5.5 billion this year.

Apple iPhone 13 lineup in various colors.

Image source: Apple.

By comparison, advertising is still a small portion of the overall services business, which generated sales of $68.4 billion in 2021 and $75.1 billion over the trailing 12 months. At best, advertising accounts for a mid-single-digit percentage of services revenue.

But there’s a lot of room for growth. Apple is benefiting from the changes it made to data sharing on iOS, preventing companies from tracking users across apps. As a result, other companies’ advertising apps, for example, don’t have a good way of tracking how well their ads perform. That’s made Apple’s native App Store search ads more valuable. Additional privacy changes could further benefit Apple’s own ad services over third-party ads.

But Apple’s also diving into video advertising. It’s now streaming Major League Baseball games on Friday nights through Apple TV+, and that content flow includes some ad inventory. It may also acquire the rights to the NFL Sunday Ticket package, which would include a small amount of advertising (although most is retained by the original broadcasters).

There are a lot of immediate opportunities for Apple to grow its advertising business, but there’s big long-term potential for Apple as well.

Apple could become an advertising giant

Apple has a lot of data on its users. It knows what devices you have, where you use those devices, what apps you have installed on each device, and how often you use each app. It might know your health and fitness information if you use those services. It has your payment information, your government ID info, and possibly your personal financial information like your salary and assets.

And it has those data on roughly 1 billion people.

While Apple refrains from using unique personal information to target advertisements, it does segment its user base according to those data and shows targeted ads for each segment. This step of abstraction can help preserve individuals’ privacy but also allows Apple to obtain robust conversion rates for its ads.

Over time, Apple may be able to generate more advertising services that could benefit from its user data and growing ad business. And the change in management, although slight, indicates it may be thinking this way.

One big area Apple may explore is developing a search engine. Google currently accounts for a significant portion of its services revenue. Alphabet (GOOG -1.48%) (GOOGL -1.38%) pays Apple billions of dollars in traffic acquisition costs for making Google the default search engine in Safari — the native web browser for Apple’s devices. 

But there’s concern that regulators could cut down on that practice or that Google may be unable to support continued increases in payments. Apple may eventually be better off competing with Google for search traffic, leveraging its massive user base.

There are other ad-supported opportunities for Apple in the future as well. From video streaming services to in-app advertising, it could become an advertising giant. That said, the same factors applied when it attempted to build up iAds, and that effort didn’t amount to much.

With an advertising business of just $5 billion per year, there are plenty of growth opportunities. Google generated over $200 billion in advertising revenue last year. What’s more, the market continues to grow at a double-digit pace. Apple advertising could be a significant growth opportunity for Apple, and it’s taking steps to make the most of this opportunity.