I wrote a piece almost a year ago on Techpinions on the subject of Apple and its advertising products. Today, Jay Yarow posted a piece on a similar subject, but reached a different conclusion, at least in the headline. My piece was actually about the inherent conflict at Apple surrounding ads, and I think Jay’s piece largely has the same theme. I wanted to post a quick update here following some discussion on Twitter on this topic earlier in the day.
Jay’s key point is this:
For 0.3% of Apple’s revenue, Apple’s ad business cuts against what Tim Cook calls one of his company’s “core values.” That makes no sense. Apple should shut down iAd.
I’ve actually made a similar point about Microsoft here, and advertising is actually a bigger revenue stream for Microsoft than it is for Apple, so why don’t I agree with Jay’s conclusion?
The biggest single reason is the role that advertising plays in the TV market, a market that Apple seems very interested in and one it is likely to enter at some point. The chart below shows the contribution of ads as a percentage of revenue for three categories of US TV-related businesses based on a sampling of companies that report this split:As you can see, for each of these sets of companies, ads are over 50% of revenues, and although there’s been a slight drop at the TV stations due to the rise of retransmission fees, it’s still an enormous portion of overall revenue. Now, there are, of course, two prominent video businesses in the US which don’t make any money from ads: HBO and Netflix. But both of them rely heavily on catalog content, mostly movies, with a handful of original series at any given point in time. Neither is a comprehensive replacement for a pay TV service, and both are used largely as complements to, not replacements for, the traditional cable TV bundle. If Apple is serious about getting into video subscription services, it has to offer live, linear programming, and that means ads will be a big part of the business model.
The challenge for Apple is how to embrace this model without compromising its principled stand on advertising. Given the increased focus on targeted advertising, that’s going to get more complicated, but the answer may lie in allowing brands to bring their own consumer data and match it with Apple users, in the way Apple is apparently planning to do with iAd. That way, the targeting is all done by the third party, with Apple only offering to match a user ID with a profile from the third party. This takes all the unpleasant profiling and targeting out of Apple’s hands, while still making its platform useful and attractive to advertisers. That’s a subtle distinction, but it may be a critical one if Apple is serious about TV.