At face value, Apple's (NASDAQ: AAPL) hard-line stance on privacy would seem to conflict with advertising business models. CEO Tim Cook has said on numerous occasions that users are the product for advertising companies, not whatever online software or services those companies may offer for free. The Mac maker had previously dabbled in mobile ads with iAd, a mobile ad network built with its 2010 acquisition of Quattro Wireless, primarily as a way to help developers better monetize their apps and content. Apple shut down iAd at the end of 2016.
That may be why some investors could be surprised to hear that advertising could soon be a multibillion-dollar business for Apple.
The App Store now has millions of apps. Image source: Apple.
The Search Ads business is just two years young
Bernstein analyst Toni Sacconaghi has put out a research note (reported by CNBC) that predicts App Store Search Ads will bring in $500 million in revenue in 2018, before soaring to $2 billion in revenue by 2020. Apple could easily end up generating more than that, as Sacconaghi considers his estimate to be "conservative." To put the $2 billion estimate into context, that would be about as much revenue that Apple Music brought in last year, according to Sacconaghi's estimates, except far more profitable.
Search Ads are a fairly new business for Apple, launching in the App Store back in late 2016. Developers can purchase ads that show up at the top of App Store search results. In line with prior reports, Apple also added a pay-per-install ad product -- an extremely popular mobile ad format -- in 2017, where developers only pay when the user downloads the advertised app.
Apple approaches its ad load fairly conservatively, only displaying a single ad on the first page of search results within the App Store. Additionally, Apple does not offer Search Ads in all markets. Geographical expansion (particularly in China) and increased ad load could help that business grow significantly going forward, in Sacconaghi's view.
These ads are different
Given Apple's fundamental disdain of advertising, it's worth noting how Search Ads don't violate its privacy principles. While the company does allow Search Ads to be targeted to users based on various criteria, Apple does not share or sell individual user data to advertisers or third parties. Apple doesn't track users, and users can also opt out of targeted ads. You won't suddenly see display ads creepily following you around the internet based on what you search for or click on in the App Store.
Apple also won't display any ads to minors under 13 years old, or to accounts that are managed for educational organizations. Only approved App Store content -- which has already been vetted through the company's review processes -- can be advertised, so users won't see inappropriate content.
In other words, Search Ads have a very narrow and well-defined purpose of content discovery exclusively within the App Store. With as many apps as there are in the App Store (over 2 million), the importance of content discovery cannot be understated. Apple is pulling on numerous levers in its effort to grow its services business to around $50 billion by 2020, and Search Ads is one of the more inconspicuous ones.
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Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.