Apple's Not-So-Secret Weapon

The tech press is marveling at FaceTime, the dirt-simple videoconferencing tech built into Apple's (Nasdaq: AAPL  ) new iPhone 4. I can't blame them -- it's a bit thrilling to feel like you're living that much closer to The Future. (Now get cracking on the iJetpack, guys.) But a much less ballyhooed introduction at CEO Steve Jobs' keynote address on Monday could have an equally big effect on Apple's future -- while taking a serious poke at Google's (Nasdaq: GOOG  ) bread and butter.

Apple's upcoming iOS4 will include support for iAds -- interactive ads from big-name customers that developers can easily incorporate in the software they sell via Apple's App Store. Starting July 1, tapping on an ad within a given app will bring up video and interactive content from the likes of Best Buy (NYSE: BBY  ) , Disney (NYSE: DIS  ) , and Nissan, whose ad for the forthcoming Leaf electric car got the spotlight in Jobs' on-stage demonstration.

Internet advertising is Google's main revenue source, and while iAds won't compete with the search giant's iron-fisted rule of text-based keyword ads, they do represent a serious threat in the emerging realm of mobile advertising. The iAds are a brilliant move for Apple for several reasons:

  • They keep developers loyal to the iPhone. Developers will get 60% of the revenue for ads in their apps, with Apple pocketing the rest. Many coders are already making piles of money from successful iPhone apps. Even if iAds only slightly increase that wealth, they'll provide yet another incentive for programmers to make their apps first (and perhaps only) for the iPhone.
  • They won't annoy users. (Much.) iAds don't automatically take over your app. They won't run at all unless you tap on them. Bored with the first few seconds of video? You can close the ad and get back to, say, beating your Peggle high score at any time. Keeping users firmly in control of the experience helps Apple prevent a backlash from grumbly iPhone devotees -- leaving users plenty of time to continue complaining about AT&T's (NYSE: T  ) allegedly lousy network service.
  • They're worth more to advertisers. Since users can ignore or opt out of the ads whenever they like, ad buyers know that those who stick around really got the message. That gives advertisers greater bang for their buck -- and could allow Apple to charge a premium over time. And let's not forget that the iPhone's typically young, upscale, well-educated, disposable-income-heavy user base is a dream demographic for just about anyone trying to sell stuff.

Thus far, Internet ads have belonged to Google. But as more of our browsing and computing moves from our desktops and laptops into our hip pockets, Apple could rule the future of online ads. That's a big threat to the search engine monolith and yet another reason for Steve Jobs to smile.

Apple, Best Buy, and Disney are Motley Fool Stock Advisor picks. Best Buy and Disney do double duty as Motley Fool Inside Value selections. Google is a Motley Fool Rule Breakers pick. The Fool owns shares of Best Buy. Motley Fool Options has recommended a bull call spread on Best Buy. Try any of our Fool newsletter services -- some of which haven't recommended Best Buy, even! -- free for 30 days.

Fool online editor Nathan Alderman also impatiently awaits the invention of teleportation and flying cars, but could do without food pills. He holds no financial position in any company mentioned here. The Fool's disclosure policy can't be easily dismissed.


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