In 2013, Apple (NASDAQ:AAPL) sold about 150 million iPhones and about 70 million iPads. It's probably safe to assume that the vast majority of these Apple customers use their phones to surf the web, and the odds are pretty good that they're using the built-in, Apple-designed Safari browser to do that searching. Apple doesn't have its own search engine, so Google (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT) benefit -- the latter's search technology powers Yahoo! as well. Could Apple develop search to cash in on this large install base of iOS devices?
Doing search is anything but easy...
Building a world-class, global search engine is not easy, and as talented as Apple's engineering teams are, creating one from scratch would require a significant investment and would likely take quite a long time to do properly. Buying a world-class search engine would be impossible unless Microsoft were willing to part with Bing, and even then, it's unclear if Apple would be able to morph Bing into something that provides a better user experience than Google search does today.
Apple could probably monetize its ecosystem in a more natural way...if it wanted to
Extracting ad revenue from an in-house search engine could be an interesting way to juice up the top and bottom lines, But it's not at all clear that it would be as lucrative a venture as one might initially expect, given how much money Google makes every year from ad revenue. Indeed, a look at Microsoft's profit and loss by division for the first quarter of 2014 shows that the company's online services division lost $321 million in the quarter. That's a far cry from the bags of cash that Google takes in each year from search and its related services.
That being said, there is probably still real opportunity for Apple to fairly painlessly monetize its software ecosystem with ad revenue. However, the approach that Apple seems to be taking with its software is to essentially use it to sell very high-margin, high-priced hardware. In short, the reason customers are willing to pay a premium for Apple products over an Android-based competitor's is the richness of the software that Apple provides for free with the device.
Foolish bottom line
As long as Apple can maintain or grow device share in its high-end corner of the market, then it will be clear that Apple's value-add via free software will continue to be the right way to go forward. However, if that growth really does dry up, then Apple will probably look to start monetizing its ecosystem more aggressively via ad-based services. At any rate, the iOS 8 launch, which should presumably happen at some point before the iPhone 6 launch, will give investors a glimpse into what Apple's longer-term strategy is.
Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends Apple, Google, and Yahoo!. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.