Apple's (AAPL 0.20%) making a big push into advertising, and it might reach its long-term goal in just a couple of years.
Earlier this year, VP of Advertising Todd Teresi said he wants to get the ad business generating double-digit billions of revenue for the tech giant. That's a big step up from the roughly $4 billion it was estimated to have generated in fiscal 2021. A new estimate from Insider Intelligence, though, puts the company's global annual ad sales at $10.7 billion by the end of 2024.
Here's what's driving the rapid advertising growth, and what it means for investors.
A billboard in your pocket
Apple has made several changes over the last year or so that have fueled significant growth in the advertising business.
Last summer it instituted App Tracking Transparency in iOS 14.5. After iPhone owners upgraded their devices, they were continuously asked if they'd like for their various apps to be able to gather data from all of their activity on their iPhone. Unsurprisingly, the vast majority said they would not like that.
As a result, it became a lot more difficult for companies like Meta Platforms to track how well their ads convert and gather important targeting data for their advertisements. That made it hard to justify the top dollar marketers were paying for ads on Facebook and Instagram or other social media companies.
Ad dollars flowed out of social media, and some of those ad dollars flowed into Apple's pockets. Apple's App Store search ads presented much better value after it became impossible to track how well app-install ads converted on other platforms.
As those ads became more valuable, Apple also moved to expand its ad inventory. It started showing ads on more surfaces within the App Store app like "today" and third-party app pages. It also shows ads in the stocks and news apps. Apple has mulled several more places it could stick advertising products, including maps, podcasts, and Apple TV+, specifically around MLS content.
Finding or developing new inventory for advertisements is likely a key part of Apple's advertising strategy going forward as it's seen a spike in demand for its ads. It's also reportedly developing a demand-side platform for ad buyers, enabling it to scale the business and make it easier for marketers to automate and manage ad campaigns across multiple types of ads Apple may offer.
NASDAQ: AAPL
Key Data Points
The growing importance of advertising for Apple
Advertising falls under Apple's services segment, which has quickly become, by far, Apple's second-biggest business after the iPhone.
To be sure, advertising is still a tiny sliver of Apple's total revenue, which came to $394 billion last year. It's even just a small part of the services segment, which generated $78 billion last year.
But there's another piece included in advertising in Apple's accounting besides ad sales to marketers. Apple also includes Traffic Acquisition Costs (TAC) paid by Alphabet's (GOOG 0.17%) (GOOGL 0.11%) Google for placement in Safari and Siri as the default search engine. Those payments have been estimated to be as much as $15 billion. Total TAC for Google was up nearly $4 billion or 12% through the first nine months of the year, with growth driven primarily by payments to distribution partners (like Apple).
But Google's payments bump might not be as big next year or the year after that. Advertisers are pulling back on spending amid economic uncertainty, and while the search ads business is a reliable source of sales, those sales may not be as plentiful.
Apple probably doesn't want to rely on the whims of a third party to generate a significant source of revenue for its services business. It could face a situation where it needs or wants to cut ties with Google -- it would certainly fit with its focus on data privacy -- at any point in the future, and it doesn't want to sacrifice billions to do so. It may also want to build its own search engine, a move Insider analyst Andrew Lipsman estimates could gross it $15 billion per year in revenue.
As Apple charts a path toward $10 billion in ad revenue in short order, investors should look for ways the company is expanding the high-margin business to grow profits for shareholders.
