Any iPhone owner knows Apple (AAPL +2.65%) has been aggressively building an advertising business. The growing number of sponsored listings in the App Store search is all the evidence you need.
In fact, at least one analyst believes Apple could generate $7.5 billion in ad sales across the App Store, News, Stocks, Maps, Podcasts, and TV+. And that number could climb significantly higher in the near future, as Apple works to develop key ad technology that would unlock a lot of growth for the business.
But Apple has a second, much bigger source of ad revenue than selling ads in the App Store and its other apps. And investors recently learned more details about just how big this extremely high-margin ad revenue is.
Apple's other massively profitable digital advertising business
Thanks to Alphabet's (GOOG +2.00%) (GOOGL +1.71%) ongoing antitrust court battle, some very interesting details became public about how the digital advertising business works.
Specifically, the public learned exactly how much Google pays Apple every year to remain the default search engine in Safari, the web browser pre-installed on iPhones, iPads, and Macs. An expert witness for Alphabet revealed the company pays Apple 36% of revenue generated through searches. The next day, Google CEO Sundar Pichai confirmed that number in his own testimony.
That's a revenue source worth $18 billion or $19 billion, according to various estimates. Nearly 100% of which flows straight to Apple's bottom line.
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Key Data Points
That's a huge amount, representing 36% to 38% of Google's total traffic acquisition costs over the past year. It's highly unlikely Apple is driving over a third of Google's traffic, but there's a reason Alphabet is willing to pay a premium to Apple for its position in Safari.
Apple users are worth more.
Since Apple focuses on premium products with high price tags, its web browser is primarily used by people with more disposable income. And users with more money to spend are more attractive to advertisers. So advertisers pay more for ads on an Apple device than they do for ads on other devices. Therefore, while Google might have to pay out more of that revenue to Apple, it comes out ahead in the long run by capturing a greater share of those valuable ad impressions.
The ongoing court case threatens to get rid of agreements like the one Google struck with Apple. That could hurt both companies. But Apple is in a great position to mitigate any negative impact from the ongoing trial.
Owning the platform is more valuable than owning the service
If there's one thing Google's deal with Apple proves, it's the immense value of Apple's platform.
With the power to direct its users toward one service or another, Apple is positioned to generate a lot of revenue no matter what. And if it's determined that deals like the one Google made to pay for default positioning violate antitrust laws, Apple can develop its own search engine.
We now know Apple needs to capture 36% of the ad spend Google was bringing in on Safari browsers. That's a high bar, and it could take Apple a long time to get there, but it's not insurmountable. Apple could do it by building its own search engine.
Of note, 37% of iPhone users now use Apple Maps, according to Near Media, and a 9to5mac poll found more people prefer Apple Maps (46.6%) to Google Maps (44.1%). That goes to show the power of defaults plus Apple's ability to build a competitive service.
But it's one thing for Apple to build a competitive service and another for it to be able to monetize it at the same level as Google. That's where its ongoing work in developing ad technology for its existing properties comes in. Most notably, Apple's developing a demand-side platform, or DSP.
A DSP is a key piece of ad technology that allows marketers to buy ads programmatically and at scale across properties. It's an essential tool for Apple to offer ad buyers if it wants to take the business to the next level.
To be sure, a loss for Alphabet in court would be a big blow to Apple, but it'd be a bigger blow to Alphabet. Apple could recover, while Google may face more competition, including in the form of an Apple-developed search engine.
While Apple stock trades for a premium at 31.4 times fiscal 2024 earnings estimates to Alphabet's 22.8 multiple, there are several financial reasons for Apple to trade at a premium. Add to that its competitive position as a platform owner instead of a service provider as another reason it's worth paying up to invest in Apple stock.
