App-install ads have been a huge revenue driver for Facebook (NASDAQ:FB) and Google, the Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) subsidiary. Now, Apple (NASDAQ:AAPL) might want in on the action. Bloomberg reports that Apple has put together a team to explore changes to the App Store. Among those changes -- paid search advertisements.
Not to toot my own horn or anything, but I suggested this as a path to revenue growth about 20 months ago. (OK, maybe I want to toot a little bit.) A little more than a year ago, Google started testing ads in Google Play. Now, it looks like Apple may join in as it looks to expand its services revenue to offset stagnating hardware sales.
Digital advertising gold
Apple is sitting on some of the most valuable potential ad inventory on the Internet. Search advertising in general is more valuable than standard display advertising because it takes into account a user's intent at that moment in time. If a user is searching for "blackjack" in the App Store, it's very clear that he's looking for a blackjack game, and is open to seeing ads for a blackjack app.
Google has made a killing with search-based advertising. Last year, the company generated over $52 billion in ad revenue from its owned and operated sites. While not all of that was search-based (YouTube, Gmail, and other sites show display ads), the majority of it came from ads on Google.com.
Additionally, Apple would be advertising apps on mobile. App-install ads have turned out to be some of the most lucrative advertisements for Facebook and Google. Developers are spending huge sums on app-install ads due to the difficulty in standing out from the crowd in the App Store these days. "There isn't a single brand in the world, consumer product, automotive or travel brand, that will spend as much money on mobile ads as apps," Mahi de Silva, CEO of Opera Mediaworks, which helps big brands advertise on top publishing sites and apps, told Digiday.
Spending on app-install ads is estimated to reach $6.8 billion in 2019. For reference, Apple generated an estimated $6.4 billion from app sales last year, and that revenue is growing fast. Still, app-install ads could provide meaningful revenue growth to the company's App Store revenue, and the overarching services segment.
A focus on services
Apple expects to see its first-ever decline in iPhone sales when it reports its fiscal second-quarter earnings. As such, it's changed its tone a bit on earnings calls and at its events. It's focusing more on its installed base, noting in its first-quarter earnings release that it now has 1 billion devices in use around the world.
Services is currently a $20 billion business for Apple, and it grew 15% year over year in the first quarter. On the company's first-quarter earnings call, CEO Tim Cook noted, "The size and growth of these services tied to our installed base compare favorably to other services companies you're familiar with." In other words, Apple's services revenue is similar in size to Facebook and growing similarly to Google.
But Apple faces a problem. On its earnings call, it said its installed base grew 25% year over year. But its earnings release shows only a 15% increase in services revenue. Apple actually generated less services revenue per user last year than the year before.
To be sure, it's focusing on new services, like Apple Music and Apple Pay, to grow average revenue per user, but ads in the App Store have just as much potential if not more, since everyone with an iPhone or iPad uses it.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and Facebook. 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.
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