The Reason There Were So Many More Ads On Cell Phones This Year

All tech companies - but Apple in particular - has gotten much more aggressive about placing ads everywhere using app tracking. And the plan is to be even more aggressive in 2023. JL

Sara Morrison reports in Re/code:

Apple is getting more aggressive about its ad business, and the company’s increasingly controversial control over its products is helping that business along. “Apple has really grown its ad revenues off the back of App Tracking Transparency.” This year, Apple added new types of ads to its App Store: They’re now on its “Today” section and the “You Might Also Like” section on an individual app’s listing. There are also ads on Apple TV+’s Friday night Major League Baseball games. Apple has considered adding ads to Apple Maps and the Major League Soccer games

Have you noticed there are more ads on your iPhone this year? You aren’t wrong — there are. Hope you don’t mind, because in 2023 there may be even more of them, and in more places.

Apple is getting more aggressive about its ad business, and the company’s increasingly controversial control over its products is helping that business along. Last year, Apple used its power over the App Store to force apps to get users’ permission to collect data on them across other apps, a feature the company called App Tracking Transparency. This cut off a stream of data that helped power the advertising business of companies like Meta. Apple framed it as a pro-consumer privacy measure. And then, this year, Apple beefed up its own ad arm, which had ended up in an especially good position because it doesn’t rely on the data that App Tracking Transparency cut off. Maybe that was a coincidence. Maybe it wasn’t.

All this comes as Apple faces ever more scrutiny of business practices that some say are anti-competitive. Several countries are investigating its App Store rules or have made laws or issued judgments and settlements forcing Apple to change some of them. In the European Union, that may even include forcing Apple to allow other app stores on its device in the coming years.

Apple has fared better in the US, where antitrust cases are often determined by a “consumer welfare” standard — typically in the form of how much you pay for something. Apple maintains that its rules are how it ensures the security and privacy of its users and that the 15 to 30 percent commissions it takes from a small number of the apps go toward running the App Store. That argument has helped Apple win antitrust lawsuits brought by competitors, avoid action from the Federal Trade Commission and the Department of Justice, and fend off bills that would force it to allow other app stores on its devices.

But Apple’s argument about consumer welfare might be harder to make now, due to a relatively small but growing segment of its business: the ads, which don’t seem to have much of a benefit to the consumer while also taking advantage of a space in the digital advertising market that the App Store rules helped create.

A brief history of Apple’s ad business

The digital ad market is dominated by Google, Meta, and, increasingly, Amazon. But Apple does have a tiny sliver. Much more importantly, it has something those companies don’t: exclusive access to you and your iPhone.

“What makes Apple a major player is how entrenched it is in the consumer device market,” Evelyn Mitchell, a digital ad market analyst at Insider Intelligence, told Recode. In the US, iPhones account for roughly half of all smartphones (Apple’s share worldwide is a smaller 28 percent). “It’s a high penetration — that’s significant. And they’ve got the stranglehold on the App Store.”

Apple’s current ad business has its roots in an older, failed one called iAd. Back in 2010, Apple rolled out the iAd platform, an attempt to create its own ad network within third-party iOS apps. Then-CEO Steve Jobs predicted iAds would get half of the mobile advertising market in the US. They did not, and Apple retired the platform in 2016.

But the company didn’t get rid of ads entirely. Instead, it put them on a few of its own properties: the App Store, News, and Stocks. Apple doesn’t say how much it makes from those ads, but an estimate from Insider Intelligence put US ad revenue at $2.2 billion in 2020. Apple’s total revenue that year was $274.52 billion. So it’s still a very small share, but Apple’s ad revenue is growing in double-digit percentages every year. In 2021, the company made $3.05 billion from ads in the US, and that figure is expected to grow to $4.24 billion in 2022, according to Insider Intelligence. Next year, it should jump to $5.34 billion and then $6.38 billion in 2024.

How will it get there? Likely with more ads in more places, a process that Apple has already started. This year, Apple added new types of ads to its App Store: They’re now on its “Today” section of the store and the “You Might Also Like” section on an individual app’s listing. There are also ads on Apple TV+’s Friday night Major League Baseball games, although those ads were sold by MLB. Bloomberg reports that Apple has considered adding ads to Apple Maps and the Major League Soccer games it will start streaming next year.

It’s not hard to see a near future in which Apple expands ads to other properties, like Podcasts, Music, Books, and Fitness. Maybe it can squeeze a few on the Calculator app. Math needs to advertise, too. Apple could even start using your notifications to send ads, which other companies already do. Apple does, too, if you consider those free trials promoting its Music, Arcade, and TV services to be ads.

For now, Apple hasn’t confirmed that it will do any of this. The company doesn’t, as a rule, comment on potential future projects. But what it has done is put out job listings that indicate it’s going to expand its ad business significantly. Apple is looking for people to build a demand side platform, which automates the process of buying ads and is necessary for a digital ad business to scale. In sum, Apple has a valuable walled garden of data, apps, and devices, and it seems poised to profit from it.

Everything is an ad network. Why not Apple?

Apple’s major revenue driver is and always has been hardware. But it’s not the only one. These days, Apple is increasingly a services company, rapidly growing its entertainment, finance, and software arms. It’s almost a natural progression for it to advertise on some of those services, too.

“[Apple is] starting to see the growth of revenue from their hardware products begin to slow. So they’re thinking, more long term, where do we find new means of revenue?” Tim Derdenger, a professor of marketing and strategy at Carnegie Mellon University, said. “One way to do that is through advertising, and it’s through these services.”

It’s also a good time for Apple to grow its ad business because it has a great source of first-party data — that is, the data its users provide — through its apps and services. That has become more attractive to advertisers with the decline of high-quality third-party data, like the stuff that comes from trackers that advertisers and data brokers put in other companies’ apps and websites.

And just why has third-party data declined? Some of Apple’s competitors say it’s because of Apple itself. Some of the privacy measures Apple has introduced, like blocking third-party cookies on its Safari web browser and forbidding cross-app tracking with App Tracking Transparency, cut off sources of third-party data that advertisers like Meta relied on to target ads and to know how effective those ads are. As in-app ads based on third-party data became less effective, developers and advertisers started spending more on App Store search ads.

“Apple has really grown its ad revenues off the back of App Tracking Transparency,” Mitchell said. “Whether it cares to admit that or not.”

Apple does not want to admit that. An April 2022 report the company commissioned said claims from competitors that App Tracking Transparency cost them billions of dollars were speculative and that Apple’s ad business likely was not a significant beneficiary of the feature. It is true that App Tracking Transparency didn’t harm all digital ad businesses. It may well have helped companies like Google and Amazon, which have more and better first-party data than even Apple does. There’s also the fact that advertisers are spending less across the board because of the economy — a downturn that has nothing to do with App Tracking Transparency.

In an industry that has come to be synonymous with furtive tracking and data collection, Apple is also trying to position itself as a different kind of digital advertiser. This is a company that has made user privacy a big part of its identity and a selling point for its products, and it wants its ad business to reflect that. Users have to opt in to personalized ads, and a majority of them don’t. That’s a significant pro-privacy feature in a world that usually forces the user to search for privacy settings and turn off personalized ads. And if you do opt in, Apple says it doesn’t target or build profiles of you, the individual. You’re placed in various segments with no fewer than 5,000 people, and advertisers target their ads to interests or demographics Apple believes you have.

Apple makes those inferences based on things like the apps you’ve downloaded, in-app purchases you’ve made, which apps you frequently use, your location, things you look at or listen to on Apple’s News and Music, and information you’ve given to sign up for your Apple ID. If you don’t opt into personalized ads, Apple may still use contextual information to target ads to you, like using the app you’re looking up on the App Store in order to serve ads to you in the search results. All of this is to say that Apple’s control over its devices and the App Store plays a big role in its ad business’s success.

Even so, that success is small so far. Apple has but a scant 1.7 percent of the digital ad market in the US, according to Insider Intelligence. It’s still a pretty limited business since it’s only advertising on a few of its own properties for now. That small size and limited reach may help Apple when it comes to potential antitrust issues. It’s hard to make the case that you’re using your market dominance to harm consumers and competitors when you don’t actually dominate that market.

Apple’s ads may even be good for your pockets if Apple uses them to lower the price of the services they’re on. For example, the introduction of an ad-supported tier for Music or TV+ could be cheaper than the tier that doesn’t have ads. Netflix recently started to do this, while Apple has so far held off. It’s a way to both keep the existing subscribers and get more of them, Derdenger said.

Apple’s digital ad market share is tiny but mighty — and antitrust enforcers are paying attention

Apple’s ad push comes at a time when Big Tech is under heavy scrutiny by antitrust enforcers and lawmakers. The App Store has been a big point of contention for some of these parties, and anything that uses that App Store control to fuel success and revenue in a different market is going to get their attention.

“The high-level issue that Apple must wrestle with all the time is that somebody somewhere is going to develop a theory that looks at the use of those advantages in any market in which they operate,” said William Kovacic, who served as chair of the FTC under President George W. Bush. “It doesn’t matter how nascent your effort is, how limited your successes, even if it’s something you’ve never touched before in your life.”

Kovacic said Apple could be seen as leveraging its position of power in one market to get an unfair advantage in another. Apple’s longstanding argument — that it can ensure the privacy and security of its users by maintaining the only app store — has worked for a while, including in its lawsuit with Epic Games. The judge in that case said she found “Apple’s security justification to be a valid and nonpretextual business reason for restricting app distribution.” But that argument may get less convincing the more things competitors and enforcers can point to that show Apple has used its App Store control to enrich itself at the expense of others.

Also on Apple’s side may be antitrust laws in the US and the modern courts’ interpretation of them. As Hal Singer, a professor of economics at the University of Utah and director of the Utah Project on Antitrust and Consumer Protection, put it, “Antitrust tends to grant, like, an immunity to conduct that’s happening within the firm’s boundaries.”

So much of what Apple does occurs within those boundaries because Apple controls so many aspects of its products, including its ad business, from where user data is collected to where the ads appear. Singer, who frequently serves as an expert witness in antitrust lawsuits, thinks that as long as Apple isn’t requiring developers to purchase ads to be allowed into the App Store, it would be difficult to make a case that the search ads are an antitrust violation.

“You have to establish, among other things, that there’s a restraint of trade that is either allowing the firm to maintain its monopoly or to extend its monopoly to some adjacent market,” he said.

The difficulty making antitrust cases against Big Tech companies in the US is part of the reason why some members of Congress wanted to outlaw certain Big Tech business practices that could be seen as anti-competitive. The two bills that made it the furthest in the legislative process would have affected Apple’s App Store. The first, the American Innovation and Choice Online Act, would have forbidden it from giving its own products an advantage over others in its App Store. The second, the Open App Markets Act, would have forced it to allow third-party app stores on its devices. Both bills were waiting for a floor vote in the Senate and neither got one, to what must have been Apple’s delight.

The Department of Justice is reportedly preparing to sue Apple for antitrust violations including its App Store, a case that has been in the works for years. If that case is filed, there will likely be years of litigation that the DOJ may very well not win.

Right now, Apple’s greatest antitrust threat isn’t in the US; it’s in other countries that have stronger antitrust regulations and are ready to use them. The EU’s Digital Markets Act will force Apple to allow third-party app stores on its devices by 2024, something the company has done everything in its power to resist. Apple is reportedly preparing for that eventuality now, although it’s only allowing those app stores where it legally has to — that is, not in the US.

The US will get to watch and see how third-party app stores on Apple devices work out. It could weaken or strengthen Apple’s argument for why they’re so dangerous, depending on how things go. It’s also possible that Apple’s ads push is an attempt to get a more significant revenue stream going in another services arm just in case Apple’s App Store revenue takes a hit when third-party app stores are allowed.

“Advertising is a way to hedge their bet,” Derdenger said.

Very few people want to see more ads in their lives. So when they start appearing in more places on their phones, it’s doubtful that many of Apple’s customers will welcome the change. But Apple isn’t doing anything that its competitors aren’t, and it says it’s doing it in a way that’s better for its users than what those other companies do. If those ads help Apple reduce the price of some of its services, that might not be a bad deal for users, either.

Advertisers who blame Apple for the hit their industry has taken probably don’t feel the same way, but their opinions might not matter much. In the US, antitrust law and how courts interpret it still have a lot to do with consumer welfare. Apple is very good at selling potentially anti-competitive moves as being necessary to keep its customers happy and safe, and it’s making the same case for its ad business.