Why Apple Needs to Get Better at Ads

on May 15, 2014

Apple needs to get better at ads. Not its own ads, but its ad product for third parties. Why? Well, a couple of reasons: streaming audio and streaming video.  The challenge is advertisements don’t come naturally to Apple. But it’s going to have to conquer those challenges if it’s to be successful in the next phase of delivering digital content.

First things first: Apple’s ad product today is iAd. Its become relatively sophisticated since Apple first launched it in July 2010 and now offers quite a few options for would-be advertisers across iOS apps and iTunes Radio. It offers targeting by device, age, gender, location (down to designated marketed areas in the US but only country level in the other 13 countries it serves), iTunes Store preferences (i.e. what has the user bought before from the App Store or iTunes Music, Video or iBook stores), and app category. Over time, Apple has increased the percentage of ad revenue developers get to keep from 60% to 70% and reduced the minimum spend commitment from a reputed $1 million to just $50. Given Apple only got into the ad business in 2010 (with its acquisition of Quattro Wireless), its come a long way. With that lower threshold, higher revenue share to developers, and more self serve tools, the iAd product is significantly more attractive today to both developers and advertisers than it was back in 2010.

But Apple faces many challenges, several of which are likely due to an ingrained resistance to the kind of behavior that makes advertising work. In order to be successful today, online and mobile advertising needs to offer the following:

  • Very effective and detailed targeting of users. Apple incorporates some useful signals here but they’re all either generic (age, gender and location) or iTunes specific. There are few explicit signals of interests outside the digital content categories Apple sells, such as general retail, clothing, cars, or beverages; or demographic data such as income, family size and so on.
  • Successful tracking of users across devices and platforms. That data comes from capturing a large portion of end users’  behavior across multiple devices and platforms. Because Apple’s data is limited to what users explicitly provide to it through manually entered information and iTunes/App Store purchasing behavior, it’s nowhere near as rich as competitors’ data. The shift by Apple away from UDIDs and towards CFUUIDs was actually partly an attempt to thwart this sort of tracking across devices, for privacy reasons, but it set Apple’s ad capabilities and advertisers back in the process. The newer Ad IDs and IDFVs are a partial solution to this problem, but give users yet more privacy options, thereby potentially limiting what advertisers can do. 
  • Retargeting. Closely related to the previous item, retargeting is the process of re-approaching users who saw an ad but didn’t engage with it, following them around the web, for example, until they click on another ad and hopefully completing a purchase. Given Apple doesn’t have an online ad product, it can’t play in this space at all. Its Ad IDs and IDFVs remain limited to single devices and so prevent even retargeting across Apple products.
  • Attribution of sales to ads. Given John Wanamaker’s famous saying about not knowing which half of his advertising was working, it’s natural advertisers want to be able to track the effectiveness of their mobile and online ads if the tools exist to do so. As such, attribution is a hot segment of ad tech today, and both AOL and Google made acquisitions in this area last week. Apple offers attribution (and therefore cost per acquisition options) for app installs and video views, but not for other products. Attribution is tough when you’re not following users into the next phase of the purchase process, which Apple doesn’t currently do.
  • Programmatic buying and other forms of automation. Another key ad tech area at present is programmatic buying, or the shifting of more and more ad spend to automated platforms which algorithmically allocate spend to the ideal platforms to achieve objectives set by advertisers (or their buyers). Even though iAd has come a long way towards self serve, individual campaigns are still subject to sign off from Apple and as such can’t be part of broader programmatic buying campaigns.

All of the above may be seen as a sort of backhanded compliment to Apple – in its desire to protect users’ privacy and prevent subpar ad products from reaching them, Apple has significantly limited its own attractiveness as a destination for advertising. Its ad products haven’t performed anywhere near as well in revenue terms as other mobile ad platforms as a result. As a side effect, of course, other mobile ad platforms are capturing that spending instead and are pushing many ads to iOS apps in the process, most of them inferior to the standard Apple sets for iAd.

But why is this important? Unlike Google, Apple doesn’t have to generate massive amounts from advertising to keep its business afloat, so does it even matter? Well, yes it does, for a couple of reasons. Firstly, as Apple pushes further into streaming music (either organically or through the rumored Beats acquisition) it is likely to want to expand its range of ad-funded streaming music options beyond the current iTunes Radio product. Though Beats itself has eschewed the ad-funded model, Apple hasn’t and that’s a recognition ad-funded streaming is going to become increasingly important. According to the IFPI, streaming music has risen from 12% of digital music revenues to 28% in the last five years and ad-funded streaming remains at about 30% of total streaming revenues. If Apple is serious about getting into the broader streaming music business, it will have to have an ad-funded option, and that will increase pressure to provide an optimal advertising product.

Secondly, Apple will likely need to adopt a streaming model for video services too, eventually including live video. If it wants the rights for live video, it will have to provide ad insertion technology for that platform too in order to fill the many ad slots in linear programming on most broadcast and cable networks. Even if it doesn’t want to do live video, it may well need to look at ad-funded models for a streaming service over time. That requires much better targeting than it is currently able to provide, as well as some of the other features discussed above.

Apple doesn’t appear to need advertising as a revenue stream today, and it’s arguable it could continue as it is for some time. But given the shift in both the music and video markets towards streaming, it will have to adapt if it is to maintain its stagnating digital content revenues. And that will mean addressing the tension between protecting its users and creating an effective platform for advertisers. It needn’t sacrifice its principles to do so, but it may well need to make further ad tech acquisitions and continue evolving the iAd product in order to fill competitive gaps and make iAd a more attractive option for advertisers. It has an enormously attractive base of customers for advertisers to target – many of them high income, high spending users – but needs to give advertisers the tools to target them effectively and to measure the potency of their ads. Doing that while maintaining its commitment to user privacy and product quality will be a tricky balancing act to pull off.