Why Apple Should Be Taking Its Mobile Ad Business More Seriously

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Apple‘s (NASDAQ:AAPL) iDevice users represent the most sought-after target audience for mobile advertisers, since they are typically more affluent and engaged with their devices. A recent report from Goldman Sachs estimates that 75% of Google’s (NASDAQ:GOOG) roughly $12 billion in mobile search ad revenue during 2014 came from iOS devices, despite the face the iOS accounts for less than 20% of the smartphone market. [1] This underscores the importance of Apple devices in the burgeoning mobile ad market and indicates an increasingly compelling opportunity for Apple. While devices will remain most prominent in terms of Apple’s long-term strategy, increasing its focus on mobile advertising could provide an EPS upside for the company.

We have a $144 price estimate for Apple, which translates to a market cap of about $830 billion. Our price estimate is about 15% ahead of the current market price.

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The Mobile Ad Market Is Getting Too Big To Ignore

Apple hasn’t really emphasized advertising thus far, with its homegrown mobile ad platform, iAd accounting for just about 2.5% of U.S. mobile ads in 2013 according to eMarketer. Apple’s business model revolves around high-margin consumer electronics products, with its software and services offerings simply serving to drive incremental earnings upside while keeping customers hooked onto the Apple ecosystem. The model works very well for Apple, which has net margins of around 23%, ahead of service-oriented Google’s net margins of about 21%. That said, the mobile ad market is getting too big to be a mere hobby for Apple. Ad dollars are quickly moving away from traditional media such as TV and newspapers, and onto mobile devices, and mobile ad spending is expected to grow 50% this year to $28.7 billion, according to eMarketer. While Apple is already indirectly benefiting from some of the ad revenue made off its iDevices (the Google deal reportedly brings in a few billion dollars annually), the upside from focusing on its core ad business could be significant.

Tweaking iAd And iOS To Grab A Bigger Share of The Ad Pie

Apple is well-positioned to take advantage of the explosive growth in the ad market, considering its affluent and engaged user base, the high level of control it has over its mobile software platform and its potentially valuable customer data. Over the last year or so, Apple has been revamping iAd, opening it up to leading demand-side platforms and improving its retargeting capabilities. Apple has also made some subtle tweaks to its mobile software. For example, the company is overhauling its native search on iOS 9 to include app content in addition to allowing third-party ad blockers and preventing app developers from accessing app-download data, in a move that could reduce their ad-targeting efficacy. All three moves could potentially improve the value of  iAd – which operates at the operating system level –  in the eyes of marketers (related: How Apple Is Bolstering Its Advertising Strategy With iOS 9).

The Privacy Conundrum

Delivering well-targeted ads requires rich consumer data sets. While Apple potentially has access to a wealth of consumer data ranging from basic demographic information to location data, deploying it for its advertising business could prove tricky. The company has been on an apparent quest to improve user privacy, increasingly talking up the privacy and security features of its devices. CEO Tim Cook has also been quite outspoken about the topic, targeting companies such as Facebook (NASDAQ:FB) and Google for their use of consumer information. While Apple already collects some basic data (such as iTunes account information) for its ad service, it will have to tread a fine line if it wants to take its ad business to the next level without hurting its premium image and its recent privacy narrative.

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Notes:
  1. A Murky Road Ahead for Android, Despite Market Dominance, The New York Times, May 2015 []