Can Apple change ads?

Published on
May 28, 2021
Benedict Evans
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Can Apple change ads?

Once upon a time, Apple was the iPod company. iPods were a much bigger business than the Mac, and they also made Apple a dominant force in the music industry. Then, as we all know, Apple jumped horse to the iPhone, which was a vastly bigger business again. But meanwhile, music switched from the download-to-own model pioneered by Apple to subscription streaming, and Apple was very late to streaming. Today it has an adequate, me-too streaming music product, but it’s far from setting the agenda. Apple doesn’t matter much in music anymore.

However, the switch to streaming also meant that music lost the strategic leverage that it had for Apple and other device companies - if you switched between stores you lost all the music you’d already bought, but if you switch streaming services you only lose your playlists, if that. Music stopped mattering as a way to lock people into an ecosystem, and it stopped being a strategic lever. Apple could perhaps* have created streaming itself, if it had had the vision, but it had little to gain from it.

What came after music? When Apple announced the iPhone, back in 2007, it also announced the original Apple TV, earlier in the same event. Google had bought Youtube two months earlier, Hulu launched that summer, and everyone in the TV industry knew that the future, at some point, would be unbundling and streaming. Steve Jobs thought he could do to TV what he had done to music - he could sweep away an arcane, complex, user-hostile experience driven by perverse incentives and misaligned industry structures, and replace it with one seamless simple experience, with Apple, of course, running the whole thing and taking a cut, but not, crucially, having to buy any actual TV shows itself (after all, Apple never had to sign musicians or run a mobile network). That didn’t happen, obviously. The Apple TV never really went anywhere, and today, Apple doesn’t matter much more in TV than it does in music.

Of course, no-one else quite managed to do this either. TV has indeed moved to streaming, and Google, Roku and Amazon Fire have managed to take positions as fairly thin smart TV platforms that can extract a certain amount of rent and start building a position in ‘addressable advertising’, but the content that matters is still owned and controlled by content companies - by TV companies. Disney, Netflix and HBO own their shows, their apps and their subscriptions, and Amazon is big in TV because it spends billions of dollars buying TV shows, not because of software.

We could argue for a long time about why this happened - perhaps it’s because the dynamics of a market with hundreds of shows is different to a market with million of tracks, and perhaps it’s because big media companies had seen what happened to music (and didn’t have the same piracy problem and revenue collapse to force their hand). In a narrow sense, Apple is behind Roku and Fire because it didn’t want to licence an embedded OS into other people’s TV hardware and it didn’t want to sell a $50 Airplay dongle (as I suggested in 2013, a month before the Chromecast was announced). But the general issue was that the opportunity to do an Apple experience, to do an iTunes (or Spotify!) to the TV market, and to turn TV into a strategic tool for Apple’s broader business, really wasn’t there. In music, Apple built and owned the Suez Canal and taxed everything going through, and then it wanted to build the Panama Canal in TV, but that turned out not to be possible for anyone.

Something else was going on at the same time, though. When Steve Jobs launched the app store in 2008, he said that the commission on payments was only there to cover the running costs, but 12 years later in 2020, Apple’s app store commission revenue was close to $15bn, which was larger than total global revenue from the entire digital music industry, and at much higher margin.

Around 90% of this revenue comes from games, and almost all of that comes from in-app purchases. Apple, almost accidentally, created a new gaming platform with vastly greater reach than consoles or PCs and a disruptive new revenue model that doubled the size of the global games industry.

This commission revenue is now, of course, under question, as I wrote here last week. Even if Apple defeats Epic’s lawsuit in the USA, the EU has already decided against it in Spotify’s complaint, and it seems clear that it will no longer be able to enforce its requirement for anyone selling content inside an iOS app to use its payment system and give it a 30% commission. However, it’s less clear how much of that 30% will actually move. A giant company with lots of engagement and a trusted brand (i.e. Epic, or perhaps Tencent, reputedly 10% of Apple’s commissions) can probably persuade people to enter a credit card, but Apple’s system will still have lower friction and higher conversion, and so many apps will still offer it. The real threat might be for a court or the EU to force Apple to allow fintech companies to replace Apple’s in-app payment system itself, or indeed to replace Apple Pay - to allow other companies to offer frictionless payment on the phone instead of Apple. That seems much less likely, though.

This isn’t the only way that Apple makes money from its control of the iPhone, nor the only lawsuit. Google paid Apple around $10bn last year to be the default search engine in Safari (which has around 60% of US mobile web traffic**). The US DoJ is suing Google over this, on the grounds that Google is abusing its market dominance in search by outbidding competing search engines that can’t afford to pay this much. But setting aside the fact that Google’s biggest competitor in web search is Microsoft, which is not exactly short of cash itself, one could just as easily say that Apple is using its market power in US smartphone browsers to squeeze $10bn a year out of Google.

So, in 2020 Apple had $15bn in revenue from App Store commissions, and another $10bn of pure margin from Google. Netflix’s total revenue in 2020 was…  $25bn, and it had to spend $15bn buying TV shows to get that. Maybe missing TV and streaming music turned out OK for Apple.

And then there’s advertising, and privacy.

Apple regards itself not just as a platform provider but as a system provider. Your iPhone is a system, and Apple decides how it works and what developers can do on it, and just as Apple controls security, wireless networking, power management or multi-tasking, it also controls privacy. This year Apple started requiring apps to get permission before sharing information to track users across different sites (‘ATT’), just as the EU and California’s cookie laws have required the same on the web. The main reason to do this tracking is to make advertising more relevant (and therefore more valuable for publishers), and ATT, cookie laws, and Apple and Google’s decision to block third party cookies on the web anyway, in Safari and Chrome, all mean that the foundation of a lot of online advertising has collided with privacy and shattered, with very little clarity on what comes next.

In parallel, Apple has built up its own ad system on the iPhone, which records, tracks and targets users and serves them ads, but does this on the device itself rather than on the cloud, and only its own apps and services. Apple tracks lots of different aspects of your behaviour and uses that data to put you into anonymised interest-based cohorts and serve you ads that are targeted to your interests, in the App Store, Stocks and News apps. You can read Apple’s description of that here - Apple is tracking a lot of user data, but nothing leaves your phone. Your phone is tracking you, but it doesn’t tell anyone anything.

This is conceptually pretty similar to Google’s proposed FLoC, in which your Chrome web browser uses the web pages you visit to put you into anonymised interest-based cohorts without your browsing history itself leaving your device. Publishers (and hence advertisers) can ask Chrome for a cohort and serve you an appropriate ad rather than tracking and targeting you yourself. Your browser is tracking you, but it doesn’t tell anyone anything -except for that anonymous cohort.

Google, obviously, wants FLoC to be a generalised system used by third-party publishers and advertisers. At the moment, Apple runs its own cohort tracking, publishing and advertising as a sealed system. It has begun selling targeted ads inside the App Store (at precisely the moment that it crippled third party app install ads with IDFA), but it isn’t offering this tracking and targeting to anyone else. Unlike FLoC, an advertiser, web page or app can’t ask what cohort your iPhone has put you in - only Apple’s apps can do that, including the app store.

So, the obvious, cynical theory is that Apple decided to cripple third-party app install ads just at the point that it was poised to launch its own, and to weaken the broader smartphone ad model so that companies would be driven towards in-app purchase instead. (The even more cynical theory would be that Apple expects to lose a big chunk of App Store commission as a result of lawsuits and so plans to replace this with app install ads. I don’t actually believe this - amongst other things I think Apple believes it will win its Epic and Spotify cases.)

Much more interesting, though, is what happens if Apple opens up its cohort tracking and targeting, and says that apps, or Safari, can now serve anonymous, targeted, private ads without the publisher or developer knowing the targeting data. It could create an API to serve those ads in Safari and in apps, without the publisher knowing what the cohort was or even without knowing what the ad was. What if Apple offered that, and described it as a truly ‘private, personalised’ ad model, on a platform with at least 60% of US mobile traffic, and over a billion global users?

Apple’s approach to privacy has been a topic for quite a while now. Five or six years ago, when it became clear how important machine learning would be, a lot of people wondered if Apple’s increasingly vocal advocacy for privacy could be a strategic liability. ML was the future and ML was data, but Apple was talking a lot about not collecting data. It turned out that Apple was able to collect all the data it wanted, in ways that it could claim were still private, and perhaps just as importantly it was also able to persuade machine learning people to find a home inside Apple’s culture. Conversely, privacy has become more and more of a strategic asset, both in the abstract as a marketing tool but much more tangibly as Apple built things like payment, credit cards, smart speakers, watches, biometric sensors and now, probably, AR glasses (which, amongst other things, are a wearable camera and microphone). This also reflects a broader theme - Apple has a tendency to build up strategic assets in discrete blocks and small parts of products, and then combine them into one. It’s been planning to shift the Mac to its own silicon for close to a decade, and added biometrics to its products before adding Apple Pay and then a credit card. Now it has Apple Pay and ‘Sign in with Apple’ as new building blocks on the web, that might be combined into other things. It seems pretty obvious that Privacy is another of those building blocks, deployed step by step in lots of different places. Privacy has been good business for Apple, and advertising is a bigger business than all of those.

So, Steve Jobs changed music by sweeping away an arcane, complex, user-hostile experience driven by perverse incentives and misaligned industry structures. That also describes mobile apps before the iPhone. Does it describe online advertising? Well, yes - obviously.

The ad market is a mess, and now very unstable, and poised, perhaps, to move to a very different idea of what ‘privacy’ means and how it works. Apple has both the market power and the brand to launch a new privacy-based tracking and targeting ad model, and offer it on hundreds of millions of high-spending users’ devices.

On the other hand, this may be a case of what my old colleague Steven Sinofsky likes to call the ‘Dr Evil’ theory of company strategy. The press used to see five or ten things going on in different parts of Microsoft, imagine they were all linked together, and say “Aha! We have worked out their evil brilliant plan for world domination!” - and people at Microsoft would read the story and say “That’s a good idea! We should do that! - except we could never make it work.”

Why might Apple be unable to make this work? Well, it first got into mobile ads in 2010 when it bought Quattro Wireless for close to $300m and set up iAd. (It bought PA Semi two years earlier, for almost the same price.) But Apple never really understood what to do with it, nor how the ad business worked, and wasn’t able to be a great partner for publishers and advertisers. iAd shut down in 2016. A decade on, Apple still has many of the same issues partnering, as also seen at Apple News. Building an ad-tech business is not just about tech: Google and Facebook have vast campuses in Silicon Valley full of engineers, but also have whole city blocks in Manhattan full of advertising people, talking to advertisers and ad agencies. Apple also has a systemic cultural and operational bias against rapid iteration and shipping of any kind of software, but especially cloud services. You can’t launch an ad platform in iOS 15 next month and then wait a year to add new stuff in iOS 16. And even more, Apple has always been ambivalent about the web itself - that might be the biggest cultural shift of all.


There’s an old line that everyone in tech is trying to give someone else’s business away for free, and to turn it into a feature of their own product and their own business model. Google gives away a free smartphone operating system to support its ad business, and Amazon gives away free TV shows to support its ecommerce business. Apple’s business model is to sell hardware to around a billion people, bringing in about $200 per user at a 30% gross margin in 2020, then to give away, or sell, a lot of other services on top, both for incremental revenue (about $50 per user at 65% gross margin) and to drive retention.

What kind of services? Well, Apple looks for businesses it can transform with simplicity and control, and take a cut, without owning anything itself, and where it can use that to leverage hardware sales. That worked for music, failed for TV, succeeded massively in smartphone apps and especially games, and has done OK in payments. How about advertising?


* Arguable, the record companies only allowed streaming music to begin with because Sweden and Spotify were too small to look like a threat, and because Spotify gave them equity.

** You can install Chrome on iOS, but it has tiny share. The Chrome team would argue this is  because Apple doesn’t let iOS browsers use their own rendering engines (they have to use Apple’s Webkit). I suspect the fact it’s good enough and the default is more important. There may be another court case coming here.

Benedict Evans is a Venture Partner at Mosaic Ventures and previously a partner at a16z. You can read more from Benedict here, or subscribe to his newsletter.