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Apple’s Advertising Business Is Bigger Than You Think. It Could Get Bigger Still.

Advertising is gradually becoming a material contributor to Apple’s revenue base.


Elijah Nouvelage/AFP via Getty Images

Apple’s
move to kill off the Identifier for Advertisers system on the iPhone has infuriated Facebook and other companies that rely on the ability to track consumer behavior so they can sell targeted advertising.

The decision has created the impression that Apple (ticker: AAPL) is simply opposed to digital advertising. But that’s not actually the case. In fact, advertising is gradually becoming a material contributor to the company’s revenue base.

In a research note Tuesday, Bernstein analyst Toni Sacconaghi does a deep dive into Apple’s ad business. While the company doesn’t talk about the business much and provides little disclosure, Sacconaghi estimates that Apple will generate about $3 billion in ad revenue in the September 2021 fiscal year, up from about $300 million in fiscal 2017. He thinks the total could grow to the $7 billion-to-$10 billion-a-year range by fiscal 2023 or 2024, boosting growth in Apple’s services business as much as three percentage points.

Sacconaghi notes that most of Apple’s ad business is centered on search ads in the App Store. He says growth drivers in the business include the June addition of search ads in China, higher ad loads, and the introduction of banner ads to the store in May. He also points out that Apple generates modest revenue today—likely under $500 million a year—from ads in the Apple News and Stocks apps.

There are other opportunities—including Apple Maps and Apple TV. Sacconaghi estimates that Google generates about $4 billion in ad revenue a year from Maps, with a user base about four times the size, suggesting $1 billion a year in potential ad revenue. And he says that the streaming-device company
Roku (ROKU)
provides “a helpful precedent” for how Apple can generate revenue from Apple TV hardware—where he sees another $1 billion-plus opportunity.

The analyst adds that Apple could place ads on other properties—like Apple Fitness+ and Garage Band—but that the adoption of advertising in applications like Apple Mail, Apple TV+, or Apple’s home screens likely would “irk consumers and undermine Apple’s strongly avowed stance on privacy.”

Meanwhile, Sacconaghi says, Apple’s position on Identifier for Advertisers, or IDFA, offers the company some competitive advantages. “While we believe that Apple’s move to eliminate IDFA was done in the spirit of advancing consumer privacy, it may ultimately provide Apple with an advertising platform that is competitively advantaged vs. peers who don’t have access to Apple’s richer APIs,” he writes.

The analyst notes that
Amazon.com
‘s (AMZN) ad business was similar in size to Apple’s in 2017—and now has a run rate north of $25 billion and is a substantial part of the investment thesis on the stock. “Along similar lines, a large and growing advertising business could help Apple accelerate its overall Services growth rate, which would likely be viewed positively by investors,” he concludes.

Apple shares were up 0.1%, at $145.72, in recent trading. The
S&P 500
was down fractionally.

Write to Eric J. Savitz at [email protected]

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