Small Apple has huge potential

apple‘s (AAPL -2.69%) The service business is undergoing a drastic change. Specifically, the company is focusing more on advertising, promoting an executive to head the business and reporting directly to Eddy Cue, senior vice president of services. A bigger push into advertising may help Apple continue to grow the services sector as it faces a challenging environment for its hardware business.

Advertising is still a small part of the services

Apple has been trying to push toward advertising for a long time. After acquiring Quattro in 2010, it launched iAd Network, but closed it in 2016 after little success. However, Apple has developed its advertising business, showing ads in App Store, News, and Stocks apps. It raised just over $1 billion in advertising revenue in 2020, but it grew to $3.7 billion in 2021, according to research from Omdia. That number could rise to $5.5 billion this year.

Image source: Apple.

By comparison, advertising still represents a small portion of the total services business, generating $68.4 billion in sales in 2021 and $75.1 billion over the subsequent twelve months. At best, advertising represents an average single-digit percentage of revenue from services.

But there is plenty of room for growth. Apple is taking advantage of the changes it made to data sharing on iOS, which prevents companies from tracking users through apps. As a result, other companies’ advertising apps, for example, don’t have a good way to track how well their ads are performing. This has increased the value of native search ads in the Apple App Store. Additional privacy changes could benefit Apple’s advertising services more than third-party advertising.

But Apple is also diving into video ads. Major League Baseball games on Friday nights are now streamed through Apple TV+, and this content stream includes some ad inventory. You may also get the rights to the NFL Sunday Ticket bundle, which may include a small amount of advertising (although most are kept by the original broadcasters).

There are plenty of immediate opportunities for Apple to grow its advertising business, but there is also great long-term potential for Apple.

Apple could become an advertising giant

Apple has a lot of data about its users. It knows what devices you have, where you use those devices, which apps you have installed on each device, and how often you use each app. You may know your health and fitness information if you use these services. It contains your payment information, your government identification information, and possibly your personal financial information such as your salary and assets.

And it has that data on nearly a billion people.

While Apple refrains from using unique personal information to target ads, it segments its user base according to that data and serves targeted ads to each segment. This step of stripping can help preserve people’s privacy but also allow Apple to get strong conversion rates for its ads.

Over time, Apple may be able to create more advertising services that can take advantage of user data and the growth of the advertising business. And the change in management, albeit slight, suggests that it may be thinking that way.

One big area that Apple might explore is the development of a search engine. Google currently accounts for a large portion of revenue from its services. the alphabet (The Google -0.70%) (Google website -0.67%) Apple is paying billions in traffic acquisition costs to make Google the default search engine in Safari – the original web browser for Apple devices.

But there is a concern that regulators may reduce this practice or that Google may be unable to support continued increases in payments. Apple may ultimately be better off competing with Google for search traffic, and benefiting from its massive user base.

There are other ad-supported opportunities for Apple in the future as well. From video streaming services to in-app ads, you can become an advertising giant. However, the same factors were applied when I tried to create iAds, and it wasn’t much of an effort.

With advertising activity of only $5 billion annually, there are plenty of growth opportunities. Google generated more than $200 billion in advertising revenue last year. Moreover, the market continues to grow at a double pace. Apple advertising could be an important growth opportunity for Apple, and it is taking steps to make the most of this opportunity.

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