Why is Apple building an ad network?

Published on May 4, 2020 by Eric Benjamin Seufert

In April, Apple updated its Apple Search Ads (ASA) campaign management API to add two new campaign parameters, supplySource and adChannelType — indicating that ASA may begin serving placements outside of the App Store. And just last week, new Search Ads placements were spotted in the wild in the Apple News app:

Apple’s Search Ads product launched in 2016, just a few months after Apple shuttered its proprietary mobile advertising platform, iAd. Search ads were launched as part of Apple’s broader push into “services,” which was initiated with Phil Schiller, Apple’s Head of Worldwide Marketing, taking ownership of the App Store ecosystem (for more on the history of Apple’s focus on services revenue, see this post). Apple saw services as a means of maintaining growth as its hardware sales decelerated; services have since become an incredibly important source of revenue for Apple, representing nearly one quarter of revenue in Q1 2020:

And in fact, services growth was the bright spot in Apple’s Q1 2020 earnings report, with growth of 17% year-over-year versus a 3% decline in hardware sales (largely attributed by Apple CEO Tim Cook on the earnings call to the COVID-19 outbreak).

It is within this context that Apple’s expansion of the ASA product should be considered:

  1. Strategic. Services revenue is increasingly important to Apple;
  2. Substantial. Mobile advertising is on an incredible growth trajectory, with worldwide ad spend predicted by App Annie to reach $240BN in 2020, a more than 25% increase on 2019;
  3. Demand-driven. Large mobile ad networks and ad tech companies are building billion dollar businesses by facilitating workarounds to app discovery: Apple can much more efficiently serve advertisers’ needs with an expanded ASA because it has no need for an intervening ad attribution system for measurement, reducing the distance between click and install and more adequately pairing app installs with intent;
  4. Efficient. Augmenting the existing ASA product is the most straightforward approach that Apple could take to grow its services revenues. Products like Apple Arcade have enormous potential but are wholly new initiatives for Apple that require the development of institutional knowledge and potentially behavioral changes on the part of users. ASA is already established and is popular with advertisers: widening its reach with new placements is the path of least resistance for growing services revenue.

Note that Apple also potentially has a competitive advantage in serving ads within its proprietary apps and more broadly throughout its iOS ecosystem: it has direct access to device and advertising identifiers that may soon be deprecated and no longer accessible to advertisers. If Apple does deprecate the IDFA advertising identifier, what ad network would be better positioned than ASA?

When it launched, the general sentiment from advertisers toward ASA was that it would be a minor component of overall traffic and, in some ways, serve as a tax on App Store discovery (advertisers use ASA to bid against their own keywords so that competitors can’t poach organic installs). I rarely see the advertisers I work with spending more than 5-8% of their overall budget on ASA given its limited reach, but that is changing with these new placements. If Apple grows ASA into a bonafide ad network, and especially if Apple does deprecate its advertising identifier, Apple could propel ASA into the top echelon of mobile app install advertising platforms.