Apple’s Secretly a Digital Advertising Giant Bringing in Tens of Billions in Revenue

Every iPhone owner is well aware that Apple (AAPL -0.01%) has been aggressively expanding its advertising business. The increasing prevalence of sponsored listings in the App Store search is a clear indication of this fact.

One analyst even speculates that Apple could potentially generate a staggering $7.5 billion in ad sales across various platforms including the App Store, News, Stocks, Maps, Podcasts, and TV+. This number is expected to grow significantly as Apple continues to invest in key ad technology, unlocking further growth potential for the business.

However, Apple possesses a second, considerably larger source of ad revenue apart from selling ads in its apps. Recently, investors were given more insights into the scale of this highly profitable ad revenue stream.

Apple’s Extraordinarily Lucrative Digital Advertising Business

Amid Alphabet‘s (GOOG -1.27%) (GOOGL -1.18%) ongoing antitrust court battle, public disclosures shed light on the inner workings of the digital advertising industry.

Most notably, the public was made aware of the precise amount that Google pays Apple annually to maintain its position as the default search engine in Safari, Apple’s pre-installed web browser. An expert witness for Alphabet revealed that Google pays Apple 36% of the revenue generated through searches. This number was subsequently confirmed by Google CEO Sundar Pichai in his testimony.

Various estimates value this revenue source at a staggering $18-19 billion, nearly all of which flows directly to Apple’s bottom line.

This amounts to 36-38% of Google’s total traffic acquisition costs over the past year. While it’s highly unlikely that Apple is responsible for over a third of Google’s traffic, there’s a clear rationale behind Google’s willingness to pay a premium to Apple for its position in Safari.

Apple users are simply more valuable. Given that Apple primarily caters to premium product consumers with high disposable incomes, its web browser is predominantly utilized by individuals with significant spending power. Advertisers are willing to pay higher rates for ads on Apple devices, making it a lucrative proposition. Although Google may have to share a portion of the revenue with Apple, the long-term benefits of capturing a greater share of valuable ad impressions outweigh the initial cost.

While the ongoing court proceedings threaten existing agreements like the one between Google and Apple, Apple is well-positioned to offset any negative impact from the trial.

The Value of Platform Ownership

Google’s deal with Apple underscores the immense value associated with Apple’s platform. Being able to steer its users toward specific services enables Apple to generate substantial revenue, regardless of external circumstances. Should agreements such as the one with Google be deemed in violation of antitrust laws, Apple retains the option to develop its own search engine.

While capturing 36% of the ad spend generated by Google on Safari browsers poses a significant challenge, Apple could potentially achieve this by creating its own search engine. Notably, 37% of iPhone users now use Apple Maps, indicating the power of defaults and Apple’s capability to build competitive services.

However, building a competitive service is one thing, while monetizing it at the same level as Google is another. This is where Apple’s ongoing development of ad technology for its existing properties plays a crucial role. Particularly, Apple is working on a demand-side platform (DSP), which will allow marketers to purchase ads programmatically and at scale across properties.

While a loss for Alphabet in court would be detrimental to Apple, the impact on Alphabet would be even more severe. Apple has the potential to recover, while Google could face heightened competition, potentially even from an Apple-developed search engine.

Although Apple stock trades at a premium compared to Alphabet, there are strong financial grounds for this premium. Additionally, Apple’s position as a platform owner rather than a service provider is yet another reason that justifies the investment in Apple stock.