Apple – Asking for suits

Digital advertising is not worth the risk.

• Apple is building up its advertising business which I think is very likely to attract a raft of lawsuits from the other digital ecosystems alleging unfair competition and demanding tens of billions in damages.
• Research carried out by the FT (see here) concludes that Apple is planning on doubling the headcount in its digital advertising business evidenced by the 250 separate job postings it was able to find on LinkedIn.
• This is an unexpected move by Apple as it has always prided itself on the privacy it provides to its users and has stated numerous times that it has chosen not to monetise its customers in this way.
• RFM Research has long found this to be a disingenuous statement as Apple monetises its customers for a far higher amount when they purchase the device than if Apple monetised its ecosystem via advertising.
• However, it now looks like Apple has changed its position and is now looking to monetise this opportunity in addition to hardware.
• The $400bn digital advertising market is currently dominated by Google and Meta Platforms with TikTok, Twitter and Snap making up a large part of the rest.
• These companies make money by offering their services for “free” but users agree to have their data used by the providers of these services in order to provide targeting for more relevant and therefore more valuable advertisements.
• Apple has spoken out against this practice many times over the years and recently changed its policy around user tracking such that users have to opt-in to be tracked meaning that almost everyone opts out.
• This is one reason why Android is now the platform of choice for gaming as 97% of game players on smartphones are monetised through advertising.
• However, this change has caused a lot of problems for Google, Meta Platforms and so on because they are partially dependent on iOS meaning that they are having to rebuild their advertising systems in order to adjust.
• Following on from the advertising change, Apple’s own digital advertising business has tripled its market share of app downloads triggered by an advertisement according to Branch.
• Evercore ISI expects this to continue and forecasts that Apple will earn $5bn in revenues this fiscal year from digital advertising which could grow to $30bn by 2026.
• I am pretty sure this does not represent a departure in how Apple processes and uses user data as there are ways of generating insights and targeting without data leaving the device.
• However, it is going to make its competitors wonder just why Apple made the policy change and whether Apple did so in order to create a void into which it could expand its own business.
• This not new for Apple as there are several instances in the past where app developers have been suddenly been cut off at the knees by a policy change only to see Apple launch its own service a few months later.
• This time it is Apple’s biggest competitors who may feel that they have been the victim of unfair competition and in contrast to small app developers, these companies have the resources to mount a substantial legal complaint.
• The amounts of money at stake are very significant as both Meta Platforms and Twitter have stated that the policy change had a material impact on their revenues meaning that if Apple was to lose a suit of this nature, the damages awarded could be very substantial.
• Given how big the rest of Apple’s business is and how much cash it generates, I am not convinced that digital advertising and the legal risks that may be attached to it is a worthwhile use of Apple’s resources.
• Hence, I think that Apple’s resources are better invested in widening the appeal of the Apple ecosystem across multiple device categories and focusing on the core competence of monetising its ecosystem through hardware.
• I remain pretty indifferent to Apple as the shares remain fairly expensive in an environment where there is significant pressure on valuations.
• This pressure has created substantial opportunities outside of the mega caps and it is here where I am looking.