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Why Apple's ad business isn't what you think it is

Peter Kafka   

Why Apple's ad business isn't what you think it is
  • Apple is increasingly emphasizing the growth of its services business.
  • Its definition of "services" includes advertising, which Apple routinely says is a major growth driver.

Apple is the iPhone, and the iPhone is Apple. But as we've pointed out many times, iPhone sales won't grow forever. Last quarter, they actually dropped.

Which is why, for the past several years, Apple has been taking pains to highlight its growing "services" business.

"Services," per Apple's description, is a fast-growing grab bag of stuff, all of which doesn't directly involve Apple hardware: money Apple makes from App Store sales, money Apple makes selling warranties and cloud storage, and money Apple makes selling you music and TV subscription services.

Services also means advertising sales, which Apple points out almost every time it talks to investors: In 14 of the company's past 16 quarterly filings, it has cited "advertising" as one of the three reasons services revenue has increased.

If you're a normal person, you'd think that means, you know … advertising. In Apple's case, that means selling the promotional slots on results pages in its App Store. (This can be alternately useful or frustrating, depending on your perspective: When I recently searched the App Store for "Twitter," the top result was an ad for Facebook; when I typed in "Facebook," the top result was an ad for TikTok.)

But in Apple's case, "advertising" also means a much, much bigger business: the money Google pays Apple to be the default search engine on iPhones and other devices — more than $20 billion in 2022 alone.

Apple doesn't come out and say that, exactly. Which makes sense because Apple has been reluctant to talk about the money it gets from Google, period. So far, the only concrete numbers about the payouts have come from disclosures in the US government's antitrust case against Apple.

But each year, in Apple's annual report, when it breaks down each of its business lines, Apple does say: "The Company's advertising services include third-party licensing arrangements." Like renting out its search exclusivity to Google. (Apple declined to comment, but two analysts I checked with confirmed my reading of that disclosure.)

Apple does have a traditional advertising business, and it does appear to be growing: The folks at Business Insider's sister company EMarketer think it will hit $6.3 billion this year, up from $5.4 billion last year.

And that's not nothing. For context: That's more than the $4.5 billion in ad sales Twitter generated in 2021, its last full year before Elon Musk bought the company; it's also more than the $4.6 billion Snap generated in 2023.

But in Apple terms, traditional ads still don't mean that much — they make up perhaps 6% of Apple's annual services revenue. The Google deal, meanwhile, represents more than 20% of that number.

So the next time you see Apple talk about the strength of its advertising business, bear in mind that it's likely referring to its Google business.