Apple sees this business reaching $10 billion soon

And it's still very early days for this high-margin service.

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This article was originally published on All figures quoted in US dollars unless otherwise stated.

About three months ago, Apple (NASDAQ: AAPL) made a small but notable change to its corporate structure. Its VP of advertising, Todd Teresi, started reporting directly to Eddy Cue, who oversees all of Apple's Services business.

That's apparently just the start of a big push for the advertising business. Since then, Apple's made more moves to grow the business, and Teresi said his goal is to grow the business to more than $10 billion in annual revenue.

Two recent changes

Apple currently advertises in the App Store, News, and Stocks apps. But the success of its big-tech companions in advertising suggests it can build a much bigger ad business.

Apple's advertising business is relatively small for a company with an installed base of over 1.8 billion devices. The company currently generates about $4 billion in annual revenue, which pales in comparison to advertising giants like Meta Platforms, Alphabet, or even Amazon. The smallest of that group, Amazon, has an advertising business nearly an order of magnitude larger than Apple.

That will start with Apple's plans to expand advertising inventory within the App Store. Apple currently shows display ads when someone clicks the Search tab on the App Store, and it has promoted listings in the search results.

Soon, it'll show display ads on the Today tab, which provides personalized suggestions for new apps to download. It'll also start showing display ads within third-party app pages, which means apps will be able to advertise their product on their competitor's product page.

The second big change in the app business is a new job listing spotted by Digiday. The company is looking to build a demand-side platform, also known as a DSP. A DSP would allow marketers to automate ad purchases across Apple's inventory, which can lead to greater ad spending. It could also attract advertisers with smaller budgets, increasing competition for each ad spot, leading to higher average ad prices. Owning its own advertising technology can also lead to higher operating margins for the ad business.

Where does Apple go from here?

Apple has a lot of opportunities to insert more advertising into the apps and services iPhone users interact with most often.

It's reportedly already explored the potential for advertisements within Maps. That could include sponsored search listings as well as highlighting locations along a route or an area of focus.

Other potential areas for advertising, as Bloomberg's Mark Gurman points out, include Podcasts and Books. Both have search and discovery features, which could lend themselves well to straightforward display and keyword advertisements.

Expanding the ad business could also lead to things like a podcast advertising network or video ads on Apple TV+. In fact, Apple's already responsible for selling a small amount of commercials during its Friday night baseball broadcasts on Apple TV+. Apple could expand that to more ad-supported video content in the service in the future.

Another interesting long-term opportunity is building an internet search engine a la Google. While Apple has a lucrative contract with Google today, the search giant could face regulatory pressure in the future, ending such deals.

Teresi's goal of reaching $10 billion in ad revenue shouldn't be too difficult. And with the high margins of digital advertising, it could play a significant role in growing Apple's bottom line over the next few years.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Adam Levy has positions in Alphabet (C shares), Amazon, Apple, and Meta Platforms, Inc.  The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet (A shares), Alphabet (C shares), Apple, and Meta Platforms, Inc. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Apple, and Meta Platforms, Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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