Stop the Noiz

How Apple Will Profit from Its Tablet: Mobile Advertising

Frank Fox - 2010.01.06 - Tip Jar

For a product that hasn't seen the light of day, Apple's forthcoming tablet computer certainly is getting a lot of attention. We have people talking about how successful it will be - or why it won't succeed. People have found multiple names for it: iSlate, iPad, iGuide, etc. And they talked about the endless ways that it will revolutionize our lives. The Apple tablet will save the print industry or reinvent TV watching.

All of this could be true - or none of it may happen. Apple hasn't even announced that it is working on such a device.

How Will Apple Profit?

The thing that is not talked about as much is how Apple will make money from the device. Most people ignore this question, because it sounds obvious: Apple make the tablet and earn profits on each sale, plus a little extra from selling apps.

The problem here is what's new? The iPhone already fills that description. Why does Apple need to make a device that competes with the iPhone?

A New Revenue Stream

The signs are pointing to a new source of revenue with the tablet: advertising. Just ask those folks over at Google what advertising is worth; they'll tell you. Google is able to host web searching for billions of queries off the revenue that advertising brings them. They even develop software to give away free, all funded from the billions earned from advertising.

Why should Apple let Google, Yahoo, and Microsoft make all the money from Web and Internet device-based advertising? Apple is capable of running a very successful Internet store (the iTunes Store) that has to track billions of separate purchases. Apple should be able to track a few million advertising hits.

For a long time, I thought Google was a bunch of jerks going after Apple's iPhone and App Store business. The truth is that Apple struck first. Many apps on the iPhone are nothing more than advertising. There is everything from Disneyland travel planners to where to find Budweiser American Ale Beer. There are HBO and Walmart promotion apps. Hundreds, if not thousands, of apps are nothing more than commercials for various businesses, celebrities, and even government groups.

Advertising is Google's bread and butter; Apple began encroaching on Google's territory once apps became a vehicle for advertising. Ad dollars that could have gone to pay for Internet ads thru AdSense were now being used to develop apps for the iPhone.

Compelling Evidence

If you don't believe me, why did Google grab AdMob before Apple could? Why does Apple need to block Google from getting Lala for the Droid? These rumors point to Google and Apple becoming competitors, and that means they must be in the same business. That business is controlling mobile access and the billions of dollars to be spent advertising to that audience. [As we were preparing this article for publication, Apple acquired Quattro Wireless, which specializes in ads for smartphones and mobile websites. ed]

Apple cracked open the mobile device market for itself, and in doing so it opened the market for other savvy companies like Google to follow behind. And they are getting a warm welcome from everyone.

The iPhone is now a necessary evil for AT&T. It steals customers from Verizon, Sprint, T-Mobile, etc. but at a high cost of turning control over to Apple. AT&T can't even directly advertise the iPhone in its campaign against Verizon. Apple controls all marketing of the device.

The wireless carriers are now praying for salvation - even AT&T. Google's Droid fits the bill. Google can move into the number two spot with every provider cheering it on.

Apple vs. Google on Several Fronts

Google only wants to use this position to channel all mobile ad dollars to itself, and it sees Apple in its way. Now Google is attacking Apple's business by going after operating systems, web browsers, and mobile Internet phones.

When you make an enemy, then you must be ready to face an attack.

The irony is that Google was strengthened when Microsoft attacked and threatened to destroy it. Google learned that to survive, it had to break Microsoft's grip on computers and the Internet. Apple and Mozilla were two strong allies. Google has increasingly turned its back on these friendly companies.

Now in turn, Apple will have to break Google's grip on advertising dollars. Literally billions of dollars are at stake. Billions to reduce the cost of the initial price to buy the device. Billions to pay for software development to fuel more sales. Billions to pay for marketing to get the message out about what Apple has to offer. Billions in profit to add to the balance sheets.

The iTablet will be a vehicle for advertising. This is not necessarily a bad thing. We watch ads every day on TV, and there are ads on this website. Advertising will be the fuel to pay for content like magazines and newspapers. It will subsidize all those things that we enjoy but don't really want to spend money on. Music and television could be added easily; there may be a real reason why Apple bought Lala.

Apple Is Ready to Go

Apple has all the necessary technologies to deliver on this vision, and it probably has a few of these ideas patented. By lining up various magazine and book publishers, Apple has gained access to advertising customers. Apple will be focused on serving these ads and collecting the money for each ad that is viewed.

How else is Apple going to save the publishing industry if it doesn't keep the revenue stream working? Seriously, every magazine that I read is at least half advertisements, and the content is spread all over to make me look at more ads. The truth is that on average on 35% of a magazine's revenue comes from subscriptions sales; the rest is advertising.

The question is what form the advertising will take. Will it be a hypertext keyword that leads to an ad, or maybe a popup ad that you have to watch before going to the next article? Since this will be a new service for Apple, I expect something simple but easy to expand on for future product releases. The big delay has probably been the software engineering to make the ads work in an easy way that Steve Jobs is happy with.

How strange does that sound, "'an advertising method that Steve Jobs is happy with"? If it pulls this off, Apple won't just be reinventing publishing; it will have every magazine and newspaper advertiser knocking at its door. The scope of the possibilities is almost frightening.

Innovation, Not Just Hardware

When I read the latest news about PC makers preparing tablet devices to compete with the iTablet, I have to laugh. Apple isn't building just a simple device with a pretty screen. Apple is building the infrastructure to mange an entire industry. No one else is ready to deal at that level of complexity: Dell, Google, Microsoft will all trail behind with "me too" gadgets and pretend that they have something close to what Apple has planned.

While the possibilities are exciting, it may never happen. After all, Apple hasn't even announced that it is working on this device - or have they? LEM

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