Apple's Plunge Into App Store Ads Could Be a Problem

(Bloomberg Opinion) -- I wrote recently about why Amazon.com Inc.'s commercial messages in product searches are a risky way to levy additional fees on the companies that sell through its digital mall. Apple Inc. is increasingly wading into similar waters.

Type in “maps” or “dating apps” in the search bar of Apple's widely used iPhone app storefront, and you might see a result for Google Maps or the Tinder app shaded in blue and labeled as an ad. Developers pay Apple when someone taps on those promotions. Apple has been selling those ad spots for several years as a way for developers to stand out in the sea of iPhone apps. 

For the second consecutive quarter, Apple executives boasted in some detail about the growth of these App Store advertisements. On a conference call on Tuesday, Apple said that revenue from these search ads doubled or more in the company's fiscal third quarter ended in June. Three months earlier, Chief Executive Officer Tim Cook said that app search advertising was “growing very, very fast” as Apple expanded those paid promotions into more countries. “It's definitely a business that is big and getting bigger,” Cook told financial analysts in April. 

Remember, though, that some prominent app developers have been complaining about Apple's up to 30% commission on in-app digital purchases or other terms that those developers think are unfair.  A group of app buyers is pursuing a lawsuit that contends Apple's commissions ratchet up app prices for consumers.

Apple's search ads for apps — like the product search promotions on Amazon — are effectively an additional commission on top of what developers may already be paying. It's common for app companies to devote marketing spending to promote their products on spots such as Facebook. But when some of that budget goes to the company that also is the sole distributor of iPhone apps, it raises the specter of price-gouging or conflicts of interest. 

Developers may believe if they don't pay to promote their apps, a competitor will grab a top spot instead — or perhaps Apple's own apps may be more prominent. Apple says 84% of apps distributed through its App Store don't pay any commissions. All of those, however, could pay Apple for ads. If developers have to pay more for their apps to get noticed, they may have to charge consumers more. 

Apple has said that the App Store has been a boon to many developers and that it doesn't treat its own apps any differently from those of competitors. “We're well aware that developers have many options for distributing their apps, and that's why we work hard to make it easy, fair and a great opportunity for them to develop apps for our customers,” the company said in a statement. 

Bernstein Research analyst Toni Sacconaghi has estimated Apple could eventually generate $3 billion to $4 billion a year from those App Store search promotions and other advertising. That's roughly on par with the revenue Sacconaghi has been expecting from Apple's coming online entertainment service, Apple TV+, which is receiving far more attention than those little search ads.  Sacconaghi also said his estimate of nearly $2 billion in search ad revenue for Apple in fiscal 2020 may be too low. Those ads are probably highly profitable to Apple, too. 

Fairly or unfairly, muscular companies such as Amazon and Apple will now face more scrutiny when they seek to generate more revenue from their hold on online shopping or smartphone systems. Lawmakers and regulators are interested in whether these tech superpowers are playing fairly, and U.S. Senator Elizabeth Warren has said that Amazon and Apple should not be allowed to both control powerful distribution platforms that many companies rely on and also sell their own items through the same system.

The attention means there could be a high cost for Apple's fresh stream of app advertising revenue. 

Google's commissions are the same in its Android app store, and some companies such as Amazon, Spotify and Netflix don't use Android's in-app payments system so they don't need to pay commissions to Google. Those developers don't use Apple's in-app purchasing for similar reasons, although Apple has stricter rules about employing these kinds of workarounds.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shira Ovide is a Bloomberg Opinion columnist covering technology. She previously was a reporter for the Wall Street Journal.

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