Last week, Apple released iOS 16.1 and iPadOS 16.1 to the public with a long list of new features, fixes, and high-priority zero-day security updates. The updates also included the latest version of WeAdNetwork, Apple’s advertising services framework for the App Store, as well as placing ads outside of the Search tab, where they had previously moved. Other changes included new App Store rules that give Apple a cut of NFT sales and purchases made to boost social media app posting.
Whatever the intended implications of these new ad-related updates, indications from third-party Apple app developers, bloggers, and users indicated that the end result was a flood of inappropriate and obnoxious ads, quite often for cryptocurrency-related scams and gambling. This included quite a few instances where these ads were not just annoying but also inappropriate – next to apps for kids games or apps for curing gambling addiction.
We contacted Apple to see if it has any information about the ad rollout, and the company has told us (and other sources) that it has “paused ads related to gambling and several other categories on App Store product pages”. In the short term, the most egregious problem was solved, and in any case, “gaming apps advertised alongside apps to treat gambling addiction”seemed to be the result of unforeseen circumstances rather than something Apple planned.
But whatever the intended effect, the outrage reminded me of something I’ve been worrying about for a long time: the growth of the Apple Services division and why it makes me worry about where the company is heading.
Where does Apple make money?
Apple still makes most of its money from the same thing it always has: hardware sales. Alongside Apple’s hardware business, there have always been less profitable businesses—the iTunes music and video stores, sales of Mac OS X and professional applications like Final Cut or Logic Pro, and subscriptions. Mac/MobileMe/iCloud. in some money. But mostly they were part-time jobs or services created to create a halo effect for Apple hardware.
This is one reason why I found it a little more comfortable inviting Apple products into my home compared to Google, Amazon, Facebook Meta, or (to a lesser extent) Microsoft products. It’s about where each of these companies make money. If products have no upfront costs and most of a company’s revenue comes from advertising or other types of targeting and tracking based products, as the saying goes, “you are the product “.
It might be foolish of me to base buying decisions on this internal feeling, but as long as Apple made most of its money selling hardware, I could at least tell myself that internal and external pressure on the company would drive the company’s growth.. a constant focus on good hardware with good software rather than chasing click through rates and user engagement. As Apple began focusing on privacy in order to create a stronger contrast between itself and Google, it seemed even more likely that Apple would resist the urge to add ads and intrusive notifications to all of its apps.
But in Apple’s financial statements, things have changed and continue to change. Compare Apple’s non-hardware revenue ten years ago to now: in 2012, software, services, and sales of music and other media totaled about $12 billion of the $156.5 billion Apple earned that year, or $7.7 percent. In 2022, that amount rose to $78.1 billion from $394.3 billion, or nearly 20 percent.
This growth has been robust, and services growth has consistently outpaced that of Apple’s hardware business over the past few years; even in 2022, a relatively slow year for service growth, its revenue is up nearly $10 billion (14.2 percent) year-over-year, while all Apple products combined are up $18.8 billion (6. 3 percent).
Services haven’t quite eaten into the company’s hardware business, but at the moment it’s bigger in revenue than the Mac and iPad combined. And while growth has slowed somewhat by 2022, there’s still likely more growth potential than in hardware, since your pool of possible subscribers includes people who don’t own Apple hardware.