This time last year, I pondered what might happen if Apple (AAPL) were to take a shot at replacing Office, the productivity software that remains one of Microsoft’s (MSFT) most profitable products. This time around, I’d like to expand on a thought raised in a piece from a few days ago about Apple’s acquisition of social media analytics company Topsy.
What if Apple is assembling the pieces for its own mobile search engine to take on Google (GOOG) Search?
When it comes to mobile, Apple makes its big money from hardware sales, while mobile search ad revenue is the driving factor behind Google’s entire mobile strategy. With users shifting from PCs to smartphones and tablets, Google — which gets roughly 94% of its revenue from search advertising — needs to make that transition too.
Mobile ad revenue is the backbone of Google’s Android strategy (get as many Android devices as possible out there to ensure use of Google Search) and the reason why the company is willing to sell a flagship smartphone like the Nexus 5 at break-even prices.
According to eMarketer, by the time 2013 is tallied, the mobile ad pot will have nearly doubled over last year, reaching $15.82 billion — of which Google Search is expected to bring home $8.85.
Apple has never made much money from advertising, despite its position as a leading mobile platform. The company’s advertising vehicle is iAd, a service for paid advertising within apps. The most recent numbers I’ve seen for iAd were for 2012, when iAd revenues were $125 million. Peanuts.
Google Search Is Vulnerable
All of this gets interesting is when you look at Apple’s super-sized influence in generating mobile ad revenue, despite the dominance of Android. According to Business Insider, iOS was responsible for generating fully 50% of global mobile advertising in Q2 2013.
This is an opportunity for Apple and a risk for Google. The opportunity is for Apple to snatch a chunk of that mobile advertising revenue by implementing its own search functionality in Safari, Maps and Siri instead of relying on Google Search or Microsoft’s Bing. Google recognizes the threat, which is one reason why it’s willing to give up some of what could be Android’s killer features — Google Now, Google Maps and the Chrome web browser being prime examples — by developing native versions for iOS and keeping them competitive with the Android versions.
Using eMarketer figures once again, mobile is expected to account for 48% of all display ads and nearly 60% of search ads by 2017, with a combined value of $29.75 billion. If Apple were to continue its 50% pace, that means about $15 billion annually (or $3.75 billion per quarter) in mobile ad revenue generated by iOS devices.
Google’s revenue for the past quarter was $15.89 billion, which means $3.75 billion represents a huge impact on its bottom line. Apple’s Q3 revenue was $37.5 billion, so $3.75 billion would have a much smaller effect; still, it would be enough to make ad revenue the company’s fourth-largest line of business, behind iTunes and software sales. And ad revenue offers high profit margins.
There’s a pretty compelling case for why AAPL should make the move, but how would the company take on Google Search?