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AAPL Ad-Blocking Extensions Not a Death Blow for GOOGL

If you are among the throngs of people who have grown sick and tired of those pesky ads popping up uninvited on their iPhones, using up their precious data, draining their batteries and generally being a pain in the neck, you are in luck.

Apple stock earnings aapl stockApple (AAPL) has announced that its highly popular Safari browser will soon include content-blocking extensions that iOS users can use to block cookies, ad pop-ups, images and other content on their mobile devices.

AAPL made the announcement at its Worldwide Developers Conference where it demoed its new operating system, iOS 9. App developers will be able to use the extensions to create ad-blocking software for Safari browser.

The Plan for AAPL’s Ad Blocker

So what’s Apple’s game plan here? It’s not yet 100% clear what AAPL intends to achieve with its ad-blocking software, though some inferences can be made.

For one, Apple could be trying to paint a cleaner image of itself. Apple’s chief executive Tim Cook recently took a thinly-veiled swipe at Google (GOOG, GOOGL) and Facebook (FB) when he distanced AAPL from companies that try to monetize every little piece of personal information at their disposal.

But, a stealthier reason for using the ad-blocking software could be that Apple intends to pull iOS users away from the web and turn their attention more to its apps, which have become a real gravy train for the company. Apple’s App Store pulled in roughly $3 billion on sales of $10 billion for the company in 2014, compared with a rather measly $487 million that Apple’s ad-serving business, iAd, brought in.

Meanwhile, shares of Criteo (CRTO), a leading personalized retargeting company, have been selling off heavily after the news.

This news certainly doesn’t bode well for Google (GOOG, GOOGL), considering that the company makes the vast majority of its money from advertising. Google stock has lost its mojo lately, and nearly flat for the year-to-date, mainly due to concerns about a slowing top line.

Growing Popularity of Ad-Blocker Software

The pervasive use of ad-blocking software is becoming a major cause of worry for publishers. Page Fair and Adobe Data have revealed that 144 million people, or 5% of Internet users, used ad-blocking software in 2014 — a huge 70% increase compared to the previous year.

The trend is expected to continue unabated with the number of users employing the controversial software anticipated to increase 50% in the current year. The Page Fair report says that use of ad-blocking software runs as high as 25% of the Internet population in some countries, with younger folks more inclined to use it.

Facebook more Vulnerable than Google

The alarming trend bears some ominous overtones for major ad companies, but more so for those that rely heavily on mobile ads to drive their top lines.

Goldman Sachs identified that mobile search ad revenue clocked in at $11.8 billion, or 20% of GOOGL’s annual revenue. Goldman Sachs says that roughly 75% of this came from Apple devices including iPhones and iPads.

In other words, the proportion of Google’s revenue that would be directly impacted by ad-blocking software on Safari browser is limited to around 15% of its overall revenue.

The story, however, is a lot more dire for a company like Facebook that relies very heavily on mobile ads. Nearly 95% of Facebook’s revenues come from advertising broadly, and a staggering 73% of Facebook’s ad revenue came from mobile ads during the last quarter.

Though there are no concrete figures available regarding how much of this is attributable to Apple devices, it’s quite likely in the ballpark of GOOGL’s 75% of total mobile ads since the two companies serve pretty similar demographics.

This leaves Facebook much more exposed than GOOGL since more than half of its revenue could be directly linked to AAPL devices. However, it’s important to note that the real impact on either company is not likely to be felt any time soon because ad revenue growth is likely to continue offsetting any revenue lost to blocked ads — at least until the number of people using ad-blockers grows significantly.

Not that ad companies are sitting on their laurels and watching ad-blocking companies topple their gravy train. A cross-section of large tech companies including GOOGL, Amazon (AMZN) and Microsoft (MSFT) have already cut deals with Eyeo, a German company that is behind the popular AdBlock Plus ad-blocking software.

The app works by whitelisting certain types of ads and blocking the rest. Financial Times reported that these companies have been forking over 30% of ad revenue that would have been realized from blocked ads to Eyeo in return for the their ads being whitelisted. Maybe these companies will find a way to sweet-talk Apple as well.

However, it’s worth noting that other companies have taken a more belligerent approach and sued Eyeo.

Google-Apple Deal on Its Last Legs

A far bigger problem for GOOGL would arise if it failed to renew its current search engine deal with Apple. The deal is set to expire later this year, with rumors flying that AAPL could be busy developing its own search engine to compete with Google’s. About half of the ad revenue Google receives from Apple devices — about $4.4 billion — comes directly from Safari browser.

On a brighter note, this could turn out to be a blessing in disguise for the search giant. The company paid Apple $1.64 billion as traffic acquisition costs in 2014 for the privilege of being the exclusive search engine for the popular browser. If GOOGL is able to cut new cheaper browser deals to replace Safari, that could become significantly accretive to its earnings.

GOOGL stock isn’t likely to immediately suffer from the ad-block news, but the trend is something to keep an eye on.

As of this writing, Brian Wu did not own any of the aforementioned securities.

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