Brief:

• Apple’s business of selling ad space in its App Store may surge four-times from $500 million this year to $2 billion by 2020, per a report from Bernstein analyst Toni Sacconaghi cited by CNBC. The search ads appear at the top of App Store pages marked with the “Ad” notation.
• Apple will boost search ad sales by increasing its ad inventory, which currently is limited to placement on the first page of search results, and extending its reach to China, the analyst said. Search ad sales of $2 billion by 2020 would match revenue from Apple Music last year, but with higher gross margins, per Sacconaghi.
• The rapid growth of search ad sales puts Apple on target to meet or exceed its goal of doubling its services revenue to $49 billion by the end of 2020. The company’s fastest sales growth comes from its services business that includes the App Store, iCloud data storage, Apple Music, iTunes, Apple Pay and AppleCare warranties for devices.

Insight:

Following its failure with iAds, Apple has been slow to try to ramp up ad sales given that the tech giant makes most of its money from hardware such as the iPhone, iPad and Mac computers. However, as Apple's iPhone sales slow and other hardware products like an augmented reality (AR) headset or an Apple Car are years away, it has expanded its services business to leverage the power of its platform to engage users with apps, content, messaging and payments. It’s understandable that the company would seek to sell more ad space on the App Store, given that major app developers have big marketing budgets to boost awareness among the more than 2 million apps that crowd Apple’s online store.

The company also has been protective of user privacy, with Apple CEO Tim Cook describing privacy as a "fundamental human right." The company will need to pay close attention to how it balances ad sales with user privacy as the former grows. Apple has gradually added more software tools to its products that boost privacy protections, and hinder advertisements in some cases, including preventing cross-site tracking, blocking cookies and letting users erase website data from its Safari mobile web browser. Apple this month also published a website to help consumers find the information has collected about them.

Apple also earns money from Google, which pays the iPhone maker to be the default search engine for the Safari web browser on iPhone, iPad and Mac devices. Google's payments to Apple will rise 33% to $12 billion next year, according to a forecast by Rod Hall, an analyst at Goldman Sachs. The bank estimated Google will pay Apple $9 billion in traffic acquisition costs (TAC) this year, per Business Insider.