All eyes are on Apple’s upcoming internet radio service, which will be unveiled at its annual developers conference next week. Music companies are already signing up, which has freaked out investors in Pandora (the stock is getting clobbered). And yet, no one really knows how Apple plans to make money off the service—including Apple.
In the app world, Apple makes its money through its in-house advertising division, iAd. iAd sells ads and then distributes them to third-party developers, who then insert the ads into the apps they sell via the App Store. Apple shares 70% of ad revenues with the developer, a process Tim Cook designed to cultivate developer loyalty.
But iAd isn’t doing so well. According to a report by research firm eMarketer, in 2012, iAd accounted for just 3% or $123.8 million of the $4.11 billion U.S. mobile advertising business. Google had the lion’s share with $2.1 billion in revenues. Pandora raked in $233 million.
Apple’s problem? Its ad redistribution irritated advertisers, who had little to no say in which third party apps ran their ad campaigns. As a result, Apple had to slash prices and relax its payment conditions to woo more advertisers (for instance, by putting a cap on the amount paid out to advertisers for their campaigns.
Apple’s hoping to make up for those missteps with its free, ad-driven streaming service. According to a Bloomberg report, the company wants to follow Pandora’s lead by helping companies to build campaigns that directly address their target audience.
Apple wants to secure several big advertisers before the platform’s launch. But that’s a tall order, considering that Apple is entering a crowded market. Arch rival Google has already announced a subscription-based music streaming service. Amazon is rumored to be in talks to launch a service of its own. Even incumbents like Pandora and Spotify, which have large followings of devoted users, still aren’t profitable.
In other words, Apple is entering an advertisers’ market. It’s time to do some serious groveling.