Apple released iOS 16.1 and iPadOS 16.1 to the public last week, with a long list of new features, fixes, and high-priority zero-day security updates. The updates also included the latest version of SKAdNetwork, Apple’s ad services framework for the App Store, and putting advertisements outside of the “Search” tab, where they had been relegated previously. Other changes included new App Store rules that give Apple a cut of NFT sales and of purchases made to boost posts within social media apps.
Whatever the intended effects of these new ad-related updates were supposed to be, indications from Apple’s third-party app developers, bloggers, and users indicated the end result was a flood of irrelevant and obnoxious ads, quite often for crypto-related scams and gambling. This included quite a few instances where those ads were not just annoying but inappropriate—next to apps for kids’ games or apps for gambling addiction recovery.
We contacted Apple to see whether it has anything to share about its ad rollout, and the company told us (and other outlets) that it had “paused ads related to gambling and a few other categories on App Store product pages.” In the short term, the most egregious problem has been addressed, and in any case, “gambling apps advertised next to gambling addiction recovery apps” seemed like a result of unforeseen circumstances rather than something that Apple intended to happen.
But whatever the intended effect, the outcry brought to mind something I’ve been worried about for a while now: the rise of Apple’s Services division, and why it makes me worry about where the company is headed.
Where Apple makes its money
Apple still makes the vast majority of its money from the same thing it always has: the sale of hardware. Apple has always had lesser money-making enterprises bubbling along next to its hardware business—the iTunes stores for music and video, sales for Mac OS X and pro apps like Final Cut or Logic Pro, and .Mac/MobileMe/iCloud subscriptions all brought in some money. But these were mostly side hustles or services made to create a halo effect for Apple hardware.
This is one reason why I’ve been a bit more comfortable inviting Apple’s products into my home, compared to Google’s, or Amazon’s, or
Facebook’s Meta’s, or (to a lesser extent) Microsoft’s. It’s about where each of those companies makes its money. If the products have no up-front cost, and most of the company’s revenue is coming from ads or other kinds of targeting-derived, tracking-derived products, as the saying goes, “you are the product.”
It might be pollyanna-ish of me to base purchasing decisions on this gut feeling, but as long as Apple was making most of its money from hardware sales, I could at least tell myself that the internal and external pressures on the company would incentivize a continued focus on good hardware running good software, rather than chasing click-through rates and user engagement. As Apple began to play up its focus on privacy to draw a stronger contrast between itself and Google, it seemed even more likely that Apple would resist the urge to tuck ads and pushy notifications into all of its apps.
But things have shifted, and continue to shift, on Apple’s financial reports. Compare Apple’s non-hardware revenue a decade ago to what it is now: in 2012, software, services, and sales of music and other media amounted to about $12 million of the $156.5 million Apple earned that year, or 7.7 percent. In 2022, that has climbed to $78.1 million out of $394.3 million, or nearly 20 percent.
This increase has been steady, and services growth has consistently outpaced the growth of Apple’s hardware business for the last few years; even in 2022, a relatively slow year for Services growth, its revenue increased nearly $10 million (14.2 percent) year over year, while all of Apple’s products combined grew by $18.8 million (6.3 percent).
Services aren’t exactly eating the company’s hardware business alive, but at this point it’s bigger, by revenue, than the Mac and the iPad put together. And although growth has slowed somewhat through 2022, there’s still likely more growth potential there than there is in hardware, since your pool of possible subscribers includes people who aren’t Apple hardware owners.
It’s still just little things, but there’s more coming
Since Apple suspended the ads for gambling apps, most of what I see next to App Store listings are relatively inoffensive ads for hotel booking apps, coloring book apps, and no-name free-to-play games—they’re not remotely relevant to me, which is its own problem, but they’re not hurting anyone. And ads, auto-generated lists of suggested or sponsored content, and messages about e-commerce features and browser switching are nowhere near as omnipresent in iOS or macOS as they are in (say) Windows or Microsoft Edge. The kind of behavior I’m complaining about, at least for now, is happening around the outer edges of the Apple experience.
But I’m still worried about the overall trend here. When I see these ads, when Apple TV+ notifies me about new shows that I haven’t watched and have shown no interest in, when Apple News pops up a notification in my feed even though I never open or use it, these represent small incursions by the Services division into the iOS experience. I can ignore the ads, I can disable the notifications, but the default settings are to nudge me in the direction of things I don’t want using methods I don’t care for.
The icky gambling ads are just one data point, but reports suggest that Apple’s ad business is only beginning to kick into gear. Reports from Digiday earlier this month allege that Apple is building out a larger ad operation for the Apple TV+ service, powered by a “demand-side platform” (DSP) to allow advertisers to more efficiently target their desired audiences.
More ads coming to Apple’s services and devices aren’t necessarily the end of the world in and of themselves, and ads airing during Apple TV+ streams won’t suddenly begin showing up unbidden on your iPad home screen. But my experience in 25 years on the Internet has been that ads don’t usually get less intrusive or pervasive as time goes on—the Chromium-based version of Edge is a great case in point, since it started as a mostly inoffensive Chrome clone and has steadily over time become a nightmare of e-commerce pop-ups and nag messages. I don’t think I’m going out on a limb when I say these ads generally don’t improve the experience of using a product or service.
On the subject of Apple TV+ ads, consider: seeing the same four or five ads six times apiece in the span of a one-hour show on Hulu is tolerable, but do they make you feel warmly about being a Hulu subscriber, or do they make you think about either upgrading to the ad-free tier or canceling your service entirely just to escape them? Do you look at a Google or Amazon search with nothing other than sponsored results above the fold and get excited to continue using those products, or do you use them because they are usually still just barely less bad than all the alternatives that exist?
Will Apple’s ads be as obnoxious as those? Probably not. An ad agency exec speaking to Digiday said that “[Apple TV] is going to be a very good ad experience with probably a low ad load. [Apple is] already actually very diversified in terms of revenue streams so there’s less pressure to fit lots of ads.” But ad experiences almost never start out as annoying as they eventually become.
That’s why Apple’s excursions into the ad business and the increased importance of the Services division to Apple’s continued growth worry me. Not because I think Apple’s products will become unusable or because I think the iPhone or Apple TV home screen is going to become dominated overnight by Roku-style half-page ads, but because I think that the pressure for Apple to degrade the experience for users and developers in the name of expanding its ad business will gradually increase as Apple tries to satisfy shareholders looking for perpetual growth.
That’s the same slope that got us from app ads in search results to “gambling apps being advertised next to literally everything,” and we’ve seen many, many products and services slip down it already. Maybe Apple will be different. But maybe not.