As the world becomes more mobile, tech companies are finding ways to shift their technology, software, and revenue platforms. Apple continues to take on Google following Google’s jump into the smartphone market with the Android operating system and Nexus One hardware. Following Google's recent purchase of the mobile advertising platform AdMob (which is still waiting approval by FTC), Apple had to develop its own mobile advertising platform to exist within their mobile application marketplace. Enter: iAd

What is iAd?

• Mobile advertising within iPhone applications (apps)
• Content based advertising - ideally, the ad shown relates somehow to the content being viewed or the person viewing the content
• CPM model (cost per thousand views). The advertiser pays a set amount for every thousand times their ad is shown

Who Will Use It?

• Advertisers pay to have their ads show in iPhone applications
• The developer of the app showing the ad makes 60% of revenue
• Apple takes the remaining 40%
• The user potentially gets more free apps but with (intrusive?) ads

Why?

Apple has sold 50 million iPhones to date (85 million with the iPod touch included.) As of April 2010, there are over 185,000 apps in the App Store with downloads exceeding 4 Billion. This equates to a lot of eyeballs. The increased technology and capacity in smartphones coupled with the increased adoption by consumers puts more smartphones in more hands and more eyeballs on third party apps. For this, market analysts anticipate mobile advertising revenue to rise sharply as the smartphone and mobile computing industry rapidly expands.

In the OS4 announcement, Steve Jobs billed this as a way for more developers to provide free apps because now they can monetize what was previously free. So whether or not the app has a price tag, the developer still stands to make money.

Likewise, Apple monetizes the previously non-existent revenue channel of free apps. While only 25% of iPhone apps are free, that’s nearly 50,000 apps that now have a way to generate revenue. Developers are excited because they can make money on free, impulsive-prone downloads. Meanwhile, Apple has found a way to turn a quarter of their app store into potential money makers.

The Economics

What is better for Apple? Someone paying a couple dollars for an app or downloading free app with iAd impressions? Clearly, it’s a win/win either way. Either they get revenue from the purchase or impression revenue. But how significant could iAd revenue be?

According to Apple, they’ve sold 50 million iPhones to date. Consider 6 million of those are the original iPhone and another 4 million are newer models that have been damaged, replaced, or lost and you get 40 million active iPhones in the world today.

Now consider app usage. The number of apps downloaded as of April 2010 comes in around 4 billion. Rough estimations put the number of apps that people continue to use after downloading around only 10% (we’re all guilty of downloading useless apps for the novelty only to delete or remove them shortly thereafter).

So 4,000,000,000 downloads x 10% retention rate* = 400,000,000 retained apps

*retention rate is likely much higher for paid apps and conversely much lower for free apps

Divide the 400 million retained apps out over the 40 million active iPhones around today and this comes to 10 downloaded apps per person that stay active on an individual’s iPhone.

About 25% of App Store apps are free, so assuming iAd will be present exclusively in free apps, 25% of those 10 apps (2-3 apps total) stay on the iPhone and show iAd ads (iAds?).

The adoption of iAd among developers is still unclear, but let’s assume mass adoption by the dev community. If 2-3 apps per iPhone are eligible to show iAds, this could mean 5-10 ad displays (or impressions) per iPhone per day.

With 40 million active iPhones seeing 5-10 ads a day, this would amount to 200-400 million impressions/day through iAd. That’s 73 to 145 billion impressions per year.

CPM is predicted to go as high as $15 for the most premium content. Multiply the number of impressions times potential CPM, consider Apple’s 40% share, and you’re well into the billion dollar range (8.7 billion based on the above numbers) in yearly revenue just through iAd.

And, oh yeah, this doesn’t even take into account iPods and iPads.

Should We Be Excited?

If you’re Apple, you should be. This could potentially be a new multi-billion dollar revenue channel.

Should advertisers be excited? In the end, it’s just content advertising. Will it lead to better ROI than Google (search or content) or Facebook advertising? I don’t believe so. If Apple really expects CPMs as high as $15, it would be more than tempting to abandon iAd for other content based platforms.

Should consumers be excited? Yes and no. While advertising on your personal smartphone is intrusive and could take away from the user experience, iAd could lead to bigger and better apps as developers find it more economical to stay involved in app development.

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Apple is working with what they have: a ton of eyeballs holding their hardware using apps for which they control distribution. It is a CPM model - which takes total focus off the consumer taking action and instead charges money for every thousand times it interrupts and shouts at someone not asking to be interrupted. Jobs happily talked down the search advertising (CPC) model during the OS4 keynote, but it is still the most effective (and measurable) online advertising model today.

Most agree Mobile is the future. Is this a winner for monetizing the shift and will it pay off enough to keep advertiser’s wallets open? That has yet to be seen. But the potential for a huge payoff certainly exists.