Markets

Why Apple Can't Find Anyone to Advertise on iAd

By Jim Edwards

Updated on: February 24, 2011 / 10:18 AM EST / MoneyWatch

The fact that Apple (AAPL) can't find enough advertisers to fill its iAd slots on iPad and iPhone suggests that the company mistakenly believes it is competing against television, when it ought to be competing against Google (GOOG).

Apple recently sponsored a "study" by Nielsen that showed iAds were more effective for Campbell's (CPB) than TV commercials. Who cares whether iAds or TV is better for soup? Apple does, but that's only because the minimum buy-in price for an iAd is $1 million.

UPDATE: Apple recently halved the buy-in price to $500,000.

That's a small sum for a big corporate advertiser like Campbell, and it's much smaller than a national TV ad campaign would cost. But that's not the kind of money that advertisers want to spend online.

Here's one example of an iPhone game app developer trying to advertise online. His budget is $250 to participate in the system and then $100 a day after that. By the time he finally figures out a price/revenue model, he's only a few hundred dollars in the hole.

Here's another example, from Daniel Amitay, who sells the Big Brother Camera Security app (it takes a photo of anyone who tries to steal your phone). Amitay doesn't give numbers, but you can tell he's smalltime because he says, "I know that my apps don't have amazing sales or revenue." In 2011, the fill rate for iAds running in his app was just 9 percent.

Now look at this iAd model, in which advertisers are charged for iAds running in a free LED flashlight app for iPhone. Advertisers must spend $1 million to run the ad, and then $835,000 in cost-per-impressions and clickthrough fees. About 1,100 people clicked through each day, meaning the advertiser paid around $4.57 for each user. As the analyst who provided the model said:

The effect of this was to push out smaller-scale advertisers that can't afford the platform.

The economics aren't that great for Campbell, either. A commenter under the Ad Age story about the experiment crunched these numbers:

53 million impressions.
1% clickthrough rate =
530,000 clickthroughs
Let's assume that these 53 million impressions cost only $1 million (the minimum to get in on iAds, but I'd guess it cost more than this, but it's still a stunning $18.87 CPM AT BEST).
At these rates, every person that clicked on the ad would have go out and buy 1.5 cans of soup (at the generous retail price of $1.25 per) for them to break even.

One of the reasons that Google, by contrast, has made so much money from online search advertising is that it quickly figured out that most of the dollars were not going to come from the massive budgets of Campbell, Coca-Cola (KO) and Procter & Gamble (PG). Rather, it comes from small business -- mom and pop outfits who've been priced out of traditional media but who can now suddenly reach anyone who searches online for their goods. They can spend what they want, when they want, where they want, and turn their budget on and off as they desire. There are no $1 million upfront fees.

Now Google is rolling out Android Honeycomb for tablets. Android is a platform that essentially provides a mobile version of online search-based advertising. (Notice how its ad-funded operating system is moving up the food chain, from Android phones to tablets to ... look out, Microsoft Windows!) That system will doubtless be filled with cheapo Admob/Android ads.

Broadly, the situation seems to be that Apple is trying to steal share from TV while Google takes a majority
of the people who actually want to advertise on mobile devices.

Related:

Image by Flickr user mac morrison, CC.

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