Hi everyone 👋 Turner back again with The Split. Welcome to the 273 new readers who subscribed over the past seven days! We just crossed 12,000 subscribers. 🤯 I'm still figuring out exactly what I'm doing with this, but it blows my mind so many people are reading. Hopefully it only gets better from here! No pressure. 😅

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Today, I'm digging into what Apple's cooking up in advertising. Ads will be a huge business for Apple, with broad repercussions for both their own business and many adjacent players (good and bad, depending who you are!).

Apple's Sleeping Ad Business

For the past five years, Apple has been setting up for what will soon be its most profitable product line. It's not a new phone or computer: it's advertising.

My friends Jack Raines and Nathan Baugh wrote about how Apple spent years laying the foundation for its ad business. You should 100% read their piece, but to summarize, Apple first spent years telling us how much it respects consumer privacy. It then rolled out ATT in 2021 in the name of consumer protection, which limited the data third party ad networks (like Facebook, Google, Snap, TikTok, etc) could collect from Apple's devices. This handicapped all the ad networks built on top of Apple's ecosystem. From this position of strength, Apple is now starting to scale what could become its own massive advertising business.

Apple executed its privacy marketing campaign beautifully. In the name of consumer privacy, it was able to box out competitors from using its first party device data, giving itself exclusive access to better target ads (Facebook, etc can still do this, its just harder). As of Q4 2020, Apple had over 1 billion active iPhones and 1.65 billion total active devices, which are generally used by higher income consumers (don't get mad green bubbles, this is especially true outside the US).

Apple is setting the stage to build all the same products it kneecapped: marketing tools for the long-tail of SMBs.

It's hard to predict exactly how big it could be, but Apple's advertising business will layer on top of all Apple's existing products and have extremely high margins. I'll go product-by-product (I'm sure I'll miss some obvious ones) and touch on some of the opportunities this shift may present for others companies.

App Store / Search

Apple did $3.7 billion in advertising revenue in 2021, most of which was likely App Store Search ads. These are fairly straight forward: similar to Amazon and Google, Apple charges publishers and developers to rank high in search results when consumers are downloading apps.

Here area few search ad examples currently live in the App Store. I wonder how much Instagram paid to be the top result as people searched BeReal all summer?

Wedgewood Partners thinks Google Play, parent company Alphabet's app store business, could be generating over $20 billion in net revenues and valued at roughly $400 billion. Google has higher reach than Apple, but they're much closer in size in developed markets like North America and Europe where digital advertising companies like Facebook and Google generate most of their revenue (and cash flow).

Beyond just the App Store, analysts estimated Google paid Apple $15 billion in 2021 to be the default search engine on Safari. The ability to monetize web search in Safari is probably worth a lot if Google is willing to pay $15 billion for exclusive access. This number will only keep increasing, and on a long enough timeline, it's inevitable Apple eventually builds its own search product instead of charging Google for it.

Apple News

This is a bad title because "Apple News" is really just Apple's "feed / content" products. Similar to how Snapchat added a "swipe to view Stories" motion that evolved into its Discover product that did over $4 billion per year in 2021 ad revenue, Apple is doing the same.

If you look at how Apple's News product has evolved, Facebook feed-like ads could naturally slot in. Apple's News app also incorporates audio, hinting at how it may finally start monetizing its Podcasts app. When do we see a "Video" tab? 🤔

Apple initially tried to make its News product a subscription, but it doesn't seem to have taken off. The last public number I could find was 125 million Monthly Active Users (MAUs), but I'm sure this is much larger now. If Apple figures out how to start effectively monetizing this with ads, we should expect to see it further integrate this content with the rest of iOS and pushed to more eyeballs. There will very likely be opportunities for other companies to benefit from Apple pushing News content to more iOS users.

Apple Maps

Apple Maps revenue is straightforward. Brian Nowak at Morgan Stanley thinks Google Maps will do over $10 billion in revenue by 2023. This is primarily through display and search ads as a user opens and searches the map. Justin O'beirne has a detailed analysis estimating Apple Maps has somewhere between 62 and 66 million US users, and 200 to 600 million globally, which is roughly half the size as Google Maps. Again, they're likely much closer in size in countries with large digital ad markets like North America and Europe.

I couldn't find an ad in the wild using Google Maps (I have seen them before), which just goes to show how much more inventory Google has yet to monetize. Revenue from products like Yelp, Expedia, GrubHub, and Uber are all within Apple Maps (and Google's!) strike zone.

Apple TV

Another straightforward business, Apple TV is Apple's subscription streaming service. It features premium movies and Apple Original shows, and has historically historically been viewed by the market as a way to drive broader adoption across Apple's product suite.

I don't know when, but Apple will eventually monetize Apple TV with ads. According to Digiday, its already shopping a TV ad product with media agencies. The cable TV ad market is declining, but was just over $100 billion in 2019. The "connected TV ads" market was over $15 billion and growing 50% per year in 2021, and TV itself is losing share to all forms of internet advertising, which is essentially what Apple is building anyways.

Lock Screen / Notifications

This is where Apple starts getting into dangerous territory. Monetizing the iPhone and iPad lock screens and push notifications with ads could be an EXTREMELY lucrative business, but also have the potential to quickly deteriorate the user experience.

If you read the list of new features in Apple's new iOS 16, "Lock Screen" is the first section it highlights. The new features make the iPhone lock screen more interactive and fun. It also changes notification animations. If you squint and take into account what Apple will likely do with News, the lock screen starts to look like a scrollable feed.

A search for "how many times do we open our phones per day" suggests an average of anywhere between 50 and 350 times. The total time spent on our phones is something in the ballpark of three to seven hours depending on what research you look at. Facebook, which did $120 billion in trailing twelve month revenue as of Q2 2022, is opened an average 8 times and used for 30 minutes per day in the US (where most of its ad revenue comes from). Assuming Instagram is roughly the same, Facebook products represent 20-40% of the opens and time spent on the average iPhone.

Monetizing the lock screen and eventually push notifications like Facebook monetized the news feed could be a huge business for Apple. And I think it has one more huge lever to pull on top of this.

iMessage, the Next Big Social Network

Evolving iMessage into a full-blown social network is probably Apple's biggest opportunity in advertising. Recent changes to iMessage scream Stories, and Apple could eventually incorporate swipe right / left features into the iMessage UI to encourage more usage of its content and feed products. They may start to further blend iMessage and other social features into the product. Photos, Messaging, Camera, Music, Content, Maps, Health, Wallet, etc. And there's a precedent: it's literally how Snapchat built a business on top of its messaging app.

Apple's been laying the seeds for this across its various products. The default Safari home screen shows who's recently shared links with you on iMessage. And if you remember what I wrote about Chrome last week, it might not be long until Safari opens to a feed of Apple content.

Not only will all these products create more ad inventory for Apple, they will likely come at that expense of every other product fighting for the time spent on our phones. Apple can subtlety prioritize its own products, essentially jumping in front of Facebook, Instagram, and Snapchat in the queue for our attention. I don't think it's far fetched to think Apple hits tens of billions in ad revenue within a few years. If it figures out how to turn iMessage into some sort of UGC / Stories-like video product and/or weave in a media feed, I think Apple eventually hitting $100 billion in annual ad revenue is not out of the question.

This revenue will have high margins, somewhere in the realm of 70-80% free cash flow margins depending on how good Apple's tax team is. It will probably be worth close to 15-25x FCF depending on what multiples look like in 10 years, meaning Apple's ad business could be worth an extra $1 to $2 trillion in market cap on Apple's current $2.3 trillion valuation.

If iMessage continues evolving into a fully-fledged social network, founders should be on the lookout for which features Apple prioritizes to find short windows of free or cheap growth. This could rhyme with free traffic from Facebook in the early/mid 10's, Instagram in the late 10's, or riding TikTok's algorithm to tens of millions of downloads over the past four years. Just be ready for Apple to pull the rug out at any time.

Apple: The Sleeping Advertising Giant

Hopefully I've made it clear that Apple has a LOT of unmonetized digital real estate. It needs to be careful as it chooses where to monetize with ads (personally I don't get excited about ads on my lock screen), but operating system-level ads have always been in the cards for iOS. A patent filed in 2009 hints at premium "lock screen"-like and contextual "your printer ink is low, refill it here" ads.

Apple will need to prove it can target ads at the same level as Google and Facebook. It's probably behind in AI, Machine Learning, etc, but by owning the hardware hundreds of millions of consumers use to access the internet, Apple ultimately controls the distribution to hundreds of millions of the most valuable consumers in the world. Kneecapping everyone else with its App Tracking Transparency changes has certainly helped, and explains why Facebook appears to be irrationally investing tens of billions per year into its own Virtual Reality platform. Figuring out how to monetize its camera (like Snapchat) also has direct benefits to Apple's eventual VR and Augmented Reality platforms.

In the mean time, I think we'll see other platforms continue doubling down growing their non-ad based monetization. In some cases, this will entail moving further down the stack, like Pinterest and TikTok owning the full purchase funnel to capturing the point of sale and even owning their own logistics layer. In other cases, products like Snapchat will heavily incentivize adoption of subscriptions.

In any case, Apple's sleeping ad business is starting to wake up.

Product Launches

FIFA 23 sees 10.3 million players in launch week: FIFA makes up roughly 40% of EA Sports total revenue, and the 10.3 million players is up from 9.1 million within the first 10 days of FIFA 22's launch. More from Games Industry.

Other Links

Startup headcount growth slowed in H1 2022: The slowdown was expected, but I'm surprised this wasn't slower than in 2020. I would have expected this to actually flip to negative growth. H2 2022 data will be very interesting. h/t Peter Walker on Carta's Insight's team.

I've tweeted about this before, but with rising rates, this is not a good chart for any country that is not predominantly purple. US Baby Boomer's win again.

SF office vacancy is up from 5% to 23% since 2019 as the shift to remote work continues, especially for larger tech companies. h/t Jason for sharing.

New US office space leases signed over time: Axes on these charts are not quite kosher, but my guess is "6M MA" means the six major US metro areas. Might make sense to convert some of these to housing. h/t @lines_down.

Container rates continue dropping: Still room to fall, and a good visual of how distorted rates got over the past two years. Record capacity is coming online, my expectation is rates stabilize lower as we finally work through all COVID-related supply chain disruptions. h/t Nathan Strang.

UK power prices back to 20-year averages. h/t Brett Donnelly.

Kroger and Albertson's merger would create new retail ad player: Especially as Apple moves to take more generic display and search, companies like Instacart, Walmart, Amazon, Kroger, and even Tikor are likely to move further down the funnel and capture entire purchase journey's at the point of discovery. More on Kroger-Alberton's from the WSJ.

US grocery store market share via JPM h/t Lawrence Hamtil.

76% of US adults are preparing for a recession: BMO's survey of 3,400 adults was conducted July 27th through August 29th. More from CNBC.

Kanye West is acquiring social network Parler: The line "Ye (formerly known as Kanye West)" in the press release caught me off guard and made me choke on my water. More from The Verge.

Chick-fil-A did almost $17 billion in 2021 revenue: The business has grown an average of 14% annually for 21 years. More from Chartr.

Dave Portnoy's investing journey: The incredible rise and fall of Davey the Day Trader in 140 seconds. Video here.

Banana Talent Collective

We officially crossed 100 candidates in the collective this weekend!

If you're new here, the Banana Talent Collective is the best way to hire or get hired. If you're looking for a job at a startup, apply here (anonymously if you choose), and sit back for interview requests from startups delivered right to your inbox.

If you're hiring and want a vetted stream of candidates in your inbox every two weeks, sign-up here (Banana Capital portfolio companies reach out for access if you haven't already). The collective includes employees from all the companies below, plus many startups you've probably heard of (to protect anonymity, I'll never disclose the names of companies still considered a true "startup").

On Friday I realized that the collective has a 55% acceptance rate on intro requests. I've applied for hundreds (thousands?) of jobs in my life, and maybe heard back two or three times. I can't think of a more efficient way to search for a startup job. ¯\_(ツ)_/¯

Monkey Business