Why Is Apple Tracking Your Location?

It’s all part of their master plan. And it appears to be working.

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Apple just announced another blockbuster quarter. Almost $25B in revenue (up 83% Q/Q), 41% gross margins, earnings are up 95%, Mac shipments are up 28%, iPhone shipments are up 113%, and another 4.7 million iPads went out the door in the quarter ended March 31.

But look closely, and you’ll see that Apple is quietly turning itself into a different kind of company:   a company that views content as a revenue driver in its own right, not just a way to move (expensive) boxes and make them sticky. iTunes, for example, , now accounts for more than 5% of total revenue, and with book downloads to the iPad growing rapidly, iTunes appears to be becoming a significant profit center.

Revenue from apps are becoming a meaningful source of revenue as well. In January, the much heralded 10 billionth app was downloaded from the App Store, with 30% of all app revenues flowing directly to Apple (more than $1 billion to date).

But perhaps the most interesting element of Apple’s growth strategy might be its disruptive approach to the rich online advertising market. Last year, total online advertising spend exceeded $26 billion. And while only $1B was spent on mobile, the projected growth rates for mobile advertising are truly astounding. Forecasts are all over the map, but Gartner (as good a proxy as any) predicts mobile ad spend will grow to $3.3B in 2011, and to more than $20B by 2015.

Why such massive growth? Because mobile (and especially location-based) ads are tremendously more effective than conventional online ads.  According to the Mobile Marketing Association, nearly 50% of users who are shown a location-aware ad on a mobile device will take some action, compared with typical clickthrough rates on web based banner ads of 0.2 – 0.3%. Put another way, mobile location based ads are roughly 250 times more effective than conventional ads. That’s something that advertisers will clearly pay for.

But the online advertising ecosystem has already become pretty crowded.

There’s not much room in here for Apple to garner a significant market share. They’re boxed out.

So Apple apparently has figured out a way to change the game (again). They created and marketed “apps.” In the browser, the dollars flow from advertiser (Infiniti) to agency (WPP Group) to the myriad data optimization / DSP / RTB / analytics / yield optimization / etc. / etc. companies, and finally to the publisher (www.cnn.com). There are a lot of hands in the till.

But with apps and iAd, there is no ecosystem. There are the app developers, and there’s Apple. That’s it. 60% of advertising revenues go to the app developer, and fully 40% of the advertising spend flows directly to Apple. With a projected $20 billion total mobile advertising market by 2015, this is a big opportunity for Apple.

What Apple needs for its plan to succeed is massive adoption of apps.

Enter the Apple marketing machine. There are now more than 100 million Apple mobile devices in the market, and Apple has the “it” device of the moment:  a tablet that’s on fire.

And so are apps.  They’re so cool!

It’s hard to believe a major brand like the New York Times devotes two page spreads to promote its iPad app. The Times already has a beautiful website and they’re successfully monetizing it with expensive advertising and subscriptions. I don’t think they’re promoting their iPad app because it’s a huge moneymaker (it’s free), or because it provides a significantly better experience than the physical paper or their website (it’s doesn’t), or even for the ad revenues (are they making more from their app advertising than they make from ads on their website?). Apple’s marketing machine has created a movement:  they’ve made it cool to have an app. So cool, in fact, that the New York Times (and every other brand, seemingly) is devoting serious real estate to promoting theirs.

Kudos (once again) to Apple’s marketing machine.

Apps are Apple’s iAd delivery mechanism. Apple is building yet another closed environment – this time, for advertising.  And now we find out that Apple has been surreptitiously monitoring and recording iPad and iPhone users’ geolocation, no doubt so that they can monetize users’ locations through geo-targeted ads (increasing ad effectiveness by 250 times or so). Apple also is syncing the location file from the mobile devices to the desktop devices, arguably to serve the same type of geo-targeted ads to users on their desktops and laptops (based on the journeys of their iPhones and iPads), further increasing revenues.

As of today, Apple has a market cap of $323 billion, making it the second largest U.S. company, behind only Exxon Mobil (XOM) at $428B.

Is Apple too expensive?

Apple has TTM revenues of $76B and $17B in net income, compared with XOM’s $342B in revenue and $30B in net income. There is no doubt that Apple’s stock price factors in some pretty aggressive growth assumptions. But Apple is executing extremely well (see latest 10-Q). And recent events (like being caught geo-targeting all their mobile users) would suggest they are also executing on their master plan to capture a significant share of the rapidly growing mobile advertising market.

It appears Apple is attempting to recast the online advertising space in much the same way it did with the PC market, and the music industry, and mobile phone market, and portable music player market.

Bet against them at your own risk.

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