Inside the Revenue Model for iAd: Why Apple Doesn't Want to Win the Mobile Ad Race

Apple's first iAd for the iPad will be for the new movie Tron: Legacy. The ad comes eight months after iAd launched, underscoring how slow Apple (AAPL) has been to get iAd up to speed. So few companies are advertising via iAd that new iAds are still regarded as newsworthy events. Renault put out a press release about its new iAd. So did Guinness.

Apple CEO Steve Jobs is a perfectionist, of course, so he probably doesn't see this as a problem. But while he makes sure the lush, enchanting iAds are perfect for Apple's devices, Google (GOOG)'s cheap-and-cheerful Android ads are gobbling up share. It now has a roughly equal share of mobile display advertising and its total share (search plus display) is 60 percent. Apple's total is just 8.4 percent. Yikes.

Is this as disaster for Apple? Um, no. The company appears to be segmenting the market this way deliberately. Apple is taking the biggest spending advertisers and deliberately ignoring small businesses. Those guys are going to Google instead.

A quick iAnalysis of iAd revenues
It's not until you see the iAd revenue model worked through in a real-life example that you realize just how lucrative iAds are for Apple and the app developers who provide the media in which they sit. According to this note from Macquarie Equities Research, if just 1,100 people per day clicked all the way through an iAd it would cost the advertiser $835,000 a year.

Marketers must pay at least $1 million to be allowed into Apple's iAd system, and then $10 per thousand impressions and $2 per customer who clicks through the ad. Here's how Macquarie believes that shakes out. The numbers are based on 26,700 downloads of the "LED Light for iPhone 4 Free" app (click to enlarge):

Macquarie says these high expenses are driving smaller advertisers to Google:

The effect of this was to push out smaller-scale advertisers that can't afford the platform, which are then more likely to go to Android-supported phones or Blackberry or Nokia devices. This marked the clearest cut yet seen between open-system mobile internet advertising and closed-loop apps, effectively segmenting the landscape for these different players.

So the reason Apple is letting itself get beat in the mobile ad race is that Apple doesn't actually need to dominate market share in order to have a fantastically profitable business: Apple is Park Avenue. Google is flyover country.

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