Apple’s IAd Mobile-Ad Service Said to Cut Prices as Clients Turn to Rivals

Apple Inc. (AAPL)’s iAd mobile-advertising business has cut rates by as much as 70 percent as some marquee clients are using rival services, two people with knowledge of the matter said, signaling the company is struggling to parlay its technology leadership into success in the ad industry.

When Apple rolled out iAd a year ago, companies such as Citigroup Inc. (C) and J.C. Penney Co. were being charged $1 million or more to run ad campaigns. Today those brands aren’t using iAd, and Apple is offering packages for as little as $300,000, said the people, who asked not to be named because the rates are private.

Even with lower prices, some advertising agencies are balking at iAd’s cost, especially because the promotions only reach Apple users. They’re turning instead to Google Inc. (GOOG)’s AdMob, Millennial Media and Greystripe, which serve a range of devices. That means Apple risks losing ground in a market that will generate $2.5 billion by 2014, according to EMarketer Inc.

“Apple’s closed ecosystem may have been interesting in the short run for advertisers, but in the long run they priced themselves out,” said Thom Kennon, senior vice president of strategy for the Young & Rubicam ad agency in New York.

Makers of applications, who benefit from iAd by selling advertising, are getting only 5 percent to 15 percent of their space filled by the Apple system, according to Mobclix Inc., an exchange for buying and selling mobile ads.

Lower Prices

Apple has cut the minimum ad purchase from $1 million to $500,000, and it’s offering agencies deals for as low as $300,000 if they bring together multiple campaigns, the two people said.

The company still has the advantage of offering the biggest selection of mobile applications. Its App Store, which provides software for its iPhone, iPad tablet and iPod Touch media player, has more than 425,000 programs. When an ad runs within an app, Apple gives the developer 60 percent of the revenue.

Natalie Kerris, a spokeswoman for Cupertino, California- based Apple, said the company continues to sign some of the world’s leading brands.

“In its first year iAd has launched more than 100 campaigns in seven countries,” she said.

Apple also is taking steps to attract more advertising. In addition to offering lower prices, it hired a former ad agency executive, Carrie Frolich, who was the head of digital for WPP Plc’s MEC. And Apple added a new online design feature, called iAd Producer, to help agencies design ads more quickly.

Disney, AT&T

Twenty companies have used iAd in the past month, including Walt Disney Co. (DIS), where Apple Chief Executive Officer Steve Jobs is the biggest shareholder; AT&T Inc., a carrier of Apple’s iPhone; and insurance provider Geico Corp. About 50 campaigns will be joining the platform in the coming months, according to Apple.

The iAd system carried unrealistic expectations from developers and advertisers, said Noah Elkin, an analyst at EMarketer, a research firm in New York. Its biggest contribution is validating the nascent market of showing advertisements to people on their smartphones, he said.

“It has been successful in that it created a beacon for mobile advertising,” he said. “Advertising was always going to be a minor revenue source for them.”

Even if prices have come down, Apple legitimized the idea of spending large sums on mobile ads, said Krishna Subramanian, the co-founder of Palo Alto, California-based Mobclix.

“You can go to an automotive company and pitch a $500,000 to $1 million campaign, and it’s realistic,” he said.

Disappointing Results?

Still, iAd has frustrated some developers, which haven’t made as much money as expected, Subramanian said. They have turned to other companies to sell ad space, he said.

State Farm Mutual Automobile Insurance Co. is using competing mobile-adverting networks after being part of the initial group of companies to advertise through Apple, said Ed Gold, the insurer’s advertising director.

J.C. Penney, another inaugural user of iAd, also is working with other services, said Danika Berry, a spokeswoman for the retailer. Citigroup confirmed that it’s not currently using iAd as well. The companies said they may use iAd in the future.

Rival mobile-advertising companies have been luring clients by undercutting Apple on price and promoting their ability to run across multiple devices, including handsets from Samsung Electronics Co., HTC Corp. and Motorola Mobility Holdings Inc. - - phones that rely on Google’s Android operating system. Millennial Media also hired one of Apple’s iAd sales managers.

Limited Audience

“You’re cutting your potential audience in half by focusing on a single platform,” said Dane Holewinski, head of marketing at Greystripe, which was acquired by ValueClick Inc. (VCLK) in April. About 80 percent of the company’s advertising campaigns work across multiple devices. “Advertisers don’t care about platform. They care about audience, performance and engagement.”

The iAd system carries a level of prestige, in part because of its sleek design, said Rob Norman, CEO of ad agency GroupM North America, whose clients using iAd include Unilever NV.

“Everyone likes the consumer experience it creates,” he said. “Everyone wants to be there because they think that, possibly since television, this is one of the most elegant customer experiences.”

Still, companies must account for the cost, Norman said.

“We’d all like to stay at the Four Seasons, but not if it costs $150,000 a night,” he said. “There’s a price equation.”

Quattro Acquisition

The iAd platform was started after Apple acquired mobile- advertising company Quattro Wireless last year. It was introduced last July at the company’s annual developers conference as a way to take more interactive features, such as videos, and embed them within applications.

Apple targets ads by using data from the millions of accounts registered with its iTunes software. The pitches are made based on demographic information, along with a user’s music, movie or App Store purchases. Advertisers can choose “buckets” of users to target, based on demographics, though they can’t pick which specific applications the ads run in.

When it was introduced, Jobs said most other mobile advertising “really sucks.”

For now, many ad agencies haven’t embraced iAd as an improvement over the old approaches, said Rachel Pasqua, vice president of mobile for ICrossing, an online marketing firm. She cites the cost, time needed to get ads approved, limited size of the audience and control Apple has kept over data.

“I haven’t encouraged any of my clients towards it,” Pasqua said. “I haven’t seen a huge value proposition.”

While Apple has stumbled in advertising, its influence over the technology industry means it’s too soon to count the company out, said EMarketer’s Elkin.

“IAd may have receded in to the background, but it’s too early to assume it’s not going to come back,” he said.

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.