Among many hits, Apple's lonely flop

October 23, 2012: 5:00 AM ET

The company's iAd advertising platform was launched with great fanfare two years ago. But it's remained a painfully niche product.

By Verne Kopytoff, contributor

FORTUNE -- Two years ago, Steve Jobs introduced Apple's iAd, the company's first foray into mobile advertising. On stage at Apple's headquarters, he called the new ad network for iPhones and iPads a "pretty serious opportunity" and then derided rivals for failing to offer something more compelling. "We think most of this mobile advertising really sucks, and we thought we might be able to make some contributions," said Jobs, who died last year.

But despite the salesmanship, Apple's (AAPL) push into mobile advertising has had mixed results. Advertisers are not clamoring to join its ad network. The competition is not crumbling. In short, it is a rare disappointment for a company that usually churns out blockbusters.

This year, Apple's iAd will finish with only 2.9% of the U.S. mobile advertising market, according to eMarketer, a market research firm focused on digital advertising. Google (GOOG), in contrast, will have an industry leading 54.5% share.

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Apple's failure to gain traction isn't a big deal for now. Overall U.S. mobile ad spending is expected to be a relatively modest $2.6 billion this year. But it does mean that the company is poorly positioned vis-a-vis a potential source of future growth. Spending on mobile ads will more than quadruple over the next four years to $12 billion, according to eMarketer.

The reasons behind iAd's lackluster performance include its limited reach, large upfront cost to advertisers and design intensive requirements, according to executives and analysts who follow the mobile ad business. Nearly all of them agreed that iAd's problems are difficult to solve.

Apple's sales pitch is that iAd gives advertisers a dazzling way to reach consumers across hundreds of millions iOS mobile devices. Tapping on a banner can bring up full-screen video clips and text swirling around colorful images -- all the better for marketers to tell memorable stories. Additionally, iAd lets businesses target highly specific audiences. If an advertiser wants to reach sports fans between a certain age, it can do so based on a mountain of demographic information and other personal details that Apple collects about its customers like what apps and music they download.

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But that sales pitch has been muted by grumbling about the upfront cost to run an iAd campaign. Initially, Apple required advertisers to spend a minimum of $1 million. That's a lot of ads, particularly when you consider that most companies are only experimenting with mobile advertising. Apple has since lowered the threshold to $100,000.

Still, the cost largely limits the pool of advertisers to big companies like movie studios and auto manufacturers, said Michael Boland, an analyst with BIA/Kelsey, a market research firm. So does the complexity of creating an iAd campaign, he said. Smaller businesses don't want to be bothered with designing specialized marketing messages for iAd and instead prefer to recycle their ad campaigns developed for desktop computers. "I think iAd is a little before its time," Boland says.

To entice app developers to sign up for iAd, Apple has had to sweeten its offer. Getting as many developers on board is critical for iAd to reach the biggest possible audience. At first, Apple offered developers a 60% cut of the revenue for ads displayed in their apps. Underwhelmed by the response, Apple earlier this year increased the split to 70%. Whether the change succeeded is unclear because Apple does not publicly disclose details about iAd, including the number of developers signed up. The company declined to comment for this article.

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Another factor holding back iAd is that it is limited to iOS devices. Advertisers that want to reach Android users must go elsewhere. "Apple customers are definitely very desirable," said Shawn Scheuer, chief executive for Moolah Media, a mobile marketing company. "But you're leaving out a massive part of the market."

Indeed, Android smartphones represent 52.2% of the U.S. market, according to comScore (SCOR), while Apple iOS phones account for 33.4%. Android owners are all the more attractive to advertisers because they tap on ads more readily than others, Scheuer pointed out. Studies show that iOS users tend to ignore ads more often, making them less valuable.

In perhaps a sign of Apple's priorities, none of its executives have spoken publicly about iAd for quite some time. Apple, after all, is doing just fine selling hardware, and mobile ads are insignificant by comparison. Of Apple's $40 billion in expected revenue this year, only 0.2% will come from mobile ads, based on eMarketer's estimates. Yes, Apple doesn't need a big mobile ad business for now. But it could come in handy in the future.

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