In early June, Steve Jobs demonstrated iAds in front of Apple developers in San Francisco. Photograph: David Paul Morris/Getty Images

British mobile users will soon find themselves embroiled in the epic confrontation taking shape between Apple and Google. iAds, Apple’s bid to run advertisements inside apps, is expected to make its UK debut in September. Separately, Google has adopted what its chief executive, Eric Schmidt, calls a “mobile first” approach, prioritising investment in a medium that has become “fundamental to everything we do”.

With the iPhone moving into mass market territory and the iPad selling 200,000 units a week, Apple’s decision to start selling mobile advertising seems likely to concentrate a few media minds.

In early June, Steve Jobs demonstrated iAds in front of Apple developers in San Francisco. The ad he showed off was a work-in-progress by Nissan. The demo, which included a 15-second video, an interactive application and a form to sign up for a competition, didn’t quite live up to Jobs’s aim of “trying to combine the emotion of video with the interactivity of the web”. But it was slick. In the future, Jobs promised, iAds would bring in the revenue that would allow developers to continue producing “free and low-cost apps to delight users”.

There are early signs that mobile advertising, like everything else touched by Cupertino’s genius, will turn to gold. During the eight weeks leading up to the presentation in San Francisco, Apple sold $60m-worth of iAds to the likes of Unilever and Disney. This compares with the $250m mobile online display revenue generated across the whole of 2009 in the US.

For media owners, there are two major problems with Apple’s ad model, which the analyst Toni Sacconaghi of Bernstein Research suggested in a recent report has the potential to become an $800m-a-year business within the next year.

First, Apple’s approach threatens to reduce media owners to the status of “developers” alongside tens of thousands of competitors. The second problem is that Apple’s business model, like Google’s, reduces media owners’ involvement in advertising markets to a minimum.

Mobile giants

Apple and Google already own the world’s two largest mobile ad networks. Both are already selling ads directly to advertisers. Advertisers, for their part, aren’t paying to reach mobile users attracted by a specific media company. Instead, in the case of iAds, they pay Apple to reach broad swaths of iPhone and iPad users who share common demographic characteristics.

In order to stitch together these communities of users, Apple has been analysing the purchasing history of its 150 million iTunes account holders worldwide who also use iPhones and iPads. Its own hardware produces a separate stream of data about what users do, and where and how they do it. Notably, the privacy policy associated with the iPhone 4 allows Apple, for the first time, to collect anonymised real-time location data on its users.

How much of this data will Apple share with advertisers and publishers? “We talk to Apple a lot,” says one publisher. “But we haven’t had that conversation yet.” The ad industry seems similarly uncertain. Michael Collins, the chief executive of Joule, a WPP-owned mobile agency, recently told Business Week that data sharing is “the question that many of us in the industry are very curious about“.

Google, too, is forging ahead, but in a different way. On the mobile web, it continues to emphasise lead generation rather than branding. Ian Carrington, director of mobile ad sales for Google Europe, Middle East and Africa, sketches out a scenario in which a mobile user is reading a book review on a handset in a cafe. “The accompanying ad will understand its context,” he says. “It will know what book is being discussed in that review. He adds: “You’ve also got GPS in most smartphones now, so your handset can tell you that this book is £5.99 in a shop 100 yards away, and £4.99 in a shop a mile away.”

Google, Carrington says, already knows how to do “the contextual part” of a scenario like this. “We’re still working on the location-based bit,” he adds. Yet the bottom line is that Google’s results-based approach will probably yield small revenues on the mobile web, just as it did on the desktop web.

Despite different approaches to advertising, one thing unites Apple and Google. Both companies want to hold on to a relatively large proportion of the ad revenue they generate. Apple, for example, proposes to pass on to developers 60% of the revenue generated by iAds. Google continues to suggest it passes on to publishers “at least 50%” of the revenue generated by ads it runs next to publishers’ content. These levels of commission will look high to anyone who recalls the 15% commission that used to go to media agencies for bringing in advertising for publishers.

There’s a further reason for publishers to be wary about the mobile web. As it turns out, Apple and Google plan to take a large slice of what, by anyone’s standards, is a very small pie. Last year, the latest in a series of years dubbed the “year of mobile advertising” by industry boosters, advertisers spent a mere £35m trying to reach British mobile users, according to Enders Analysis. That’s 1% of what advertisers spent on all digital advertising and, as Benedict Evans, a consultant at Enders Analysis, points out, less than the £50m he estimates Britons shelled out last year to have pornographic images texted to their handsets.

In the words of one publisher, the cumulative effect of these challenges is a “cautious” and “risk-averse” approach to publishing on tablets and handsets.

Others take a more positive view: Matt Kelly, digital content director at Trinity Mirror‘s national papers, says Apple has the upper hand “because they’re first into the market, they’ve done all of the development, all of the creative hard work”. “They’re reaping that reward,” he adds. “At the moment, content producers are at the mercy of great technology innovators. But it won’t stay that way forever. We may see a swing towards publishing content on Android if Google’s business terms become more attractive.”

Not a bad deal

Kelly is also wary of the argument that Apple and Google are skimming off too much mobile ad revenue. “The overheads at Trinity Mirror’s newspapers are 75% of revenue – for paper, ink, transport and so on. If someone comes along and says, we’ll replicate the revenues, but the bulk of your costs will be 40%, it’s not automatically a bad deal.”

Kelly remains confident about the value of content: “Technology will become commoditised and homogeneous, more open for third parties to come in and innovate and copy. The profits for platforms will decline and the profits associated with content will increase.”

Steve Pinches, lead product development manager at ft.com, says that Apple wants to use iAds to sustain a “huge long tail of apps that really have no easy way of monetising themselves”. Big media is different, argues Pinches. “We have very deep relationships with our advertisers that have been formed over years and years,” he says. “We also have an incredibly deep relationship with our readers.”

Evans also sees positives in Apple’s pricing of iAds. “They’re trying to catalyse the market,” he says. “If they’d gone out and said this is going to be cheap, advertisers would have carried on with their small experimental budgets. “But Apple has told advertisers they’re not spending $80,000 on another experimental campaign. Instead they’re each going to spend a minimum of $1m on each iAds campaign.”

Rupert Murdoch thinks the iPad “may well be the saving of the newspaper industry“. Yet Apple would like to claim the lion’s share of profits from the mobile web by charging a high price for its hardware. By contrast, Schmidt at Google foresees a future in which handsets and airtime are free, subsidised by advertising.

Both Apple and Google need what Jobs describes as “free and low cost” content that engages users and attracts advertisers. On the mobile web, the task facing media owners is to figure out how much revenue they can wring out in return.