How Apple’s iAd Could Blow Marketers’ Mobile Budgets

Dozens of questions remain about Apple’s plans to get into the mobile advertising business, from how much a campaign will cost to which applications will they run on.

Based on information Apple (NSDQ: AAPL) is telling advertising agencies, we were able to get answers for at least one: how much a campaign could potentially cost on the iAd platform — and the results are startling. According to our number crunching, CPMs will be highly variable but in some some cases could wind up being triple what marketers are used to paying for banners, and double the price of a video ad on mobile. In another scenario — a very successful campaign that generates an unusual number of clicks — a marketer’s ad spend could easily wind up being more than seven times what it had anticipated.

There are plenty of skeptics who say that iAd’s high prices and other restrictions may drive interested marketers away. But if Apple gets its way, iAd could mean a financial landslide for the mobile advertising industry, which was been bouncing along the bottom for years, totaling only $416 million in 2009, according to eMarketer.

For starters, Apple is setting the minimum annual spend at $1 million, but the price could go much higher if the ad generates a lot of clicks. For comparison sake, luxury brands Jaguar and Land Rover last year budgeted a combined $1.6 million for mobile marketing. With Apple asking for that much on just its platform, advertisers will have to weigh the attractiveness of the company’s user demographics and premium ad experience with how much they are really willing to lay out for mobile advertising.

For Apple, the key lies in iAd’s model of charging marketers based on a hybrid of CPMs and click-through rates, rather than one or the other, as is standard. Apple is said to be charging 1 cent per impression and $2 per click, reports the WSJ. Using those figures, we tried to determine how pricey a campaign would be, assuming a few different scenarios. The biggest variable is the click-through rate. Today, the mobile industry commonly sees anything between 1 and 3 percent, but iAd could easily be higher because of its novelty factor. Using this information, and assuming a marketer spends no more than $1 million, we calculated the CPM, which is the industry standard for cost per thousand impressions (see chart).

On the low-end (assuming a 1 percent click-through rate), the CPM would be $15. On the high-end (with a 3 percent click-through), it would jump to $70.

Jumptap’s Chief Marketing Officer Paran Johar says mobile banners today garner between $6 and $30, while mobile video on the high end falls between $20 and $40. “I have talked to a dozen or so agencies and there’s going to be a lot of push back. They