I have always thought Apple should have their own search engine. Way back when Altavista was being snapped up by Overture (then swallowed by Yahoo) I thought Apple should be in the search engine market. I still do, so here are five reasons why Apple should have its own search engine.

[Disclaimer: I own a few hundred shares in AAPL. These ideas are my own.]

1. Revenue

We know that Apple’s core source of revenue of hardware sales which is not about to change. However, stock market analysts Trefis suggest that 8.2% of Apple’s share valuation comes from App related income.

This is an income stream that has been around for about two years, in which time the share price has risen from $96 per share to $270 per share (date: 26 April 2010). Now this share boost cannot be attributed to the apps alone (lest we forget countless iPhone releases and the iPad) we can see that new income streams are helping grow the overall size of the company and diversify the revenue streams away from just hardware income.

Creating a search engine that sold ads, on competition with Yahoo, Google and Microsoft could create another source of income that would be valuable to the long term business of Apple.

2. Consumer Relationship Channels

If we look at Google for a minute, we can see that Google started with a pure search engine, then added other search related services before expanding to offer blogging tools, and productivity apps to compete with Microsoft and Apple. Google Apps like Google Docs and Google Mail work to bring the user relationship closer to the ‘start’ of their online behaviour as well as working to retain them for longer [and know more about the user through smart data management.] The development of Chrome Browser, the OS, the Nexus One and the rumoured iPad challenger are all reasons for Google to grow the relationship with the consumer to boost its core business of search related advertising.

Why is this relevant to Apple? Because Apple already has those channels and more. They have the top selling mobile Internet device, known as the iPhone. They sold out the first stocks of the iPad. They make their own desktop hardware, own an email service and email client [Mail] as well as desktop software with their iLfe suite of products. So Apple already has the customer relationships across a wider suite of hardware, software and services than Google. Microsoft would still be dominant in this category but have struggled to really make the connections pay pre Bing. Yahoo only has a search engine and some additional web services that seem to wither once purchased (MyBlogLog anyone?)

Where Apple has a further advantage is their connection in the living room of homes. Whilst the Apple TV is small beer in terms of sales and revenue, it is still a connection that could only be rivalled by the Windows Media Center. Whilst Apple still define the Apple TV as a hobby they aren’t cancelling it, more trying to work out what to do with it. Could this be their Trojan Horse?

3. Traffic

The Apple site is a well respected and active site on the web. With estimated traffic figures for Apple.com standing around 5.6m visits per day [source: statbrain.com] it is a long way off Google [estimated at 118m] but much closer to AOL with an estimated 8.267m visit per day. On a pure comparison basis, Apple would not be able to compete with Google, Yahoo or MSN for traffic. Nor should it need to. If we look back at the AOL comparison for size of site [if Apple.com just became a search engine which would of course not happen] we could see promising income. For Q4 2009 (the latest AOL earnings report) advertising income stood at $500m. [source] Basic maths says that’s a billion dollars a year business – something that could be achievable for Apple.

Again, taking AOL as a comparison, not all Apple’s income would come from the core search engine. iWeb, the website building tool from Apple has the ability to include advertising widgets. These widgets at the moment are Google AdSense based, so the ability is already there to include an Apple advertising widget to generate third party income. Creating their own search search widget to further harness search traffic and resultant income would not be difficult to achieve.

This ability to harness channels is already taking shape with the iAd platform for the iPhone and iPad apps. AppleInsider (very slow link at time of publishing) suggests revenue from iAd could generate add another 8% to their share price. The combination of factors here is the perfect example of what could be done with a search engine.

This joining of the dots [the iPad/iPhone, editorial approval and distribution of apps with the app store and the aderving capabilities of iAd] could be replicated across more of Apple’s products to make a very strong ‘funnel’ to populate their own search engine. Analysis from Trefis suggests that the iAd could earn Apple $2bn in gross ad revenue. If that is pure mobile related income, what could be generated from a search engine?

For the sake of balance, the potential revenue from iAd was based on rate estimates from AdMob which were challenged by BusinessInsider.com as being way too high in this current economy.

4. Brand Loyalty

If we were comparing just traffic, Apple would be a niche player. But the brand loyalty of Apple is huge, with new disciples being made with every new iPad sale. Not only could Apple be harnessing its various strands of user connections but it could also be building on the relationship and trust Apple has with its consumers. Can you tell me any other site that gets people so excited when it goes DOWN? This has to be a strong card for Apple to play.

Looking at the list of 100 global brands for 2009, Apple was ranked 20th best Global brand by Interbrand. Google was 7th, Microsoft was 3rd. Yahoo was not featured.

5. Ad Serving

I believe this is important enough to warrant its own point. You may recall back in 2007 that all the main search engines acquired their own ad-serving products. Google acquired Doubleclick for $3.1bn, Microsoft bought aQantive for $6bn which included the Atlas ad server. Yahoo moved to purchase Blue Lithium an ad network with proprietary technology and took full ownership of Right Media.

These deals were to connect the supply chain between ads, advertisers and the sites themselves. Again, as we have seen with the purchase of Quattro Wireless that became iAd, Apple have connected the parts to manage the supply chain to in app advertising. I am not an expert in ad serving but I would expect that once you have a good ad server, there shouldn’t be too much work to make it connect to web pages, rather than mobile devices.

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So, I believe Apple have many of the key elements in place to create their own search engine play. Consumers with Apple devices are already searching. Whilst Apple will be getting third party revenue from Google AdSense it will be a lot smaller than if Apple had its own direct stream.

To me it seems a logical extension, to join the dots. But for the purpose of balance, here are a few reasons why not.

i. Mobile is the future, why invest in old technology?

A recent ‘future internet’ prediction from Mary Meeker of Morgan Stanely pointed firmly to a future Internet dominated by mobile access, so why bother investing in parts that may be redundant in five years? Well, people still search – they are just doing it from more platforms, of which Apple has the bases covered. Even if in time the search function is packaged as a dedicated app, a search engine will need to be built.

ii. Apple is making so much money, why bother?

Yup, Apple is making a lot of money. The share price is at an all time high, with expectation building for it to reach $300 per share.  With many of the components already in place, it shouldn’t have to be a huge investment to create a search engine upon which ads can be served and income can be generated.

iii. Build or Buy?

Search engines aren’t easy to build from scratch, and the skills required probably aren’t working in Cupertino right now. So an acquisition may be worth looking at. AOL has gone from being the world’s largest ISP to a ‘niche’ player in the market. With a market cap of $3bn compared to Apple’s $247bn this could be a an easy purchase, but AOL don’t have a search engine of their own. Ask Jeeves? Since Jeeves handed all but the front page over to Google it has slowly lost its relevance. With the growth in ‘personal content’ (aka user reviews and UGC) is there a new role for a ‘human edited search engine’? Ask Steve anyone?

iv. Shareholder Sentiment

The challenge with creating a search engine to compete with Google is the comparison with Google. Both Yahoo and Microsoft achieve great revenue from their search products which if they weren’t compared to Google would be huge news. Instead, because of Google’s success at better monetising the search arena, Yahoo and Microsoft get unfavourably compared against Google, which doesn’t always work well for shareholder sentiment. Should Apple decide to go down the search route, they may get more negative reaction than positive. As a golden stock right now, they may not be keen to jeopardize this.

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So, these were just my thoughts. It seems to be me that Apple are in prime position to create a new revenue stream from search. They have many of the component parts already in place, and cash to build or buy what they don’t have. If we look at the ‘big three’ search engines (Google, Microsoft, Yahoo) it seems to me that Yahoo is the most vulnerable. It has been slow to cement strategic investments and lacks the hardware/software/services route to connect with customers that Microsoft has and Google is rapidly building. Could we see iSearch as a potential search player?