Monetization within iPhone apps is a tricky issue. While freemium models like Dropbox and Evernote can bring in significant revenue with just one to five percent conversion rates, not all applications are designed to drive users to a premium service. Another heavily used option, of course, is in-app advertising.

Mobile ads are, in a sense, especially optimized to work with iOS apps: Apple marks each device with a Unique Device ID (UDID), a 40-digit code linked to everything you do with your iPhone or iPad. When phrased this way, UDID tracking sounds risky and potentially malicious. Really, though, it’s the way that so many apps can be offered for free. An app that doesn’t charge a straight fee will generally sell users’ information, tracked by UDIDs, to advertisers.

Advertisers use your iPhone activity — across apps, down to the finger tap — to target their ads so they’re relevant to you. The problem with this system is that vast stores of users’ personal data, unified by UDIDs, are kept backed up in databases. Users rarely are alerted to this data collection, and it’s often conducted without consent.

Apple sees the problems inherent in the UDID structure, and announced to developers last August that it was moving away from the UDID system. Developers submitting apps to the App Store that included UDID-related services or tracking soon found those apps rejected.

iPhone Apps and User Privacy

The move away from UDIDs represents the desire on Apple’s part for greater transparency and user privacy. It has serious implications, though, for the developers and publishers who rely on UDID data for revenue from advertisers — the revenue that makes so many iPhone apps available free. Mobile marketplace MoPub found in a recent study that after the phasing out of UDIDs, mobile ad prices could fall by up to 24 percent.

When MoPub looked at the effective cost per thousand impressions over a three-month period, mobile ads that included UDID data earned 24 percent more than those that did not, at an eCPM of $0.76 compared to $0.58. App publishers worry that the change could cut out a significant part of their revenue — at least for a short period. Inside Mobile Apps notes that replacement tracking services have already been proposed, like Apple’s CFUUIDs (Core Foundation Universally Unique Identifiers) and open-source, cross-platform ones like OpenUDID.

It’s uncertain whether one tracking service in particular will become the standard in the way that UDIDs have. What’s more concrete is the sheer amount of money involved here: in-app advertising is now a $1.7 billion industry.