Apple AI – Desperate Times.

Acquisition remains the most likely outcome.

• Apple is toying with the idea of using a 3^rd party to power Siri, but unless Apple has complete control of the AI that powers Siri, it is at risk of losing its competitive edge, which, in turn, could result in profitability declines.
• Hence, the most likely outcome remains an acquisition by Apple of one of the LLM companies.
• It is no secret that Apple is struggling with AI, and RFM Research has classified Apple as a laggard for several years already.
• However, the level of desperation to even consider ceding potentially critical digital real estate to a 3^rd party is surprising to witness given how committed to vertical integration Apple is.
• According to Bloomberg (see here), Apple is considering using either OpenAI or Anthropic to power Siri and is currently running tests side by side with its in-house LLMs to see which fares better.
• There is no question in my mind that either OpenAI or Anthropic will easily outperform Apple’s in-house LLMs, but whether Apple takes the gamble to deploy them on the iPhone remains to be seen.
• This may not seem like a big risk at this point, but if one believes even half of what Google, OpenAI, Anthropic, Meta and so on say about where the use of AI agents is going, then this could put the iPhone business at risk of becoming much less profitable.
• I am far from convinced that AI agents are going to take over the user interface of the smartphone in the same way that they could in the vehicle or in The Metaverse.
• This is because the touch-based icon grid as a user interface is already very good on a smartphone in contrast to the vehicle and head-mounted displays, where the user interface is quite poor.
• Therefore, the increase in the quality of the user experience afforded by voice in the vehicle or on a head-mounted display is far greater than it is on a smartphone.
• As a result, I am far less certain that it is going to take off on smartphones in the same way that I am in the other device categories.
• However, assuming the luminaries are right, and everyone starts using voice to interact with their smartphone, then this represents a potential dislocation point in the smartphone market.
• This is because the AI agent on the phone will become the key control point, which puts Google and Tencent in a similar position to Apple.
• The key difference is that both Google and Tencent have an answer to this problem, which is why we are seeing Google put all of its weight behind Gemini.
• Google must ensure that Gemini is the agent of choice on Android, or else it faces losing control of the platform as well as access to the data that it uses to drive its $300bn advertising business.
• When one looks at it in this context, it becomes very clear why Google is pushing Gemini so hard, and I expect that this will continue.
• Apple is in a much more difficult position because Siri is awful and is completely unfit to receive complex requests and execute them on the iPhone.
• This is where both Google and Tencent are in a much better position to retain control over their ecosystems should the use case move to AI agents.
• Furthermore, if Apple uses technology that is owned by a 3^rd party, it will have introduced a large risk into its business model over which it has no control.
• Should OpenAI or Anthropic end up being acquired by one of its rivals, it will have become dependent on the technology of a competitor, which is a very uncomfortable position to be in as Mr Zuckerberg knows only too well.
• This is why I think that the only solution for Apple is to build a decent AI itself, or buy one of the other players and bring the technology in-house.
• Fortunately, it has time to deal with this issue as AI agents are far from being a factor that influences the decision to buy an iPhone.
• I think that the most likely outcome is an acquisition by Apple that brings the competence it needs in-house, that will allow it to fix this problem.
• Hence, I don’t expect anything to come of the tests with OpenAI or Anthropic, but I am pretty sure that Apple’s rivals are enjoying every moment of its discomfort.