Why Apple Will (Eventually) Win AI

Apple doesn't need to compete in AI to be its biggest beneficiary

Apple as gatekeeper (created with OpenAI)

Apple is catching a lot of flak for its AI efforts.

Here are a few recent headlines:

• Axios: “AI Is Turning Apple into a Market ‘Loser’”

• Fortune: “Apple CEO Tim Cook Has Created More Shareholder Value than Steve Jobs. But Suddenly his Weaknesses Are on Display in the AI Era”

• Quartz: “Apple Is Falling Behind Its Magnificent 7 Rivals. Should It Just Be the Mag 6?”

• IBD: “Apple Needs Acquisition To Catch Up in AI Race, Analyst Says”

• Motley Fool: “Is This the Real Reason Apple Is So Far Behind Its Rivals on Artificial Intelligence?”

• Bloomberg: “Apple Faces Calls to Reboot AI Strategy with Shares Slumping”

• Washington Post: “Apple Faces Existential Problems–and is in Need of New Blood”

Even the most recent All-In Podcast found a rare point of unanimous agreement that Apple is missing the boat on AI.

Reports of Apple’s death are greatly exaggerated. The fixation on Apple’s seeming inability to innovate in AI, or build and ship its own models, misses the bigger picture.

Despite its underwhelming AI initiatives so far, Apple is likely to be the ultimate beneficiary of AI–and they can afford to take their time.

Apple owns the consumer.

Over half of smartphones sold in North America are iPhones, and no one is ready to switch because Apple has been slow to upgrade Siri–iPhone still commands the highest loyalty among smartphones. Yes, OpenAI is working on an AI-powered device, but it seems unlikely to unseat the iPhone anytime soon. Apple commands more loyalty than perhaps any other brand.

AI is quickly becoming commoditized.

The cost of using AI is rapidly falling; inference cost is becoming 9x to 900x cheaper per year depending on the task. Open-weight models are increasingly closing the gap to closed-weight frontier LLMs.

Apple doesn’t need to build its own AI. With multiple viable AI providers competing for access to Apple's massive user base, this commoditization works in Apple's favor. Apple can choose to buy or partner with an AI provider, or simply build on any of the increasingly excellent open source models available. Even OpenAI’s most recent valuation prices the company at $300B, less than Apple’s annual revenue of ~$400B (with massive cash reserves). AI is a buyer’s market, and well within Apple’s reach.

AI disintermediates software.

What does software do? What are apps and websites for? Software helps device users complete tasks. Yes, even if that task is finding content to consume.

What does AI do? AI completes tasks for device users. For the most part, this means AI disintermediates software. A huge number of apps and websites used to accomplish specific tasks–shopping, finding information, booking flights, managing tasks–will be entirely bypassed by increasingly competent AI.

This creates an unprecedented opportunity for whoever controls the primary AI interface. This AI will be the ultimate gatekeeper; it will know everything about the user and will influence or directly execute every user decision. It will determine what is purchased, what content is consumed, what relationships are tended to, and what opportunities are considered. Deep knowledge of user behavior quickly becomes an insurmountable and rapidly expanding moat, as knowing the user intimately is essential for making choices and completing tasks correctly on their behalf.

This is the App Store on steroids. Today’s app stores control software distribution and impose commissions of 15-30%. Tomorrow’s AI will own (and more often, replace) the entire, newly consolidated, user journey across everything. Today, brands bid on Google and Meta for a chance to appeal to users; tomorrow brands will sell directly to the consumer’s AI. The AI layer becomes ubiquitous, with potential to extract value from virtually every transaction in a user's life.

Proximity to the user wins.

As layers of technology are disintermediated, winners are often not the first movers. History favors the platform closest to the consumer.

We’ve seen plenty of examples in previous disruptions: Netscape Navigator dominated the early web with over 80% market share, but rapidly collapsed when Microsoft bundled Internet Explorer with Windows. Napster proved consumer demand for downloading mp3s before iTunes dominated the market by offering a seamless integration with the iPod. Camera manufacturers innovated in digital photography for decades until the technology was compact enough to be bundled into smartphones by Kyocera (1999) and Samsung (2000), took off 7 years later with the launch of the iPhone–demolishing the digital camera market. Dropbox led consumer cloud in 2008; iCloud launched in 2011, quickly overtook Dropbox, and is one of Apple’s most popular paid services today. Google Wallet pioneered the mobile payments space, but Apple Pay was first to mainstream traction.

Browser market share 1996-2009. Source: Wereon.

So, does the device always win? Not necessarily. Internet Explorer eventually lost to Chrome. Samsung users are also Android users, and typically prefer Google Assistant over Bixby.

But Apple is uniquely positioned with dominant smartphone market share, ownership of both the device and operating system layer, trusted visibility across digital activities, and perhaps most importantly, a fierce loyal consumer base who welcomes stringent control over the user experience.

Despite strong third-party alternatives, iOS defaults are preferred on iPhones: Safari is the most popular browser; iMessage is the most popular messaging app; Apple Music is the most popular music service; iCloud is the most popular cloud storage; and Apple Pay is the most popular digital wallet.

Apple doesn’t need to compete with the dominant AI labs today. The most popular consumer AI will be whatever Apple eventually sticks in front of its users–making Apple the biggest beneficiary of AI.

Probably.