To The Moon

The recent discussions between $Apple(AAPL)$ and $Meta Platforms, Inc.(META)$ to integrate Meta’s generative AI model into Apple’s AI system for iPhones represent a monumental shift in the landscape of artificial intelligence. This potential collaboration could significantly enhance the distribution and adoption of AI technologies across Apple’s vast user base, positioning Apple as a central hub for advanced AI capabilities.

Apple has always been known for its strategic prowess, and this move is no exception. By exploring partnerships with top AI players like Meta, Apple is essentially ensuring that it remains at the forefront of AI innovation without having to develop these capabilities entirely in-house. This is not just a smart move; it's a masterstroke. Apple is leveraging its massive user base and premium brand to attract the best AI technologies, integrating them seamlessly into its ecosystem.

The discussions between Apple and Meta are just the tip of the iceberg. Other AI companies, including $Alphabet(GOOG)$, Anthropic, and Perplexity, are also reportedly in talks with Apple. This indicates a broader strategy by Apple to offer multiple AI options to its users through premium subscriptions, taking a cut of the revenue. This model is reminiscent of Apple’s approach with the App Store, where developers pay a percentage of their earnings to Apple for the privilege of being included in its ecosystem.

One of the most intriguing aspects of this potential partnership is the financial arrangement. Chatbots and large language models (LLMs) are notoriously expensive to run, and currently, companies like OpenAI are losing money on every query. The cost of querying an LLM is high, which is why OpenAI and Apple have a non-payment deal: Apple users can access OpenAI directly through Siri without either party paying the other. This arrangement allows Apple to maintain a competitive edge in user experience while providing OpenAI with increased exposure and valuable training data.

From my perspective, Apple’s strategy here is brilliant. If you can’t catch up, then join them. By collaborating with leading AI players, Apple integrates cutting-edge AI technologies into its products without the hefty R&D costs associated with developing these technologies from scratch. This approach allows Apple to stay relevant and competitive in the rapidly evolving AI landscape.

Looking at the bigger picture, Apple’s strategy isn’t about playing catch-up; it’s about absorption and resale. Apple takes these advanced technologies, integrates them into its ecosystem, and then resells them to its vast user base, taking a significant cut of the profits. This is similar to how the App Store operates: developers must pay Apple a 30% commission to sell their products on the platform. Even though some might argue that the App Store isn’t strictly necessary, Apple’s control over its ecosystem ensures that it remains a crucial revenue stream.

Apple’s approach to hardware further exemplifies this strategy. The company’s devices, like the iPhone, often use components from other manufacturers—Samsung screens, for example. Yet, Apple’s branding and ecosystem integration make these products uniquely desirable to consumers. The same logic applies to its AI strategy: Apple integrates the best technologies available, enhancing them with its user-friendly interface and ecosystem, and sells them as premium features.

In conclusion, Apple’s discussions with Meta and other AI companies are a clear indication of its strategic genius. By integrating top-tier AI technologies into its ecosystem, Apple ensures it remains a leader in the tech world without bearing the full cost of AI development. This partnership model allows Apple to provide its users with the best AI capabilities while securing a significant share of the profits. It’s a win-win situation that highlights Apple’s ability to adapt and thrive in a rapidly changing technological landscape.

How do you think Apple’s strategy of integrating AI from top players will impact its market position and user experience in the long term? Do you see any potential challenges or downsides to this approach?

Disclaimer: This is not financial advice. Do your own research before making any investment decisions.