AI: Apple's 'AI Search' King-making role. RTZ #713

The ongoing antitrust trials against Google saw news in the form of testimony from a senior Apple executive. And it’s hinting at AI impact on traditional Search that investors have been worrying about for some time. Google stock is down 8% on the news. Let’s unpack the development.

This despite Google CEO Sundar Pichai underlying its opportunity to add its Gemini AI capabilities to its Apple Search deal.

Bloomberg lays it out in “Apple Eyes Move to AI Search, Ending Era Defined by Google”:

“Apple Inc. is “actively looking at” revamping the Safari web browser on its devices to focus on AI-powered search engines, a seismic shift for the industry hastened by the potential end of a longtime partnership with Google.”

“Eddy Cue, Apple’s senior vice president of services, made the disclosure Wednesday during his testimony in the US Justice Department’s lawsuit against Alphabet Inc. The heart of the dispute is the two companies’ estimated $20 billion-a-year deal that makes Google the default offering for queries in Apple’s browser. The case could force the tech giants to unwind the pact, upending how the iPhone and other devices have long operated.”

The broader, new information is as follows:

“Beyond that upheaval, AI is already making gains with consumers. Cue noted that searches on Safari dipped for the first time last month, which he attributed to people using AI. Cue said he believes that AI search providers, including OpenAI, Perplexity AI Inc. and Anthropic PBC, will eventually replace standard search engines like Alphabet’s Google. He said he believes Apple will bring those options to Safari in the future.”

We’ve known that Apple was planning to bring in other AI providers besides OpenAI as an external AI search option for some time. But this was the first time we’ve seen data of regular search activity on Safari browsers. And his statements made other options coming soon more explicit:

““We will add them to the list — they probably won’t be the default,” he said, indicating that they still need to improve. Cue specifically said the company has had some discussions with Perplexity.”

“Prior to AI, my feeling around this was, none of the others were valid choices,” Cue said. “I think today there is much greater potential because there are new entrants attacking the problem in a different way.”

Apple is the massive distribution opportunity for any AI company out there. And investors have known this for some time.

“The looming shift is a giant one for the iconic iPhone and a company with more than 2 billion active devices. Since Apple’s original smartphone launched in 2007, users have navigated the web by making searches through Google. Now, consumers will enter a universe dominated by AI from multiple companies.”

“Investors saw the testimony as a bad omen for both Alphabet and Apple, which may have to abandon a lucrative arrangement.”

“Alphabet shares tumbled as much as 8.7% on Wednesday, dragging the broader market lower. Apple shares also slumped on Cue’s comments, slipping as much as 2.7%. The S&P 500 Index briefly flipped into the red, erasing an earlier gain that had topped 0.5%.”

For now, OpenAI is in the AI catbird’s seat in Apple’s ecosystem:

“Apple currently offers OpenAI’s ChatGPT as an option in the Siri digital assistant and is expected to add Gemini, Google’s AI search product, later this year. Cue said Apple also looked at Anthropic, Perplexity, China-based DeepSeek and Grok from Elon Musk’s xAI for this purpose. He said the agreement with OpenAI allows it to add other AI providers to the company’s operating system, including Apple’s own.”

“Before ChatGPT was chosen last year as part of Apple Intelligence in iOS 18, there was a “bake-off” with Google, Cue said. He said Google had provided a term sheet that “had a lot of things Apple wouldn’t agree to and didn’t agree to with OpenAI.”

OpenAI is in the process of evolving its corporate structure to a for profit entity, while modifying its complicated partnership with Microsoft, a longtime Apple rival.

Apple underlined the fast AI changes underway in this AI Tech Wave.

“Technology is changing fast enough that people may not even use the same devices in a few years, Cue said. “You may not need an iPhone 10 years from now as crazy as it sounds,” he said. “The only way you truly have true competition is when you have technology shifts. Technology shifts create these opportunities. AI is a new technology shift, and it’s creating new opportunities for new entrants.”

“Cue said that, in order to improve, the AI players would need to enhance their search indexes. But, even if that doesn’t happen quickly, they have other features that are “so much better that people will switch.”

“There’s enough money now, enough large players, that I don’t see how it doesn’t happen,” he said, referring to a switch from standard search to AI.”

The crux of course is how billions of mainstream users change their daily habits with AI, Voice and all:

“Cue also said that large language models — the underlying technology for generative AI — will continue to improve, giving users more reason to change their habits.”

And cited that this opportunity is for Google to lose:

“Still, he believes Google should remain the default in Safari, saying that he has lost sleep over the possibility of losing the revenue sharing from their agreement. He said Apple’s pact with Google today for regular search still has the most favorable financial terms.”

For now, the relationship between the two companies around AI has been expanding:

“Last year, the companies expanded their deal to include Google Lens integration as part of the Visual Intelligence feature on the latest iPhones. That allows a user to take a picture and use Google AI to analyze it. Cue also said that its agreement with Microsoft Corp.’s Bing — a non-default option in Safari — was recently amended to be a year-to-year arrangement.”

All while Apple continues to finalize its AI strategy ahead:

“Apple’s own AI technology has lagged behind those of peers. The company doesn’t have a AI search engine and has been forced to delay major upgrades to Siri that would have used a customer’s personal data to help fulfill queries. The company is holding its annual developer conference starting June 9, when it plans to introduce improvements to Apple Intelligence, its AI platform.”

Questions abound on Apple’s options on AI ahead. And lots of smart folks discussing the possibilities. Apple is discussing deeper integrations with AI companies as the WSJ points out:

“Perplexity’s new voice assistant, released in late April, can even control music, email, reminders and other iPhone functions.”

“During his court testimony, Cue said Apple has talked with Perplexity about deeper iPhone integration. He also predicted that AI search providers—including OpenAI, Perplexity and Anthropic—will eventually replace traditional search engines like Google. (Insert Genmoji-me saying this a few weeks ago.)”

Leveraging Apple’s core platforms around hardware, software and services, Apple’s core mantra, for third party companies and developers is a time-proven successful strategy for Apple. From the Apple II in the 1980s to the iPad and iPhone in the last decade and a half. Embracing that in the AI Tech Wave, may be turbo-charge Apple into unseen AI opportunities.

Far better opportunity than trying to re-engineer Siri on their own for the AI Age.

Zooming out, I’ve written before, both Google and Apple have tremendous opportunities around AI, despite the competitive environment and perceived challenges. It’s still early days in this AI Tech Wave. But both companies have to unleash their core capabilities into the AI opportunies ahead. That’s easier said than done when their core businesses are globally incumbent cash gushers with ecosystems that work without much tinkering.

But in the mean time, with AI technologies accelerating their change vectors, there will be volatility driven by short term uncertainties ahead. WIll have more on this in future posts. Stay tuned.

(NOTE: The discussions here are for information purposes only, and not meant as investment advice at any time. Thanks for joining us here)