Most of the world's largest tech companies are feverishly developing artificial intelligence (AI) and placing the technology at the center of their businesses. The "Magnificent Seven" companies -- which include Nvidia, Microsoft, Amazon, Meta Platforms, Tesla, Apple (AAPL +2.90%), and Alphabet (GOOG +4.95%) (GOOGL +5.10%) -- are particularly active in the space.
But Apple has been far quieter than its peers on the AI front. Instead, it spent the last few months launching the Vision Pro mixed reality headset, which is the company's first new hardware platform since it released the Watch in 2015.
But Bloomberg recently reported that Apple is in talks to integrate Alphabet's Gemini AI models into the next generation of its iPhone (potentially the iPhone 16). The deal -- if it happens -- could create the ultimate opportunity for investors.
Image source: Getty Images.
Alphabet fell behind in the AI race last year
Alphabet is the parent company of Google, YouTube, DeepMind, and Waymo. The conglomerate has been developing AI for years, but that wasn't apparent in early 2023, when Microsoft agreed to invest $10 billion in ChatGPT creator OpenAI. Microsoft immediately integrated the technology into its Bing search engine. Investors feared it could threaten the dominance of Google Search, sending Alphabet stock plunging.
Alphabet launched a ChatGPT rival called Bard, and the traditional version of Google Search now delivers responses to queries powered by generative AI. Bard was recently replaced by the Gemini large language model (LLM), which is Alphabet's response to OpenAI's latest GPT-4 models.
Alphabet says Gemini outperforms GPT-4 across most multimodal benchmarks, which means it can interpret and generate text, images, videos, and computer code more effectively.
Gemini is available as an add-on for many of Alphabet's customer-facing applications, including Google Docs and Gmail, and developers can also access it through Google Cloud to build their own AI products.
Apple could be the world's biggest AI opportunity
Google pays Apple $18 billion each year to be the default search engine on its devices, which include the iPhone, iPad, and Mac computers. Why? Because there are more than 2.2 billion of them in use worldwide. According to Statista, 96% of the global population uses a mobile device to access the internet, and smartphones account for about half the time we spend online.
Deals like the one with Apple help Google's maintain its dominant 91.6% market share in the search industry.
The same phenomenon will apply to AI. There are reports that Apple is also holding talks with OpenAI, and whichever AI provider the company selects to power its devices could instantly become the most widely deployed in the entire world.
NASDAQ: AAPL
Key Data Points
Apple isn't new to AI. Its Siri voice assistant is powered by the technology, as is the recommendation engine in Apple Music. Its latest iPhone 15 Pro is also fitted with the A17 Pro chip, which was designed to efficiently handle AI workloads on-device instead of in the cloud.
Apple is building its own AI models in-house. However, its staunch approach to privacy means the company may not have the same amount of useful data as Google -- or perhaps isn't willing to use it -- to make those models competitive. That's speculation on my part, but outsourcing AI could be the more palatable option.
Details are light on the scope of the potential deal, but Gemini could help Apple users rapidly craft messages and emails, as well as quickly generate image and video content. Plus, chatbots are a more convenient way to find information compared to traditional search engines, so Gemini could reduce the time users spend browsing the internet. Since that basically cannibalizes Google Search, it's even more important for Alphabet to win this deal.
Apple and Google need each another
Apple needs Gemini to deliver advanced AI to users of the next-generation iPhone. Competing smartphones from Samsung (and even Google) are already miles ahead on that front. The Samsung Galaxy S24 introduced capabilities like Live Translate, which allows two people to converse in different languages over the phone, and Circle to Search, which recognizes image content to help users run search queries.
Apple was the largest company in the world, with a $3 trillion valuation up until January. But it's now worth just $2.6 trillion, with Microsoft riding its own AI efforts to a $3.2 trillion market cap.
Apple faces a few other issues like sluggish revenue growth, as well as a recent lawsuit from the Department of Justice that accuses the company of illegally monopolizing the market. The latter could challenge Apple's closed-ecosystem approach to the App Store and even the iOS operating system, but it will probably take years for the case to wrap up.
An AI deal with Google could be worth tens of billions of dollars if the two businesses' existing search partnership is any indication. That will add some growth to Apple's top line, but more importantly, it could make the company the largest distributor of AI in the world.
Google, on the other hand, needs Apple's vote of confidence to cement its leadership in AI after it fell behind in 2023. ChatGPT has over 180 million monthly users, but a deal with Apple would see Gemini eclipse that number by several orders of magnitude.
If the two companies do reach an agreement, investors might want to own a stake in both, because it will easily be the biggest AI deal this industry has seen so far.
