A former official talks about how the iPhone maker will win with AI

CUPERTINO, Calif. — Nasdaq held a market open festival. apple’s Tuesday, the eve of the company’s 50th birthday, at its sprawling Silicon Valley headquarters.

Tim Cook rang the opening bell from his desk in Apple Park, the ring-shaped campus that Steve Jobs spent his later years helping design, and in the process ushered in the iPhone maker’s second half of a century.

It was a celebration, but it also marked a pivotal point for the iconic American company, which faces major challenges now and in the coming years as artificial intelligence sweeps the technology industry.

Prior to the AI ​​boom that began with the launch of OpenAI’s ChatGPT in late 2022, Apple was able to dominate the consumer device market and win by adding the Siri voice assistant to its product portfolio.

The pitch is always simple. Pay top dollar for a device and trust that what happens on it, including your messages, photos, and notes, remains yours. Personal data is not fuel for advertising engines.

Two of Apple’s biggest tech companies took the opposite approach. google and meta is a digital advertising giant that makes tens of billions of dollars a year by offering its core services for free and targeting users with promotions.

Apple’s philosophy was developed by co-founder and longtime CEO Steve Jobs. His successor, Mr. Cook, has preached this idea since he became CEO in 2011, shortly before Mr. Jobs’ death. For most of Apple’s 50-year history, that was gospel in Cupertino.

That’s why Apple’s move feels so unconventional.

Apple signed a multi-year deal in January to use Google’s Gemini AI as part of its rebooted Siri. Google already pays $20 billion a year to be the iPhone’s default search engine. With AI, this relationship is reversed. By licensing Google’s technology, Apple pays for the underlying intelligence.

The main issue is not money. Apple recorded $54 billion in net cash in its most recent quarter and returned $32 billion to shareholders, primarily through stock buybacks. The real concern, said Horace Dediu, an analyst at Asinco, is what the deal with Google means for user data and whether the search company will use that data to power its algorithms.

“There should be a wall there,” Dediu said. “They won’t give that information to Google, and Google won’t get smarter or improve its core business just because Apple is sharing information with them.” He added, “As long as intelligence improves, it should stay within Apple.”

Apple declined to make anyone available for this story, but CNBC spoke with former employees and people who have spent decades researching the business. The prevailing sentiment is that Apple is at a crossroads, caught between the ethos that has shaped the company and technological changes that are forcing it to compete in unfamiliar territory.

Apple is in this predicament in part because it has been slower to embrace AI than its peers. The long-awaited Siri AI update is facing delays, but Apple still says it will be released by the end of the year. In 2024, the company launched Apple Intelligence, which includes an image generator, text rewriter, ability to summarize push notifications, and integration with ChatGPT. Consumer reaction has been mixed.

Apple actually bucked this trend by reining in capital spending, not going down that path. Amazon, microsoftAlphabet and Meta are committing hundreds of billions of dollars annually to new AI infrastructure to support cutting-edge models and workloads.

Many in the industry argue that Apple’s workaround puts Apple at a disadvantage in generative AI, as rivals have built huge modeling businesses that involve training by scraping information and data.

Cook has long referred to privacy as a “fundamental human right.” During an appearance on ABC’s “Good Morning America” ​​in mid-March, he reiterated that Apple is doing everything possible on its devices. When necessary, Apple uses something called private cloud computing. This is essentially a secure extension of your device in the cloud.

Gene Munster of Deepwater Asset Management says Apple’s leadership misread the market.

“It comes down to a failure to recognize where the world is going and the speed at which things are happening,” he said, adding that the company is currently at a “crossroads” in terms of the long-term relevance of its products.

Munster said the challenge lies in “enhancing the AI ​​digital assistant.” If Apple doesn’t fix it, someone else will, he warned, a development that could erode Apple’s control over the future.

Siri could have given Apple a head start. It was released in October 2011, the day after Jobs’ death. It will be years before Amazon Alexa or Google Assistant hit the market. But the product stagnated.

Walt Mossberg, a former Wall Street Journal columnist who has long chronicled Apple, said Apple “basically blew a five-year lead.”

Siri co-founder Doug Kittlaus left Apple after Jobs’ death and recently told CNBC, “I didn’t want to work without him.”

Kittlaus said Siri continues to improve technologically, particularly in voice recognition. But without Jobs’ intuition and product vision, he said, the company would never have actually expanded Siri’s capabilities.

“There are no more technical barriers to any part of our long-standing vision for Siri,” Kittlaus said. “We are willing to die to have the technology that exists now.”

Adam Cheyer, who co-developed Siri with Kittlaus, said the original vision was much more ambitious than what shipped. The idea was to create a system that could answer questions and take actions, and eventually support a broader ecosystem that outside companies could use, similar to the App Store. He said the challenge is to integrate “what we know and what we do” into a single system.

The first companies to do that with the “right experience” will be “the dominant technology companies of the next AI era,” Cheyer said. “And I think Apple can still play there.”

Today, AI is a cloud business. The model behind ChatGPT, Gemini, and Anthropic’s Claude is too large to run on a mobile phone. But the model is shrinking. Within a few years, a large amount of workloads will be running on chips inside mobile phones.

That’s Apple’s bet, and the company has been integrating AI-enabled silicon into its devices since 2017. It is believed that once AI moves into devices, Apple’s privacy issues will begin to resolve themselves. All user queries are processed locally and do not access cloud servers.

Dediu said this follows the historical pattern of computing moving from the center to the edge, from mainframes to PCs to phones.

Tony Fadell, who co-founded Nest and made the iPod and the first three iPhones before selling it to Google, said early signs of a computing shift are already visible. As more people experiment with personal AI agents, some also run the infrastructure themselves, often on devices like Mac Minis at home.

A partnership with Google could be a bridge for Apple, Kittlaus said.

“People are motivated when they can see a path to victory,” he says. “I think that’s the moment.”

As AI moves to the edge, the question for Apple is whether the devices it has perfected over the past two decades will remain at the center of computing.

Last year, OpenAI acquired Jony Ive’s design firm iO for $6.4 billion, accusing the former Apple design chief of building something as important to the AI ​​era as the iPhone for the transition to mobile.

“This is an incredibly big ask and an incredibly big vision,” John Sculley, Apple’s CEO from 1983 to 1993, said in an interview. “You can’t underestimate someone as good as Jony Ive.”

Ive, who designed gadgets such as the iPod, iPhone, iPad and Apple Watch, is reportedly developing a family of screenless devices for Sam Altman’s company.

Dediu said that’s the scenario Apple should be concerned about, not better devices, but simpler devices that don’t require a screen. Apple’s superiority in visual design becomes moot if it turns out that AI interfaces are something people wear rather than hold in their hands.

It’s still not a working approach.

Ken Kocienda, who worked at Apple for 15 years and invented keyboard autocorrect on the original iPhone, left the company in 2017 and joined AI hardware startup Humane a few years later. Humane tried a screenless, AI-native device, but it failed.

Kocienda said the idea could still turn out to be true, but it’s too early. Fadel isn’t too worried.

“I think all these pins, pens, pendants are accessories for the phone,” he said. “There will be a confederation of devices…and instead of them disappearing from your life, they will all be AI-enabled.”

If the future of AI hardware revolves around phones, Apple may be ready to lead the way again, with its next chapter shaped by the same strengths that built the company.

That was the backdrop at Apple Park early Tuesday. The lawn was still holding the night’s rain when the employees and cooks gathered on it.

Just as the Nasdaq opening song echoed through the yard, the sky cleared and Mr. Cook stepped forward to ring the bell. The entire scene felt almost impossible to control, as if even the weather was subject to Apple’s choreography.

The company is betting that its Siri revamp will achieve similar results, as it all happened just in time to show off to Wall Street.

The anniversary celebration ended with a performance by Paul McCartney, another high-flying production designed to project confidence in the path forward as Wall Street waits in anticipation for Apple’s AI revival.

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