Why Apple Doesn't Need The Best AI

Welcome to WWDC. It does not matter how good or how bad Siri gets because Apple has the distribution network. Apple is a sell-the-news company. I love the presentations and all, but when it actually does intelligent things for me I'll be extremely happy. This is stuff that I sort of expect the phone to do already. The bullish case for Apple is that you will need to upgrade your phone. They were basically trying to deliver on something that they had promised two years ago. Today we're looking forward to sharing some exciting announcements including our latest advancements in Apple Intelligence and Siri. Apple wants to reposition itself as an AI company. AI is taking center stage and they're trying to show the world that where they're going to be going now is AI. They've been behind the ball on a lot of this. AI has not been going well. Siri has not been going well for many years. Apple had to pay a settlement $250 million earlier this year over AI promises that didn't materialize. And so this has been an area where they're stumbling. But now they're trying to show us that AI is the future. There are some cracks that are starting to show. And to give one specific example, they've announced that Apple's going to be using Google models, a Google model to help to build Apple's AI, the Siri AI. And that's a red flag for a lot of people because that means that Apple is giving up control. And Apple's a company that loves having that control over both the hardware and the software experience. The proof is in the pudding, as they say. Once Siri actually does something intelligent for me, like I love the presentations and all, but when it actually does intelligent things for me, I'll be extremely happy. So, so far that hasn't happened. So I'm waiting for my Siri AI. But boy, the rest of AI is phenomenal as long as it's not Apple's, right? So this is a seminally important moment for Apple. Also, who needs another Tim Cook presentation? My God, I had to wake myself up again because I fall asleep every time. It's like probably the best sleep medicine in the world is an Apple presentation. So we're ready for the John Timos era. We're ready for AI to take over Apple devices, which knows everything about us, that can totally unlock the Apple ecosystem in a way that's never been before, not only just from an economic perspective, from really a productivity perspective. So I'm really excited for this next generation of Apple iPhones that are powered by Google. When you're using Apple, it's all your, from your contacts to your photos, to your text messages, to, you know, even the private areas of your phone. It knows everything. Plus it can act as an agent to take actions, which is what AI really needs to do to increase productivity. Like book that restaurant at Voltaire for me, you know, see if it's available on Tuesday, but actually book it and Apple will be able to use the apps on your phone for you. So it unlocks AI agents in a way that no other, I think, device that we own could do it. So that's what I'm saying. Apple could be the biggest winner in AI without actually developing their own AI system. Like a lot of folks, Ross, are going to upgrade. A lot of them are going to upgrade for the reasons they've always upgraded, because faster processor and stronger battery, Ross, right? Better camera. Like how many do you think will upgrade based on, hey, a new and improved Siri? Well, I think if it works, 100% of the people. Like it will make your old phone seem kind of useless, you know? This is stuff that I sort of expect the phone to do already. In other words, like if I go into my photos on my iPhone and I search for something, I expect it to come up. And guess what? It doesn't always come up, right? Or if I go into my texts, as the Wall Street Journal review gave this example, like it said, what podcast did my sister recommend? Like I now sometimes will go into my texts and search for certain words, and it won't come up, even though I know it's in there somewhere. And so some of this, again, is just sort of like enhancing, I think, the expectations that the users maybe already have. Yeah, and I think you hit on probably what's going to be the first most evident, you know, valuable case, which is just better search, right? I think anybody who's used, even, again, in a workplace context or whatnot, you know, you have documents, you have context. Somebody told you something three weeks ago and you don't know what that is. And so just having far better semantic search, which Apple's been pretty good at, I think is going to be a huge step up. Most people find that valuable, but I don't think anybody in their brain, right, is going to associate that as it's AI, right? It's just going to be useful. Like it's just, and that's why I keep coming back to is at the end of the day, the cycle that we're in, AI software, where everything we're seeing across enterprise and consumer just needs to make people's lives easier with the tools that they use and just be useful. You don't even have to think I'm talking to this or I have this agent. It just needs to do things for you that you find useful and helpful. I think what Apple does is actually very interesting here because you could argue, and I think we're a bit of this position, that it's actually going to be harder for the opening eyes of the world and even Anthropic to the degree that they would ever have consumer ambitions to be that interface that we're talking about in light of what Apple has just done. Because Apple will be the trusted source, the one who people will use. Siri becomes that control plane that I talked about, and thus Apple can maintain and preserve the value of their platforms with that kind of agent, you know, AI interaction versus others who might try to have usurped that from them. Overall, it was more subdued than we've seen in prior WWDCs, but it was for a reason. I mean, they were basically trying to deliver on something that they had promised two years ago, 2024, when they had originally announced their updated version of Siri. And so now they're launching what they're calling Siri AI. Apple Intelligence, that's still around, but that's basically the mechanism on which Siri AI kind of rides. And I think for Apple, the way they're positioning this is AI that's more personal and secure. That's something that they've tried to kind of telegraph with the announcement itself, as well as some of the examples that, you know, I got to see kind of behind the scenes here. And so, you know, one of the examples that they talked about was, you know, say you're going to a barbecue and, you know, you want to see what everybody else is bringing, so you don't bring the same exact thing. Well, you would say, you know, hey, Siri, what's everybody... Hold on, mine just went off. What's everybody doing at the barbecue? And it'll kind of go through all of your data on your phone, basically, pull up what's going on in the Messages app, and then provide you with a list of what, you know, everybody that you've been talking with is bringing. And then you can say something like, OK, what pairs well with this? And it'll, you know, follow up that action with, you know, types of wine or, you know, sodas or things like that that would go along with those foods. So it's able to get that information directly from the Messages app without you having to open it. You know, they're laying the foundations for this, I think, better than they previously did. The important thing is that this all works. It does feel as though this is a good step forward for Apple. I think, you know, one of the important things to point out is that the most advanced models will only be available on the most advanced iPhones right now. And then there will be some kind of token kind of limit when it comes to some of the image generation apps. And, you know, they haven't said what that will be yet. But if you want to go past that limit, you would likely need a subscription to iCloud Plus. And so, you know, those are different ways that they're going to kind of probably monetize this moving forward. Eventually, you will see more and more of the compute going on the actual personal devices, because some of these features that they noted, it's like personal assistants. And if you think about AI agents and what AI agents are doing, imagine being able to have one directly on your phone. So I think that for the long term, this is bullish for Apple, even though the reception of this unveiling has been sort of muted. You're seeing the stock down today, and it was down slightly yesterday. But the stock is coming off of its all-time highs. And the bullish case for Apple is that you will need to upgrade your phone. You're going to need a more powerful phone in order to have these AI features on there. Apple is a sell-the-news company. So I actually prepared a seasonality chart. I'm going to load it on the Wi-Fi interactive here. So this, I looked at the average and median returns for Apple by month, January through December, going all the way back to 1980. And even before we had the iPhone cycle, which nowadays is released in September, you're going to notice that's one of two negative months there. September has been a historically negative month for Apple for whatever reason. Now, we are currently in June, and you're going to note that's the other month that tends to be negative here. And I don't think it's quite a coincidence that we get a lot of these developer, a lot of the development news in June and September. So Apple is a stock, and I respect the way they've approached AI. I'm going to show you a longer-term chart here. Here's the Nasdaq 100, but I'm going to show you a year-to-date of Apple. They're not plowing hundreds of billions, if not trillions of dollars into AI the way everybody else is. They're focusing on privacy and also the compute on their devices. Now, let me show you a one-year chart because they just broke to recent highs here. As long as they hold this, what is that, 285, 290, I think Apple is a great long-term player because they're not going to get sucked in to the hyperscaler CapEx game. We were just talking about data centers in space. Guess what? To put data centers in space, you suddenly have a latency problem. You're going to send your complex problems up there, but a lot of us are going to be using local AI on our devices, and for that, Apple is going to be a key player, and they're also focusing on privacy. We got the updates on Siri yesterday, and the market wasn't that excited about what they had to say. I mean, there was nothing surprising. Yeah. We kind of all saw what was coming. Step change improvements in Siri. This isn't a total revamp and overhaul. This is not Siri is now Claude, but it seems they're trying to move more into the assistant tech, right? I don't use Siri. The only people I know that use Siri are, frankly, no one in my generation, I would say. Hey, whoa, whoa, whoa. Guilty, guilty. I do own a HomePod, so I talk to the HomePod. That's fair, that's fair. I try to use it. It doesn't work. Like, if I'm driving, and I want to ask it to call somebody. Totally fair. No shade from me, no shade from me, but I will say, to me... It felt like a little shade. A little bit of shade. It does not matter how good or how bad Siri gets, because Apple has a distribution network, so they can essentially publish whatever AI products they want, and you know it's going to hit, what, two billion people immediately? So to me, their moat isn't the technology. It's not whether they're partnering with Google or Anthropic or whatever. They have iPhones in everyone's pocket around the world, so they can send anyone anything, and people will eventually use it because that's what they have in their pocket. So to me, it's all about distribution. The tech is secondary. They have the hardware moat, and that's the long-term bull case on Apple. It doesn't matter the tech, because they're already in your pocket. Well, the interesting thing is, how do they monetize it, right? Is it more like if they weren't doing this, it would remove a buying impetus for the phone eventually? Maybe? Maybe, but the iPhone is so bought-in. Or maybe they add... You can't move out of the iPhone. Maybe they add on fees to it at some point. Who knows? I saw an argument of pass-through fees, basically, of apps are going to have to pay for Siri to be able to access them and serve that kind of... If you're Uber, and you want Siri to be able to call someone in Uber, and you think that's going to be a model that people are using, you're going to have to pay Apple a fee to have Siri plugged into Uber, right? I think they're making the right moves now for that long-term strategy surrounding the hardware. They're partnering up on the software side, which I think is important so that they can stay to the core competency. In the hardware, like you said, the super cycle is coming. It's not going to be in the next year or two, but I do see in three to five years, we start to move towards that where the average selling price, the complexity of the hardware is increasing rapidly, which in turn obviously helps with the top line for Apple. So yeah, long-term, definitely see it as a benefit.