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The tech world is abuzz with the news that Apple (AAPL) is in discussions with Google parent Alphabet (GOOGL) about using Google’s generative artificial intelligence (AI) model, Gemini, for its next iPhone.
Apple’s CEO, Tim Cook, has promised investors that the company will introduce generative AI capabilities this year. He told investors the company would release transformative features that “break new ground.”
Cook knows he needs something; investors are looking for new growth sources at Apple. Meanwhile, the company’s smartphone rivals - Samsung and Google - have already added Gemini to their newest devices.
Smartphone rivalry aside, though, the deal on AI should not come as a major surprise. It would merely extend one of the tech sector’s most long-lasting partnerships. Since Apple introduced the iPhone in 2007, Google has been a key contributor to its success. The company now known as Alphabet initially provided Google Maps for navigation, and later struck a deal to have Google become the default search engine on the iPhone’s Safari browser.
The Apple-Google Symbiosis
That pact has been a gravy train for Apple, since Google reportedly pays Apple more than $18 billion a year.
A deal involving Gemini would be a huge victory for Google. Apple has more than 2 billion devices actively in use. And its reputation for protecting customers’ private information will be a plus as AI becomes a bigger part of people’s everyday lives.
An iPhone partnership would mean that - virtually overnight - Google could have more people using its AI than its main rival, OpenAI, which created ChatGPT and is backed by Microsoft (MSFT).
Having the Gemini model on its iPhones would likely be a moneymaker for Apple. It likely would get a piece of the action from Google, which currently charges $19.99 per month for its Gemini Advanced app.
But why isn’t Apple coming out with its own AI technology? Apparently, it can’t.
Since early 2023, Apple has been testing its own large language model (LLM), codenamed Ajax. It has also been trying out a chatbot called Apple GPT.
But Apple’s technology remains miles behind the AI models from Google and others. Without the huge server farms on hand to train the LLMs used in AI, striking a partnership with a FAANG peer is the next best option.
Apple, though, is preparing new capabilities for iOS 18 — the next version of the iPhone operating system — based on its own AI models. But those enhancements seem to be focused solely on features that operate on its devices, rather than ones delivered via the cloud.
The net result is that Apple is seeking a partner to do the heavy lifting of generative AI.
What Comes Next?
The talks between Apple and Google are ongoing. It’s unlikely any deal will be announced until June, when Apple holds its annual Worldwide Developers Conference (WWDC).
Of course, it’s also possible that the two companies do not reach an agreement. They are already under regulatory scrutiny for their partnership in search.
So, Apple could ultimately choose to go with another generative AI provider, like OpenAI. Or Apple could even tap multiple partners in AI.
If a deal is done, it’s a big win for Google.
While Google will likely pay billions to get Gemini on iOS devices, it gets the one thing it so desperately wants in AI: size. By bringing Gemini to the iPhone, Google will not only get millions more potential users; it specifically gets users that are more than willing to pay a premium price for advanced AI features.
There’s a bonus, too - more users means more data. And more data means a better Gemini and a more valuable product. Google, as you may have heard, has had problems with Gemini. In February, the company had to pause its image-generation feature after it created images with almost laughable historical inaccuracies.
Buy Alphabet Stock
Apart from AI, Alphabet has a lot going for it. Google dominates the online search market, with 90%-plus global share (80%-plus US share), and the business generates very strong cash flow. Android’s dominant global market share of smartphones leaves Google well-positioned to continue dominating mobile search.
In addition, Google's Chrome browser remains the market leader with 65% share, according to StatCounter. And YouTube's video platform has more viewers than other online video properties, making it attractive for advertisers.
I also believe Google will continue to gain traction in the cloud market, with 22% annual revenue growth expected through 2028.
Finally, as the number of online users and usage increase, so will digital ad spending, of which Google will remain one of the main beneficiaries.
Add it all up, and Alphabet stock is a buy under $155.
