The Real Test For Consumer’s AI Appetite Is About To Begin.
Apple finally threw its hat in the AI ring with Apple Intelligence. With Apple, Google, Samsung, and Microsoft all releasing their own AI-powered devices, question is: will consumers take the bait?
«The 2-minute version»
The world has (im)patiently awaited Apple’s AI plan for over 18 months, and it’s finally here. The result? Investors cheered and Apple shares leapt +10%, adding $250 billion to their market cap, surpassing Microsoft and becoming the largest company in the S&P 500 once again. But will consumer appetite to buy these devices match up to investor expectations?
But first, some context: Up until now, every September, year after year, for the last several years, all that users got in their next iPhone is either something faster (chips), something larger (screens), more high-res (cameras/screens), or a combination of those three features. With iPhone sales plateauing for several years and upgrade cycle getting longer, its legacy was at stake and Cook could no longer afford to stay quiet on Apple’s AI ambitions. Welcome to AI, not Artificial Intelligence, you fools, Apple Intelligence, duh.😉
Slow, but steady wins the race: Since the launch of ChatGPT in November 2022, there has been plenty of chatter that Apple might be letting the moment pass by. But if there is one thing we should know (by now), it is that the company approaches new technologies deliberately and on its own time, developing its distinctive take on the product, and releasing it only when polished to the company’s quality standards.
Plus, Apple has an advantage: Based on the company’s AI principles, where its should be a) easy to use, b) integrated into products you’re already using and c) personalized based on what it knows about you, Apple can pull from your email, messages, contacts and other surfaces throughout the operating system to help you navigate the world, something that OpenAI or Anthropic simply cannot.
Siri just got more useful: That’s right, Siri is transforming from a hard-of-hearing assistant to a know-it-all conversationalist. This means more natural convos with Siri and you can type to it too. But the real kicker is that Siri can now act on your behalf in your apps. This is new.
Don’t listen to Elon on privacy: In case you’re wondering, Elon has been spreading significant FUD by threatening to prohibit Apple devices at his companies. The truth is Apple at no point will be sending any of your data to OpenAI without explicit user permission. Even if you opt for “Use ChatGPT” for longer questions, OpenAI isn’t allowed to store your data.
A prelude to success? According to Counterpoint Research, smartphone makers who have launched AI features on their smartphones have seen a revival in sales. Look at Samsung for example, where its S24 series grew 8% compared to S23 in 2024 with sales for its mid-range premium model growing 52% YoY. With Apple having a larger market share, along with receding expectations for an economic recession, this could be the start of a new growth chapter for the Cupertino darling once again.
After Apple’s WWDC24 event this week, no one must have heaved a bigger sigh of relief than Apple’s lead frontman, Tim Cook.
After almost 18 months of playing hide and seek with investors, customers, and technology enthusiasts, Apple AAPL 0.00%↑ finally unveiled their answer to GenAI and its manifestation in the iPhone. With Apple Intelligence, Cook and co. have thrown their AI hat into the ring that is now starting to look a little crowded.
2023 welcomed the strange-looking AI devices Rabbit r1 and Humane’s AI pin. But hundreds of reviews later, these AI devices that took a bold look at infusing AI into devices, now appear to be headed into the dumpster. Then, earlier this year, Samsung launched their AI-powered smartphone at the MWC24 Barcelona. Subsequently, Google GOOG 0.00%↑ launched their AI phones and services at their I/O2024, which was followed by Microsoft MSFT 0.00%↑ introducing their AI PCs.
The thing is AI was “cool” in 2023, but companies now appear dead serious about passing on the perceived benefits of AI to the end user in 2024. The only question is: Do consumers really have an appetite to buy these devices that consumer tech firms want to sell them?
Smartphones aren’t synonymous with innovation anymore
Smartphones aren’t exactly the hottest thing people talk about nowadays. In the first half of this decade, we conquered the mercurial COVID virus, created AI assistants way smarter than Alexa, Siri, and Google combined, experienced Taylornomics firsthand, and finally broke the gender binary.
And yet, every September, year after year, all that users have gotten in the next iPhone is either something faster (chips), something larger (screens), more high-res (cameras/screens), or a combination of those three features.
It’s not just Apple. Ditto Google, Samsung, OnePlus, and everyone else who went from big innovations to predictable optimizations. There is no doubt that the best years of the smartphone were the first 8–10 years after Steve Jobs led the iPhone moment in 2007. By 2016 and 2017, Apple had raised prices on their iPhones as sales started to top off and the novelty of the iPhone started wearing off.
To make matters worse, this also coincided with some embarrassing incidents with Samsung and Apple during this period of time. Problems started with Samsung’s bizarre lithium-ion battery problems in 2016 that randomly blew up smartphones, followed by issues at Apple that included 2017’s embarrassing Batterygate. Smartphones stopped feeling special any more since that point, and global sales of iPhones hit a ceiling.
So, naturally, when some U.S. consumers were asked in 2019, as to their reasons for holding off on buying or upgrading their iPhones, at least 33% of them argued that “Apple phones are either too expensive or don't pack compelling enough features.” The consumer’s reluctance to replace an existing iPhone with the next model had already started to cause immense worries for the company’s investors.
Fast forward to today, consumers’ reluctance to upgrade their iPhones still persist.
According to data from market research firm Kantar Worldpanel, 62% of customers surveyed in 2023 are pushing out their iPhone upgrades beyond the 2 year cycle, compared to 48% in 2018. There is no doubt that macroeconomic forces also could be a contributing factor, but the trend predates this. Kantar’s own research from 2019 indicates that the average number of months consumers held on to their smartphones before upgrading was already rising from ~22 months in 2016 to ~25 months in 2018.
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In Cupertino, AI now stands for Apple Intelligence
Heading to this week’s WWDC24, the scene was set for Apple. Cook could not afford to stay quiet on Apple’s AI ambitions any longer and realized that its legacy was at stake. Therefore, to no one’s surprise, the company launched a suite of software features and products at the event, along with Apple Intelligence, Apple’s answer to AI-in-the-iPhone.
What was immediately clear after watching Apple’s pre-recorded demos was that Apple’s approach to AI in the iPhone for now is going to be additive. Instead of creating another AI app or another chatbot, Apple is relying on the network of apps each user installs on their iPhone and allowing AI to augment the iPhone user’s app experience across apps in the iPhone.
Think about it, when you type something into ChatGPT or Claude, it has limited memory of how you have used their chatbots. On the other hand, Apple can pull from your email, messages, contacts and countless other surfaces throughout the operating system to help you navigate the world in a more personalized fashion.
Once Apple Intelligence becomes available to users later this year, it should be able to turn sketches into images, create genmojis on the fly, and become a writing assistant, helping correct the user’s grammar, changing the tone of a message, and drafting emails for the user. (Grammarly might look to lawyer up 😬.)
In addition, Apple also gave Siri a renewed life, turning it from a hard-of-hearing assistant to a know-it-all conversationalist. Siri will continue to locate info across your apps, like “Where is tonight’s dinner reservation?” or “What’s the address for my doctor’s appointment?” But here’s the real kicker: Siri can now act on your behalf in your apps. For instance, if a friend texts you their new address, just say, “Add this address to their contact card,” and Siri will take care of the rest.
Plus, Apple announced their partnership with ChatGPT on the iPhone, shunning the expected partnership with Google’s Gemini. At the Pragmatic Optimist, we had always believed that the chances were much higher for an Apple/OpenAI partnership than one with Google.
Finally, Apple is also investing heavily to ensure that all this “AI stuff” stays private, which is one of the core tenets of the company’s philosophies since the very beginning. Tasks such as image generation, writing assistance, genmojis, etc. will all be processed on the iPhone itself, whereas the more compute-intensive AI tasks will be sent privately to iCloud. In case you are curious about the details, Pete Huang at The Neuron explains in a step by step process of what really goes down when you ask Siri with AI a question.
For almost all questions, Siri uses AI that lives on the device, aka it won’t need to hit up the cloud or ChatGPT, aka your question won’t ever leave the phone.
These on-device models are decent (they’re built on top of open-source models) and outperform Google’s on-device model, Gemma-7B, 70% of the time.
For more complex questions like “Find the photo I took at the beach last summer,” Siri will consult a smarter AI model that runs on Apple’s servers.
When Siri sends your question to Apple’s servers, your data is anonymized and not stored there forever.
Now, for longer questions like “Can you help me create a weekly meal plan?” or "Rewrite this email using a more casual tone,” Siri will use ChatGPT only if you give it permission to.
Even if you opt for "Use ChatGPT," OpenAI isn’t allowed to store your data.
AI could be Apple’s best shot at reviving iPhone sales
Now that Apple has laid out its vision on AI, it's up to the developer community, many of whom were present at WWDC24, to take Apple’s building blocks and roll out the AI integrations that Apple has promised into their respective apps.
At the same time, Apple announced that all AI features will be available in U.S. English but are being limited to the iPhone 15 Pro and Pro Max, which run on Apple’s A17 Pro chip; the iPad Pro and Air, which run on Apple’s M1 chip or later versions; and various Mac computers that run on the M1 chip or later. While part of the reason might be to incentivize users to take the bait and upgrade to last year's iPhone 15 Pro/Pro Max or wait for (what anyone can assume) is this year’s iPhone 16 lineup, the other part also has to do with controlling performance and user experience.
Andrej Karpathy, previously the Director of AI and Autopilot at Tesla, detailed in a tweet last year just how easy it was to run inference models on Apple devices that are powered by the company’s homegrown chips. Therefore, aside from arguments to nudge users to upgrade, performance is definitely a key reason to limit Apple’s AI capabilities to the iPhone 15 Pro or higher. The only unknown is whether consumers see enough appeal in Apple’s AI story to upgrade to the iPhone 15 Pro lineup.
A survey by YouGov last year revealed that just 26% of participants indicated they would consider buying the iPhone 15. But survey participants who already owned iPhones had a stronger appetite, with 39% of them indicating that they would consider upgrading. Remember: That survey was last year—before the AI announcements by Apple, Samsung, Google, and Microsoft.
Meanwhile, 2024 has been a revelation for Samsung. Samsung regained the top spot for the largest smartphone maker in the world from Apple, buoyed by the success of its S24 Galaxy smartphone, which is powered by AI features. According to data from Counterpoint Research, global unit sales of Samsung’s Galaxy S24 series devices grew 8% compared to Galaxy S23 series during its first three weeks of availability, with demand for its mid-range premium model S24 Plus growing 52% YoY accounting for over one-fifth of revenue.
In addition, Counterpoint’s research also indicates a revival in smartphone sales, especially by phone makers who have launched AI features on their smartphones. All these results by Apple’s rivals in the Android section point to some form of demand environment where Apple’s Apple Intelligence might be just enough to convince users to upgrade to the iPhone15 pro or later versions.
There’s still a chance you may be asked to “eat rocks”
In all of the optimism that is pointing to a scenario where consumers may respond to Apple’s rally call to upgrade, it is important to also remember that all of the demos were produced in a perfect sandbox environment—every aspect of the Apple Intelligence demos were controlled for. Journalists did not get to interact with Apple Intelligence in person at the event, and even if developers got a chance, they remained tight-lipped about it. So the real question is how Apple Intelligence really performs once iPhone users get their hands on it.
AI has had its fair share of issues in the past year. Google has perhaps been the most common example of how AI could go wrong, with many widely known issues plaguing its GenAI products. Most recently, Google was, once again, caught in the wrong place, with Gemini recommending users “glue pizzas” and “eat rocks”, while Perplexity and OpenAI have both been accused of plagiarism issues.
Apple is aware, and the last thing the iPhone maker would want is to be associated with such problems, especially after the Cupertino-based company has been accused of moving slowly on innovation.
In a recent podcast with tech YouTuber Marques Brownlee, or MKBHD, Tim Cook gave a deeper glimpse of how Apple will look to integrate AI across products but still promises users a resilient experience.
Cook: It [GenAI] was always about pursuing it in a thoughtful kind of way. And so, that’s what we’ve done and we’ve implemented it in ways that are less likely to create issues.
MKBHD: How so?
Cook: How so? Well, if you think about the kinds of things we talked about, we talked about personal context and we talked about privacy. We’re not waiting for a comprehensive privacy legislation regulation to come into effect. We already view privacy as a fundamental human right. That’s the lens that we see it at.
Cook: Given that we’re doing it all, personal context and privacy, we wanted to integrate it at a deep level. So you’re not having to think “Oh now I want to use something that uses [Apple] Intelligence. We put it in the apps you’re already using and integrated it deeply.
Sitting here and listening to Cook spin the vision story about AI’s promise in the iPhone that is centered on privacy-led personalization and augmentation appears to notionally deliver what users may have been waiting for. The question is: will users eventually follow through and buy that vision?
Nice post on Apple and AI. I appreciate the explanation on the misinformation about privacy risk (although recent research suggests that even speculation about potential risk encourages people to believe misinformation.) Still, it's important to keep trying to inject reason and clarity, so thank you. AI adoption is a fascinating race between excitement over innovation to make it actually useful and fear that it will be "too" useful. At least with Apple, the visual design and packaging will be very good.
Per usual...EXCELLENT. Thank you.