Recently, a new Bloomberg report came out and said that Apple (NASDAQ: AAPL) has been talking to Google about the possibility of a deal to use the Gemini AI engine in iPhones. This potential partnership between two tech leaders was enough to get the tech world buzzing with excitement. AAPL stock was up by more than 2%, while GOOGL stock soared by more than 5%, making it the best-performing stock in the S&P 500 on that day.
While this collaboration hasn’t been confirmed, with both Apple and Alphabet (NASDAQ: GOOG) refusing to comment when asked about it by media outlets, the potential for it could be massive.
Why Apple Wants the Deal
The news was first reported by Bloomberg, which said that Gemini, Google’s suite of generative AI models, could be integrated into the software of iPhones later this year, citing people familiar with the matter. Many found this strange, and wondered why would Apple even want to partner up with Google for this, when the company said multiple times that it’s working on its own AI software. In fact, Apple wanting to collaborate with Google could mean that Apple hasn’t made great advances on its own AI technology, but the report clears that up, saying that Apple’s own software focuses features which operate on its devices, rather than ones provided through cloud.
However, Apple not catching up with its Magnificent Seven peers when it comes to AI might not be an entirely bad thing, because Apple wasn’t the first company to develop a smartphone, but it still won in the smartphone race, and its iPhone 14 was the best selling smartphone in 2023. The company also wasn’t the “first” to a lot of products and technologies, but it’s really good at generating a lot of value from existing ideas, and that’s what the average iPhone user cares about, because they want a good product and don’t really care about the AI race.
To sum up, Apple is searching for a partner for generative AI that will help it develop features like creating images and written content based on prompts. This is definitely part of Apple’s broader AI strategy, as the company recently announced that it’s abandoning its $10 billion EV plans to shift its focus to AI, a decision that was welcomed by AAPL stock investors as the stock rose 1% at the news. Many AAPL stock investors were also worried about Apple’s AI progress and felt like the company was lacking when it came to developing AI technologies. Apple might market its next iPhone as an “AI phone” in response to this criticism, but also to the fact that some of its smartphone competitors, like Samsung (OTCMKTS: SSNLF) and Xiaomi (OTCMKTS: XIACF), have already come out with their AI-powered smartphones, so the fact that Apple is exploring this partnership with Alphabet isn’t too surprising.
Why Alphabet Needs the Deal
Alphabet has been caught up in a lot of controversies thanks to the multiple failings of its AI chatbot Gemini, which included the company releasing an edited demo of the chatbot, as well as the chatbot itself generating racist images that received so much backlash that Google had to pause Gemini’s image generation feature. The company lost $96 billion in value thanks to this fiasco, and GOOGL stock price dropped to around $130, as investors became more and more concerned over the company’s AI generation.
GOOGL stock eventually started rising again to around $140, and now it’s close to $150, thanks to the news of this collaboration, and this makes up the majority of GOOGL stock gains YTD, which indicates how much the company would benefit from a deal like this with Apple.
According to Wedbush analysts, who have an Outperform rating on both AAPL stock and GOOGL stock, the potential Apple-Google partnership is part of a broader iPhone AI strategy that Apple is currently working on, and that it could be a golden opportunity for Alphabet because it’ll result in the company getting a hefty licensing fee from Apple. The deal would also give Google access to Apple’s over two billion devices worldwide, and if you choose to focus on just iPhones, that’s still more than one billion devices. But the analysts think that whatever comes out of the deal would be an Apple-branded solution, meaning that when you use these services, they’re not going to say “powered by Google” but instead something related to the Apple brand. But it’s likely that Alphabet doesn’t really care about this as long as it gets paid.
The Risks Facing the Deal
Investors shouldn’t get too excited because we don’t actually know for how long the deal will actually last, if it actually happens. Apple used to use Intel (NASDAQ: INTC) chips, then it started developing its own chips and ended the Intel agreement. This can be the same case here, meaning that Apple intends to only use Gemini for the short-term, then leave Google behind when it comes up with its own generative AI capabilities, so investors should keep that in mind before making any investment decision regarding Apple and Alphabet.
Additionally, Apple and Google already have a long partnership that originated in 2002, in which Apple makes Google the default search engine on its devices, and this has drawn the attention of the U.S. Department of Justice, which has filed a lawsuit against Google, saying that this partnership helps Google illegally dominate online advertising and curb competition. Of course, any GOOGL stock investor would know that advertising is a big part of Alphabet’s business, as it generated $65.52 billion in revenue from it in Q4 of 2023, including $48 billion of Google search revenue and about $9.2 billion of YouTube ad revenue, and this was an 11% increase year over year.
During the federal antitrust trial in November of last year, a Google witness accidently revealed that the company pays Apple 36% of its Safari search revenue, and the Department of Justice estimates this to be a staggering $18 billion each year. That trial was so bad for Google, that the company’s lead lawyer visibly cringed when the exact figure was said.
Since this agreement is a multi-billion dollar agreement, then investors in GOOGL stock have a lot to look forward to if the iPhone and Gemini deal becomes a reality, but at the same time, there’s a possibility that the Department of Justice will oppose this deal as well, since it already is against an old partnership between the two companies.
Apple x OpenAI?
It’s probably thanks to concerns over how regulators would react to this deal that the talks are so secretive right now. If the Department of Justice really ends up opposing this partnership, Apple might just turn to another partner. Microsoft-backed (NASDAQ: MSFT) OpenAI is another candidate. In fact, the Bloomberg report mentioned that before talking to Alphabet, Apple talked to the creator of ChatGPT about using its AI models.
As mentioned above, what Apple is seeking from this partnership is generative AI, and that’s what OpenAI and ChatGPT are the best at, as ChatGPT can generate content to nearly all user prompts. Meanwhile, Gemini had to pause its generative abilities because it got dragged online, so it seems like OpenAI is the best choice for Apple here. If Apple chooses OpenAI, it’s very likely that GOOGL stock will take a big hit, but you could say that Google has the advantage here thanks to the agreement it already has with Apple, so it could play its cards right and offer to mix the two agreements up for Apple. For example, it can offer to increase the amount of money it pays Apple in the search engine agreement, in order to keep the Gemini agreement.
Aside from its existing relationship with Google, Apple also might not choose to partner up with OpenAI because OpenAI culture has been unstable and unpredictable, from the whole board drama and the firing then comeback of CEO Sam Altman, to the recent lawsuit that Tesla (NASDAQ: TSLA) CEO Elon Musk filed against the company. For now, we just have to wait and see how this unfolds, as it’s unlikely that any deal will be announced before June, when Apple intends to hold its annual Worldwide Developers Conference, and this is an event that CEO Tim Cook has been hyping up, saying that the company has some “incredibly exciting things” to share later this year in terms of generative AI in an earnings call.
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