Reports of Apple, Inc. AAPL launching its own AI model and discussing licensing a foundation model with Google and OpenAI illustrate a significant shift in the iPhone maker’s growth strategy, according to Deepwater Asset Management Managing Partner Gene Munster in a note on Monday.
Rare Development: Munster notes that after the cancellation of Project Titan, Apple is now considering a rare move for the company – licensing another company’s tech stack.
Pulling the plug on the car project offers Apple two advantages, he said. This decision would free up $4 billion to $5 billion annually, approximately 11% of the company’s overall R&D spend, for artificial general intelligence (AGI), and also allow the company to sharpen its focus on AGI.
“Apple knows it needs to move fast and is exploring all options when it comes to integrating generative AI into their products,” Munster said. He anticipates the company releasing its own model to power certain features across its product lineup while also licensing a model to support other features.
If Cupertino were to pursue model licensing, Munster suggests it may need to invest several billion dollars annually. He outlines the potential costs, which could be structured as usage-based or involve a flat guarantee similar to Apple’s search deal with Google.
The actual cost to Apple depends on the scope of usage. Munster suggests that if the model powers the majority of AI features on the iPhone, the cost could be substantial, while a limited use case might incur lower costs. He believes Apple will opt for the former, given its large user base.
See Also: Everything You Need To Know About Apple Stock
Apple Still Leads: Munster maintains that Apple will remain at the forefront of personalized AI despite complexities regarding user data rights. He suggests that Apple will find a way to gain user trust for personalized AI opt-ins.
The company could introduce an AI subscription model, monetizing it by charging users around $10 per month for access to personalized AI. Munster estimates that even with a conservative user adoption rate, this could contribute significantly to Apple’s revenue.
“I believe Apple now gets it. AGI has the potential to have a profound impact on their business, and they need to add AI to the company’s core competency of hardware, software, and services,” he said. Munster acknowledges that this may entail slight margin sacrifices in the short term for expanded margins in the long term.
Munster predicts a gradual decline in net income over the next couple of years, beginning in the second half of this year. This trend may lead to a 130 basis-point margin contraction to 24% compared to fiscal 2023, he noted.
Apple traded up 0.22% at $174.10 in premarket trading on Tuesday, according to Benzinga Pro data.
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