Apple Is Lagging In AI. It Might Not Matter.

When the AI race started heating up, I waited patiently to see what Apple (NASDAQ: AAPL) would do. Maybe the company's large language model (LLM) would soon debut and surpass its rivals. Or, perhaps exciting new AI features or even devices would launch that would propel the company firmly into the AI era.

But then, nothing much happened.

Instead, Apple disappointed loyalists (and shareholders like me) with some promises of new Apple Intelligence features that were eventually delayed.

But now, Apple is on the verge of releasing a new version of Siri that could be a significant improvement over its current AI assistant.

The new version of Siri will likely use a foundational AI model that Apple didn't build. That might seem like an AI cop-out, but it might now matter that Apple is leaning on other chatbots to improve its devices. Here's why.

Image source: Apple.

Apple is sticking to what it knows best

Apple has more than 2.5 billion active devices in use worldwide, and 79% of its revenue in the first quarter comes from selling those devices. This helps insulate Apple from some of the current pressure that software companies are facing as they either race to build the best AI chatbots, or adjust their existing software to integrate AI so they don't get left behind.

Services are an increasingly important part of Apple's business, with sales from the segment rising 14% in the first quarter to $30 billion. But Apple isn't dependent on them. Because software and services aren't a major revenue driver for the company, Apple doesn't have to worry about some of the same disruption scenarios.

The company has billions of customers worldwide because it makes great products, with features people love, and runs them on a reliable operating system. That's not to say that Apple doesn't need to innovate or that it doesn't face any rising competition. But when it comes to building the best AI model, Apple can likely leave that to other tech companies and still come out ahead.

Apple can benefit no matter which AI agent is best

Apple recently struck a deal with Alphabet to use the company's Gemini chatbot in an upcoming new version of Siri. The Financial Times reports that Apple will pay $1 billion per year to Alphabet for the use of Gemini. While that's not cheap, it's far less expensive than the $650 billion tech companies -- including Microsoft, Alphabet, Amazon, and Meta -- are spending on capital expenditures this year, much of which will go toward AI data centers.

Apple will, at least for now, happily integrate Gemini into Siri to help it bring new AI features to its customers at a considerably lower cost than its competitors. This strategy isn't foolproof, but neither is spending billions of dollars to create the best AI model. The recent switch of some users from ChatGPT to Claude, because of its useful Cowork tool, has shown just how fickle users are.

The new version of Siri is rumored to have its own app, similar to ChatGPT and Claude, and to offer far more integration with users' phones to provide contextual responses based on user information, as well as on-screen awareness. If Apple gets the balance right in integrating Gemini's foundational model into its OS, Apple users probably won't care who built the underlying AI, as long as it makes their Apple device better.

As a shareholder, I'm going to watch this very closely. I'm more optimistic that Apple could get this balance right than I was before. It could look very smart in hindsight if Apple can benefit from the new AI era with far less invested in building an expensive AI model.

Chris Neiger has positions in Apple. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, and Microsoft and is short shares of Apple. The Motley Fool has a disclosure policy.