What Wall Street Is Missing About Apple’s Just-Revealed Plan for AI

They Just Don't Get It

A few years from now, the artificial intelligence plans Apple Inc. (AAPL) announced at its 2024 WWDC keynote will be seen as a pivotal event for the company.

But Wall Street, as usual, didn’t grasp its significance. AAPL stock fell 2% in reaction to the news.

To quote Emperor Palpatine, “You will pay the price for your lack of vision.”

I suspect Wall Street was looking for some “wow factor” new AI capability. Instead, it was disappointed that Apple mostly talked about features similar to what other companies have shown, such using AI to improve or create images or written text.

But Apple’s secret sauce has always been the integration of its ecosystem – all the devices and services connected, working together seamlessly. Apple made it clear in the WWDC keynote that this is exactly what it plans to do with its AI tech, which it has cheekily named “Apple Intelligence.”

It’s not just that Apple Intelligence will work across all its devices. Apple’s AI will draw upon the user’s own data as opposed to drawing on large pools of data on the internet. Apple Intelligence will be ultra-personalized to a degree that other AI rivals won’t be able to match.

That’s because other tech companies will have access to slices of their users’ personal data, but not the whole of it. Apple Intelligence will draw upon a user’s text messages, mail, calendar, photos, contacts, and personal habits.

So while many of the AI features appear familiar, Apple’s version customizes it in useful and practical ways.

In one example given during the keynote, an Apple staffer asked Siri when her mom’s flight was landing and then asked about their lunch plans. Finally, she asks how long it will take them to get from the airport to the restaurant. The new, Apple Intelligence version of Siri knows who her mom is and can fish all the relevant info out of multiple apps.

But making AI more personal is just one thing Wall Street is underestimating.

Apple Intelligence Everywhere All the Time

Apple’s suite of AI services are not standalone apps, nor are these features restricted to certain apps. Most of them are available across multiple apps. Apple Intelligence is deeply integrated into the operating system, and will work pretty much the same on Macs, iPhones, and iPads.

In other words, the text-enhancing AI features won’t just work in Mail or Messages, but in just about every app that uses text. Users will soon take it for granted that these features will just “be there” whenever they’re typing.

And better still – Apple announced that it was making its AI capabilities available to developers to add to their own apps “with just a few keystrokes.” That will go a long way toward making the Apple ecosystem the premier AI platform, where AI features work the same way across all apps and devices – even third-party apps.

Other AI software companies simply can’t do this because they lack Apple’s vertical integration.

And if a customer has a specific use case where they really want to use a competitors’ AI, well, Apple has that covered as well. The rumored partnership with OpenAI, the maker of ChatGPT, isn’t that it will power Apple’s AI. Apple instead is offering ChatGPT as another option within  Apple Intelligence.

The company said it would add more AI providers in the future, which would explain the rumors of Apple’s talks with Alphabet (GOOGL) to license the Google Gemini AI engine.

And of course, Apple has gone to great lengths to protect users’ privacy as they use Apple Intelligence, even if they use ChatGPT or another AI provider. Privacy, or lack thereof, has been an issue with other tech companies.

Many AI features will be executed on the device itself, which is the best way to keep data safe. When an AI request requires more powerful computing power, Apple will tap into its own cloud server system, which it has designed to preserve the privacy of user data.

But What Will it Cost?

AI isn’t cheap. The research to build the software costs billions, the cloud servers that crunch the data cost billions. I imagine Wall Street hoped Apple Intelligence would join the company’s suite of monthly subscription services.

Nope. All the Apple Intelligence features described in the WWDC keynote are free, including access to third-party AI services like ChatGPT. That’s astounding to me, and likely another big reason Wall Street is disappointed.

But again, they just don’t get it. By integrating AI into its ecosystem, and by inviting developers to add Apple Intelligence to its Mac, iPad, and iPhone apps, Apple makes its products more compelling and the ecosystem even stickier.

Apple isn’t charging for AI features because it doesn’t have to. It expects the new features to drive sales of its high-margin devices, which drive subscriptions to its even higher-margin services.

The Apple Intelligence features will require an M-series chip on Macs and iPads, and at least an A17 chip on an iPhone. So folks with older Macs and iPads will have a good reason to upgrade.

As for the iPhone, only last year’s iPhone 15 Pro and Pro Max have the A17. That could nudge iPhone buyers from two or three years ago to upgrade sooner than they had planned. It might not produce the hoped-for “upgrade supercycle,” but the desire for Apple’s new AI features will definitely juice iPhone sales.

Apple is leveraging its vertical integration to make a more personalized AI it thinks will customers will prefer, while making its already formidable ecosystem even more alluring.

It’s a brilliant plan to drive future growth – which Wall Street will figure out eventually.

Update: Of course traders woke up the next day and drove the AAPL price up more than 7% to a record high. Sooner than I thought, but it does demonstrate a conviction that Apple’s AI strategy is a turning point that will trigger a fresh wave of growth.