Can Apple Intelligence Save the iPhone?
In late 2022, the launch of ChatGPT by OpenAI sparked a frenzy of interest in the potential of artificial intelligence. Within months, tech giants like Microsoft, Meta, and Google jumped on the bandwagon, unveiling their own AI chatbots and generative AI tools. By the end of 2023, Nvidia emerged as the sole company uniquely positioned to rake in massive profits by powering these services. Fast forward to 2024, and a major theme in AI focuses on our beloved gadgets, with tech companies striving to bring AI to phones and laptops.
This year, Samsung unveiled its AI-powered Galaxy S24 smartphone. Microsoft, partnering with companies like Dell, HP, and Qualcomm, began selling a new line of AI computers called Copilot+ PCs over the summer. Just a few weeks ago, Google launched its Pixel 9 series of AI phones. However, these new devices have largely fallen short of expectations. Rather than ushering in entirely new experiences, they’ve introduced features aimed at streamlining photo editing, engaging with chatbots, or providing live captions for videos. And then there’s Humane’s AI pin, a clip-on device that was met with immediate derision in reviews. By August, reports surfaced that daily returns were outpacing sales.
Apple is now poised to change the narrative. On Monday, the company is expected to showcase its new iPhone lineup, brimming with AI capabilities announced back in June. This system, dubbed Apple Intelligence, will be gradually rolled out over the coming months. Existing Apple devices like the iPhone 15 Pro and certain newer iPads and Macs will also have access to it.
Crucially, Apple Intelligence will be free. As a result, the company faces the challenge of convincing hundreds of millions of iPhone users to upgrade. This is precisely what Wall Street will be closely observing when the latest iPhones hit the market this month. Will Apple Intelligence propel higher iPhone sales? Or will the post-pandemic sales slump continue?
"The reality is GenAI is still in its early stages, and use cases that have been announced are probably only the tip of the iceberg of what’s to come," commented Nabila Popal, a mobile analyst at IDC.
Key Takeaways
- Apple is introducing its own AI system, Apple Intelligence, which will be available on new iPhones and some existing Apple devices.
- Apple Intelligence is a significant step towards integrating AI into the entire Apple ecosystem.
- Analysts are skeptical about whether Apple Intelligence will be enough to boost iPhone sales, but Apple’s measured rollout strategy and vast user base give it a competitive edge.
- The AI capabilities of Apple Intelligence will initially be limited to U.S. English and may be blocked in countries with strict AI regulations, like China.
- Consumer interest in AI gadgets remains uncertain, and Apple will need to market its features effectively to convince users of their value.
Do Consumers Really Want AI Gadgets?
Apple typically introduces modest upgrades to its iPhones each year, with incremental improvements to camera quality, processing speeds, and battery life. However, these incremental enhancements may not be compelling enough to entice consumers to upgrade every year or two, as they did in the early days of the iPhone when significant hardware innovations were commonplace. This year’s iPhones are expected to continue this trend of iterative hardware improvements.
This puts more pressure on Apple Intelligence to deliver. But the answer to the question of whether consumers are ready for AI-powered gadgets remains unclear.
A recent survey by research firm Canalys revealed that only 7% of consumers had a "very high inclination" to make a purchase decision based on AI. This interest is noticeably higher in Apple’s most profitable markets, the U.S. and China, but there exists a substantial disparity between the two.
In the U.S., 15% of respondents reported a high or very high inclination to buy gadgets with AI features. This number soared to 43% in China, where consumers tend to place a greater emphasis on tech specs. The relatively subdued interest, particularly in the U.S., suggests that Apple will need its marketing might to effectively communicate the compelling story of what AI can bring to the average iPhone user.
"There are lots of interesting features, but you have to bring those to the normal user in situations they can use repeatedly, not just a one-time feature," explained Gerrit Schneemann, an analyst at Counterpoint Technology. "It’s hard to tell that story in a store with a poster or a two-second sales pitch."
Apple Intelligence and the Future of the iPhone
Apple Intelligence will leverage personal data stored on iPhones to enhance Siri’s capabilities and transform it into a more sophisticated assistant. Moreover, app developers will be able to tap into Apple Intelligence, enabling its use across a wide range of phone applications. Schneemann sees this as a fresh approach to AI compared to Google or Samsung.
"There is the potential to help speed up that educational curve and permeate into the market," he said.
Samsung’s Galaxy S24, its latest flagship device, has outsold last year’s model. However, IDC’s Popal says there’s little evidence suggesting AI is a primary driving force in these sales. Apple occupies a different category entirely.
"The psyche for premium Apple customers is different," Popal said, adding that many iPhone customers utilize financing plans, making upgrades more accessible.
More recently, Google introduced its Pixel 9 series of phones, featuring the company’s digital AI assistant, Gemini, directly integrated into the software. Google’s smartphones have historically struggled to gain significant market share, but they often act as a preview of what’s possible on Android phones before these features are eventually adopted by Samsung or Motorola devices.
The Pixel’s flagship feature is a version of Gemini that can conduct natural conversations instead of merely responding to single commands – a capability that other Android phones with Gemini are expected to gain in the future. While the reviews for the Pixel 9 were positive, it’s still too early to determine if AI will lead to a surge in sales.
In the PC market, Microsoft’s Copilot+ PCs launched this summer, but without their key AI feature, Recall. (Microsoft learned the hard way that releasing a product that continuously takes screenshots of everything you do on your computer is a recipe for disaster.) The Recall feature is set to arrive later this fall for a limited number of early testers.
Without Recall, these AI PCs have little to offer in terms of AI enhancements. The real benefit for now seems to be the power and performance delivered by the new PC chips from Qualcomm that debuted in Copilot+ PCs. These processors are based on the same technology as phone chips, which means they’re still highly powerful without draining the battery.
"This is the transition of the traditional PC, turning it to look like a mobile device," explained Alex Katouzian, Qualcomm’s general manager for mobile and wearable technology. He added that Microsoft is actively developing more AI features and addressing the privacy concerns related to Recall.
Microsoft projects that 50 million Copilot+ PCs will ship this year, representing approximately 1 in 5 PCs expected to be sold. Katouzian claims that Qualcomm-powered Copilot PCs are "on track" so far.
Nonetheless, Copilot PCs accounted for a "relatively small percentage" of PC sales at Best Buy this summer, according to CEO Corie Barry during the company’s most recent earnings call. She added that customers "just want to replace and upgrade" without necessarily seeking out devices with AI or spending a premium for them.
Apple’s AI Rollout: The Road Ahead
If Apple can defy the trend and captivate its customers with Apple Intelligence, the next step will be to roll it out globally to boost iPhone sales in markets beyond the U.S. However, several obstacles stand in the way.
China, where Apple generates almost one-fifth of its sales, mandates government approval before an AI model can be launched within the country. Tim Cook, Apple’s CEO, told CNBC in August that his team is actively working with Chinese regulators to obtain this approval.
Additionally, the EU has enacted a series of strict regulations targeting the world’s largest technology companies. Apple announced this summer that it won’t immediately launch Apple Intelligence in the EU due to these regulations.
For the time being, users of Apple Intelligence will remain part of a relatively exclusive group. Apple’s mission is to convince customers to invest in a new device and join this exclusive club.
"We’re very excited about the value that Apple Intelligence gives to users," Cook told CNBC in August. "For that reason, we think it’s another compelling reason to upgrade … we’ll see how the season goes once we start shipping, but we’re very excited about it."
