Apple bets on AI without inflating its capex

Apple reports a record year while keeping its investments below those of its rivals. The company combines on-device AI, in-house servers, and third-party models, and is preparing paid tiers for certain features. Between App Store commissions, sales of Macs for local AI, and future billing for Siri AI, multiple revenue sources coexist, with cloud costs still difficult to predict.

Expected Revenue from Siri AI and Services

Apple plans to convert part of its AI usage into subscription revenue. John Ternus indicated that features relying on server-side models, including Siri AI and smart photo editing, will have usage limits. He added that customers who need more capacity will be able to purchase expanded access in the future. He recalled that iCloud tiers initially focused on storage before integrating additional capabilities. The rollout has begun: the revamped assistant has been in beta since September for English speakers in the U.S. and was expanded in October to French, Japanese, Korean, Portuguese, and Spanish.

Controlled Costs: $2.2 Billion Capex Compared to Tens of Billions for Peers

In the last quarter, Apple incurred $2.2 billion in capital expenditures, compared to $77.3 billion at Amazon and $51.4 billion at Alphabet. These amounts cover all activities, not just AI, and exclude certain AI expenses. Apple's operating expenses rose by 21% to $19.2 billion, with increased R&D efforts including AI. Its approach combines on-device processing, internal servers, and external technology. Cloud costs related to Siri AI will be accounted for in service sales costs and could increase with usage. However, Kevan Parekh believes it is premature to anticipate the share of requests requiring servers rather than local execution.

Monetizing Others' AI via the App Store, Despite Workarounds

Apple collects commissions on subscriptions to AI apps and generates revenue when its customers subscribe to third-party services through the App Store. According to AppMagic, Apple is on track to exceed $1 billion in fees by 2026 for generative AI applications. At the same time, OpenAI is directing potential subscribers to its website rather than the App Store, circumventing commissions. Apple's situation allows it to benefit from AI developed by other players, while providers seek to evade its commissions. Apple emphasizes the diversity of its revenue sources and claims it does not need to develop every model or invest in infrastructure equivalent to its competitors to generate revenue.

The Mac as a Local AI Machine for Businesses and Creators

Apple indicates it is benefiting from hardware purchases intended for local AI, including models from other publishers. John Ternus asserts that the Mac is experiencing a full-fledged AI moment. The company cites Gap, which uses Mac Minis for loss prevention in hundreds of stores, avoiding the cost of cloud tokens, and Christie's, which operates local models on Mac Studio for workflows including price estimations. Purchasing hardware allows for executing AI without paying a cloud provider per request. Ternus assures that Mac Mini and Mac Studio push the boundaries of local and private AI. The Mac Mini is gaining a clientele of developers and enthusiasts seeking affordable local execution. Earlier this year, Tim Cook indicated that the recognition of these capabilities was progressing faster than expected, leading to demand exceeding expectations. Kevan Parekh suggests that AI is driving upgrades and cites opportunities through third-party applications, partnerships, and in-house offerings.

Massive Installed Base and Openness to External Models

With over 2.5 billion active devices, Apple dictates the interface through which many consumers access AI, including those from competitors. Siri's AI relies on models developed with Google's Gemini technology, and Apple plans to offer a choice of external providers for writing and image generation tools. AI and Apple Intelligence were mentioned 45 times during the call, and John Ternus sees this as a major opportunity.

Financial Performance and Margin Reservations

Apple recorded its best fiscal year in revenue and earnings per share. In the fourth quarter, iPhone revenues increased by 17.5% to $57.6 billion, and Mac revenues rose by 24% to $10.8 billion, the highest in four years. Management sees AI as a sales driver but does not specify the exact share of this technology in growth. The stock fell in pre-market trading on Tuesday after a warning about the impact of rising memory costs on margins during the holiday period. References to a revamped Siri were made in June 2024, and Apple is considering charging for increased access to its own AI features.