The OpenAI’s Apple Problem

How can a $3.5 trillion company invest in a $150 billion nascent one? I am not sure if it is about money and appreciation of capital. In other words, the acceleration of say $1 billion to become $10 billion in a 10x gain, cannot be the core reason. Simply, any investment Apple is making on OpenAI cannot be seen from the angle of making direct gain on the investment. 

With dilution, a $1 billion investment in OpenAI for a 10x return will mean that OpenAI has to be valued in the range of $2 trillion. Of course, that is not going to happen overnight. And that is why Apple’s investment is not about beating the investment alpha.

This explains why Apple’s reverse on investment in OpenAI is a big issue for the AI company: “Apple has decided to withdraw from negotiations to participate in OpenAI’s anticipated $6.5 billion funding round, escalating concerns about the AI company’s internal stability. According to the Wall Street Journal, Apple stepped back from the talks just days before the round is expected to close, despite the iPhone maker’s initial strong interest in joining the round just a month ago.”

What is going on? I posit three things:

-Apple is rattled by the leadership changes in OpenAI that it does not think the company can sustain its generative AI product leadership to stay with it for the long-term.

-Apple wants to put that money and build something internally (with some strategic acqui-hires) while maintaining a peripheral partnership with OpenAI just like other companies.

-Apple, unable to unveil the highly heralded AI component in iPhone, may not like what it is seeing from OpenAI, and has decided to wait a little more  on this AI game. It waited for the Apple Watch and later won. Traditionally, it is very great at studying, copying and then winning. 

For Apple to invest in OpenAI, it is not about a direct investment calculus. Rather, it is how putting that money will make it possible for Apple products to get preferential access to tools and products that will improve them. Where Apple is not sure those things will happen, it is going to push the brake and reevaluate. OpenAI has not made me use Microsoft Bing. While I acknowledge the efforts of Copilot, you need awareness to get the best from it. Simply, AI, while valuable, remains marginal on why we use some products.

If OpenAI is making Apple that uncomfortable, count it that it has a big problem, since Apple will give it data and customers it cannot win in a decade in 24 hours.

Comment on LinkedIn Feed

Comment 1: If I understand correctly, Apple may be conducting a cost-benefit analysis to compare the net advantages of investing in OpenAI against those of funding their own projects. The latter part of this analysis piques my curiosity, prompting me to consider what the value of control might signify for Apple.

I value the mention of leadership changes at OpenAI. As I understand it, a company’s value originates from its culture, which in turn stems from its leadership—it all starts at the top. Your comment leads me to believe that perhaps a well-developed culture, especially among leadership, is significant for Apple too.

My Response: Absolutely,  Apple could be looking at the culture and by extension the leadership. The exit of the CTO after the Chief Scientist had left should be a significant factor for a company as big as Apple. Fairchild Semiconductor pioneered the modern semiconductor industry but lost to Intel over a similar scenario. Sure, Sam is not Shockley.

Comment 2: Apple could have built a better search engine (or attempted), but instead pays Google $20B per year to license theirs.

How much is a next-gen Siri worth when the AI training costs are $1B+? Or $10B?

What if the ChatGPT app on iPhone becomes so dominant, that Siri can never catch up?

My Response: The comparison is not there. On Google Search, all that Apple has to do is to sign a document and provide a bank account to receive $20B yearly. That $20B is largely pure profit since there is really no work than putting a default URL on Safari.  Should Apple go ahead to battle Google, in the world Bing has failed, I am not sure Apple has any chance of making $20b in profit yearly. So, for Apple, this is free money and why bother since the best is paying, meaning that it is going to be assured going forward? The $20B is about 36% of what Google makes via Apple Safari.

But here, Apple is paying for OpenAI not to have a space in the OpenAI ecosystem to make money as Google does. In other words, unlike Google which makes tons of money and pays Apple 36% as commission, Apple is sending money to OpenAI for the tools so that it can go and make money by itself, even though that same OpenAI can use that money and build tools which can compete with whatever Apple has in iPhone.

You can see the comparison with the Apple/Google Search deal does not apply here. Google pays Apple commission for “lead generation”. Apple is paying OpenAI to license a tool and then do all it can to monetize it. That poses a risk for Apple.

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