Productivity

Alphabet and Apple have cause to circle AI wagons



The enemy of Alphabet (GOOGL., opens new tab enemy may be its friend. The $1.8 trillion search giant pays Apple (AAPL.O), opens new tab billions of dollars to make its Google search engine the default option on the iPhone-maker’s devices. That has helped maintain its dominance, but artificial intelligence threatens to flip the script. The two are now in talks over licensing Alphabet’s AI models, Bloomberg reported, opens new tab on Monday. The value of their existing partnership offers Apple boss Tim Cook some handy leverage.
Over 2.2 billion devices run Apple’s operating systems globally, and it was the top seller of smartphones last year, according to, opens new tab research outfit IDC. That makes its search deal with Alphabet enormously valuable since iPhones shuffle a huge volume of traffic to Google and its advertisers. Cook's company got a cut of as much as $20 billion in 2023 in return, Bernstein analysts say.
The risk is that users begin flocking to intelligent chatbots, like OpenAI’s ChatGPT, in lieu of using Google search. Apple can’t wedge in its own service, yet: Unlike Alphabet or Microsoft (MSFT.O), opens new tab, which owns a stake in OpenAI, the company hasn’t released its own offering. Analyst Ming-Chi Kuo of TF International Securities reckons, opens new tab catching up will be costly, estimating that Apple will purchase up to 20,000 servers for AI initiatives this year. Based on current prices for Nvidia (NVDA.O), opens new tab coveted H100 chips, crucial to machine-learning efforts, that could cost nearly $5 billion. Even that would trail spending by rivals like Meta Platforms (META.O), opens new tab.
Apple and Alphabet both have a problem, then. Apple controls an enormously valuable contact point with users, but has no AI service to keep them ensnared. Alphabet’s Google search, still the majority of its revenue, could lose a big audience. And its own AI effort, dubbed Gemini, has been off to a slow start, courting controversy over spitting out inaccurate images. Chatbot hype helped send Microsoft’s stock up 13% in 2024, almost twice as much as Alphabet’s.
A deal could solve both issues. And while Apple has also had talks with OpenAI, according to Bloomberg, it holds an advantage in negotiating with Alphabet, because Google has something to lose.
Antitrust enforcers are the most imposing hurdle. The two companies’ existing partnership has come under attack in a lawsuit from the U.S. Department of Justice, alleging that Alphabet pays Apple to gain an unfair advantage in search. The proposed deal makes so much sense for both technology behemoths that watchdogs might feel they have little choice but to intervene.
Follow @AnitaRamaswamy, opens new tab on X
(The author is a Reuters Breakingviews columnist. The opinions expressed are their own.)
CONTEXT NEWS
Apple is in talks to license a set of Alphabet’s generative artificial intelligence models, known as Gemini, to power new features on its iPhone mobile device, Bloomberg reported on March 18, citing unnamed sources.
Analysts from investment bank Bernstein reckon that Alphabet paid Apple roughly $18 billion to $20 billion last year to maintain its search engine, Google, as the default on Apple’s iPhones. Apple told investors in a Feb. 1 press release that it had an installed base of over 2.2 billion active devices globally, including iPhones.

Apple Inc. is in talks to build Google’s Gemini artificial intelligence engine into the iPhone, according to people familiar with the situation, setting the stage for a blockbuster agreement that would shake up the AI industry.

The two companies are in active negotiations to let Apple license Gemini, Google’s set of generative AI models, to power some new features coming to the iPhone software this year, said the people, who asked not to be identified because the deliberations are private. Apple also recently held discussions with OpenAI and has considered using its model, according to the people.

If a deal between Apple and Google comes to fruition, it would build upon the two companies’ search partnership. For years, Alphabet Inc.’s Google has paid Apple billions of dollars annually to make its search engine the default option in the Safari web browser on the iPhone and other devices. The two parties haven’t decided the terms or branding of an AI agreement or finalized how it would be implemented, the people said.

Listen • 41m24

Bloomberg Intelligence: Apple, Google AI Talks (Podcast)

Alphabet shares rose 4.6% on Monday in New York, the biggest single-day gain since Dec. 7. Apple was up less than 1%.

A deal would give Gemini a key edge with billions of potential users. But it also may be a sign that Apple isn’t as far along with its AI efforts as some might have hoped — and threatens to draw further antitrust scrutiny of both companies.

Apple is preparing new capabilities as part of iOS 18 — the next version of the iPhone operating system — based on its own AI models. But those enhancements will be focused on features that operate on its devices, rather than ones delivered via the cloud. So Apple is seeking a partner to do the heavy lifting of generative AI, including functions for creating images and writing essays based on simple prompts.

Spokespeople for Apple and Google declined to comment. OpenAI didn’t immediately respond to a request for comment.

Since early last year, Apple has been testing its own large language model — the technology behind generative AI — codenamed Ajax. Some employees also have been trying out a basic chatbot dubbed Apple GPT. But Apple’s technology remains inferior to tools from Google and other rivals, according to the people, making a partnership look like the better option.

A deal with Apple would be Google’s highest-profile partnership for Gemini to date and could be a major boon for the company’s AI efforts. Apple has more than 2 billion devices in active use that could potentially become home to Google Gemini later this year. In January, Samsung Electronics Co. rolled out new smartphones with AI features powered by Gemini.

But a partnership between the two Silicon Valley giants would likely draw the eye of regulators. Google’s current deal with Apple for search is already the focus of a lawsuit by the US Department of Justice. The government has alleged that the companies have operated as a single entity to corner the search market on mobile devices. The pair has justified the arrangement by saying Apple believes Google’s search quality is superior to rivals and that it’s easy to switch providers on the iPhone.

The arrangement between Apple and Google is also under fire in the European Union, which is forcing Apple to make it easier for consumers to change their default search engine away from Google. As regulatory pressure grows and artificial intelligence becomes more prevalent, the current search deal could ultimately be less lucrative for both companies. It’s possible that a new agreement around AI could help make up for that.

Microsoft Corp.’s funding of OpenAI has drawn its own regulatory scrutiny, with the US Federal Trade Commission examining whether that deal may violate antitrust laws.

While the talks between Apple and Google remain active, it’s unlikely that any deal will be announced until June, when the iPhone maker plans to hold its annual Worldwide Developers Conference. It’s possible that the companies don’t reach an agreement or Apple ultimately chooses to go with another generative AI provider, like OpenAI. Or Apple could theoretically tap multiple partners, as it does with search in its web browser. Other generative AI providers include Anthropic, which offers a chatbot called Claude.

Gemini has captured the imagination of consumers and businesses, but it hasn’t been without controversy. Last month, users discovered that the system sometimes inaccurately handled the race of individuals depicted in AI-generated images. Sundar Pichai, Google’s chief executive officer, called the issue “completely unacceptable,” and image generation was paused.

Apple in Talks to Build Google's AI Into iPhones
0:33
WATCH: Bloomberg has learned that Apple Inc. is in talks to build Google’s Gemini artificial intelligence engine into the iPhone, Lizzy Burden reports.

Tim Cook, Apple’s CEO, has promised a major AI announcement this year. He told investors the company would release transformative features that “break new ground.” The plan is especially important as investors look for new growth sources at the iPhone maker, which canceled a project to develop a self-driving car earlier this year. It moved some engineers on that project to its artificial intelligence division.

Last year, Cook said he personally uses OpenAI’s ChatGPT but indicated that there were “a number of issues that need to be sorted.” He promised that new AI features would come to Apple’s platforms on a “very thoughtful basis.” By outsourcing the generative AI features to another company, Cook is also potentially lessening the liability for its platform.

The generative AI features under discussion would theoretically be baked into Siri and other apps. New AI capabilities based on Apple’s homegrown models, meanwhile, would still be woven into the operating system. They’ll be focused on proactively providing users with information and conducting tasks on their behalf in the background, people familiar with the matter said.