About 2.5 years ago, I wrote a post discussing how Apple’s business model (monetization through hardware) better positions them for our coming AI-future relative to Google’s (monetization through advertising). I argued that despite Google’s leadership in AI, their ad-driven business model could potentially be damaged in an AI-centric world, limiting the (business) degrees of freedom for them to push AI adoption.
The post seems to have held up quite well with the passage of time. Google’s search ad business is more than thriving, but it’s hard to see how Google has made any progress in creating a sustainable business model around AI. While Google has announced truly astonishing services like Google Duplex (AI assistant with initial focus on local restaurant/service reservations)…
…the lack of a business model has no doubt limited the reach and momentum of their AI efforts.
On the other hand, Apple (and also Amazon and Microsoft) have found much more success over the last 2.5 years in monetizing their AI efforts. For example, while Google was first to market with a very impressive “Night Mode” feature for their Pixel phones, which utilizes AI to enhance photos taken in dark environments, Apple’s more appropriate business model centered around hardware almost guarantees that Apple will be the first to commercialize/popularize “Night Mode” among average individuals despite launching at a later date (i.e. Within 2 years, Apple will have ~200 million users enabled with such a feature vs just 10s of millions for Google).
Or take Google’s very impressive efforts at AR-like directions called Live View…
There is no doubt that such a feature would eventually make the most sense in a glass-type product, which Apple would likely have an edge in by virtue of their hardware strengths. While Google can try to find a sustainable business model around Live View, there is little doubt in my mind that hardware would be the more appropriate route to market. It would be incredibly ironic (perhaps even unfair) if Live View were to become the “killer app” for Apple’s hardware.
While my observation 2.5 years ago was solely around the intersection of business models and AI, I think I could have made a broader observation about Apple’s business model: Whereas many people believe Apple to have one of the weakest business models in tech due to dependence on hardware, Apple actually has the most diversified and robust business model among tech companies because it is the only vertically integrated player and hence can choose to monetize within any level of the tech stack it desires.
Google is largely a services company and hence can largely only monetize through services (e.g. through ads for search or subscriptions/fees for services such as Google Play Store). Amazon is also largely a services company and hence can largely only monetize through services (e.g. commissions/margins on product sales or fees for services like AWS).
As a vertically integrated player, Apple operates throughout the entire stack, from hardware to OS/software to services. While Apple does generate the vast majority of its revenues and profits from hardware, it is largely a choice. I think the value of this optionality is highly underestimated by the vast majority of people. If it ever makes sense for Apple not to monetize through hardware, Apple can choose to shift towards OS/software or services. For example, we are likely witnessing such a shift at this very moment as Apple launches Apple News+, Apple Arcade, Apple Pay/Apple Card, and Apple TV+. Whereas Apple has this flexibility because of its vertically integrated model, Apple’s most relevant peers (Google, Amazon, Facebook, and Microsoft to some extent) do not.
I posit that Apple choosing to monetize through hardware has had the effect of limiting the oxygen/profits that are available to their most relevant peers. Since the start of the mobile revolution in 2007, Apple has generated >$1 trillion of revenues from the iPhone whereas no other relevant tech peer comes close with any combination of service/software. And I think this dynamic will be even more acute the more relevant that AI (and ambient computing) becomes in our lives.
Disclosures: I do not own shares in AAPL or any other name mentioned and have no intention to transact within the next 48 hours.