Alphabet and Apple have cause to circle AI wagons

Strange bedfellows. The enemy of Alphabet’s enemy may be its friend. The $1.8 trillion search giant pays Apple 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 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 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, which owns a stake in OpenAI, the company hasn’t released its own offering. Analyst Ming-Chi Kuo of TF International Securities reckons 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’s coveted H100 chips, crucial to machine-learning efforts, that could cost nearly $5 billion. Even that would trail spending by rivals like Meta Platforms.

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.