Apple remains one of the most innovative and powerful companies on the planet, with nearly $400 billion in annual revenue and close to $100 billion in annual profit. But that doesn’t mean it’s invincible. This week brought reports of a major shakeup within the company’s artificial intelligence division where John Giannandrea will apparently move aside to make room for Vision Pro creator Mike Rockwell, who will take over Apple’s AI efforts as it works to modernize its Siri voice assistant. That process has faced delays for months even as competitors release new models and updates on an almost weekly basis. It’s a bit stunning how far behind Apple has let itself fall on AI, and the embarrassing news over the last week that the company can’t seem to deliver on Siri enhancements it already advertised was enough for CEO Tim Cook to make a change. If history is a guide, Apple will probably get its AI act together relatively quickly once it rights the ship – but it has been an unusually rough 2024 for the company, which saw both its newest toy Vision Pro and its old mainstay the iPhone underperform. Some of that ties back to an inability to release new “wow” features (such as AI), but it’s also interesting that Rockwell will take on AI and Siri considering that his Vision Pro sold so few units that the company has halted production. Of course, that’s not because the AR/VR device didn’t work; it actually worked exceptionally well, according to reviews. It’s just that consumers didn’t want it. At a tech-focused company like Apple, lack of demand never gets you in as much trouble as products that don’t work. And Apple’s AI ambitions remain largely unrealized, with reports suggesting the company may need to essentially start from scratch to bring Siri and its AI infrastructure up to speed.
Interestingly, the AI delays at Apple indirectly affect everything it produces, including its Apple TV+ service that would obviously benefit from smarter, AI-driven Siri voice navigation and content discovery akin to the “conversational search” that Amazon birthed through its Alexa+ launch last month. Furthermore, Apple TV+ remains an enigma within Hollywood, spending a reported $4 billion to $5 billion annually on content and yet, according to a report this week from The Information, losing more than $1 billion per year because it simply doesn’t have enough paying subscribers to pay the freight. That according to what unnamed former employees and people “with direct knowledge” disclosed in interviews about Apple’s inner workings. It’s hard to gauge the accuracy of a report based mostly on unnamed sources, but its investigation suggests Apple would lose even more on Apple TV+ if not for its inclusion in the Apple One bundle, which also includes Apple Music, Arcade, and iCloud (In fact, some sources said cloud services is the key retention driver for Apple One, not its entertainment offerings). Consider that the Services division accounts for roughly a quarter of Apple’s revenue. Apple doesn’t disclose how much of Services’ nearly $100 billion per year in revenue is profit, but estimates suggest the division approaches a gross margin nearing 75% (nearly twice that of its hardware division). And yet Apple TV+ – the by far most prestigious and zeitgeisty part of Apple One with hundreds of awards for shows like “Ted Lasso” and “Severance” – apparently drags down the division’s profits by at least $1 billion (although that’s tiny when stacked against perhaps $75 billion in annual profit).
Next? As Apple’s streaming peers start to eke out profitable quarters around their direct-to-consumer businesses, it’s perhaps odd that Apple TV+ remains in the red. Its prestige shows haven’t all caught fire, but most critics and consumers acknowledge the high quality of its output, with comparisons to the old HBO brand. And amid all those accolades, we’d be remiss if we didn’t mention that former Time Warner Cable executive Peter Stern oversaw Services, including Apple TV+, until he departed in January 2023 (he’s now CEO of Peloton Interactive). While HBO was a product of the old Time Warner Inc., not Time Warner Cable, it’s interesting that a former cable guy played a big role in growing Apple TV+ to its current prominence (if not yet profitability). These days, Apple Music and Beats head Oliver Schusser oversees Apple TV+, with management of Arcade and iCloud falling to Adrian Perica, who interestingly also oversees Apple’s relationship with OpenAI. Voila. It all comes back to AI eventually. And we should keep things in perspective as well: Remember that Apple makes nearly $100 billion per year – so what’s a billion dollars in annual losses when Cook can crow during the Q4 earnings call that Apple TV+ “continues to draw attention and accolades” with 2,500 award nominations and 538 wins? Prestige is largely on-brand for Apple. But so is profitability. Eventually those two truths will need to reconcile when it comes to Apple TV+.
