Apple (AAPL +0.11%) brought about a revolution in the smartphone market in 2007 when it launched its first-ever iPhone, changing the fortunes of established smartphone companies such as Nokia and BlackBerry (known as Research in Motion at that time).
It's worth noting that Apple sold just 1.4 million iPhones in 2007. For comparison, the popular Nokia 3310 sold 7.4 million units in the fourth quarter of that year alone. The Nokia device was seven years old at that time, and it was simply a feature phone. However, Apple changed the game by infusing the internet, entertainment, and a touchscreen into the same device.
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Key Data Points
Apple has come a long way since then. It was the top seller of smartphones in 2023, according to IDC. The company shipped 234.6 million iPhones last year and controlled 20.1% of the market. It was slightly ahead of Samsung, which had a 19.4% share of the smartphone space last year. The two companies have long been involved in a fierce duel for smartphone supremacy and are now looking at artificial intelligence (AI) to unlock the next growth frontier in this space.
Samsung has been ahead of Apple in the generative AI smartphone market so far. However, Apple made its AI move in June this year when it introduced Apple Intelligence, a suite of generative AI features. Let's take a closer look at Apple Intelligence and see why the company could use this feature to boost its growth.
The monetization of Apple Intelligence
Apple says its generative AI platform will unlock "new ways for users to enhance their writing and communicate more effectively." From enabling users to proofread, rewrite, and summarize text to recording, transcribing, and summarizing audio to a more intelligent Siri, there are a bunch of tools that Apple Intelligence users will get access to.
Apple hasn't announced whether it will charge a fee for its generative AI features. However, there is a strong likelihood of the company heading in that direction. That's because Apple isn't just a hardware company. The tech giant has a flourishing services business that has generated $71 billion in revenue in the first nine months of fiscal 2024, accounting for nearly a quarter of its top line.
The important thing here is that the services business has a much fatter margin profile than Apple's product business. Apple's services business reported a 74% gross margin in the fiscal third quarter, compared to the product segment's gross margin of 35%. The services business currently has a range of offerings that include cloud storage, music, TV, gaming, fitness, and news.
The company offers these services through a subscription model under the Apple One umbrella. An individual subscription starts from just under $20 a month, while the family plan costs just under $26 a month. The top-end plan can be purchased for just under $38 a month.
The addition of Apple Intelligence to this plan could help the company further increase its revenue from the services business, which is approaching an annual revenue run rate of $100 billion (based on the services revenue generated in the first nine months of fiscal 2024).
Wall Street analysts and research firms believe that Apple could charge a subscription for access to advanced Apple Intelligence features. Counterpoint Research, for instance, anticipates that the company could charge between $10 to $20 a month for Apple Intelligence features when it includes them in the Apple One plans. Bloomberg's Mark Gurman, on the other hand, predicts that Apple will first offer generative AI features for free, but be likely to charge for advanced features.
Note that Microsoft is doing something similar with its Copilot AI assistant. It offers the standard version of Copilot for free, but the paid plans start at $20 a month and go up to $200 a month based on the number of features users opt for. Customers have been paying for Microsoft Copilot, and the company has already built a strong base of paid customers for this service.
A huge installed base of users means Apple could make a lot of money from AI
In February, Apple CEO Tim Cook announced that the installed base of the company's active devices stood at 2.2 billion. That's a massive number that could pave the way for the quick monetization of Apple Intelligence since the company is going to offer its AI features across MacBooks, iPads, and iPhones.
Of course, Apple Intelligence isn't compatible with all those devices. The features are currently only supported by the iPhone 15 Pro, the iPhone 15 Pro Max, the iPhone 16 lineup, and iPads and Macs running on M1 chips or later. Of its huge installed base, Wedbush Securities analyst Dan Ives estimates that 1.5 billion active devices are iPhones. Around 20% of those iPhones haven't been upgraded in four years, which means that roughly 300 million users could end up buying Apple's generative AI-enabled smartphones.
On the other hand, the growing demand for AI-enabled personal computers (PCs) could encourage customers to buy new MacBooks that support AI features. So, there's a strong likelihood of an increase in Apple's product sales because of AI. That should eventually filter down to the services business if Apple decides to charge a subscription for its AI features.
Assuming Apple decides to charge even $10 a month for its AI services and manages to get 300 million paying customers, it could generate $3 billion every month from the monetization of Apple Intelligence. However, that number could be higher if subscription charges are higher, or if a bigger portion of its installed base starts using its offerings.
Apple's services business is approaching $100 billion in annual revenue, and it could get a big shot in the arm if the prediction about charging for Apple Intelligence features comes true. Throw in the potential rise in sales of Apple's hardware, and it won't be surprising to see an uptick in the pace of this tech giant's growth.
