Tim Cook, Apple, and AI: An Analysis (Premium)

We live in interesting times, thanks to AI, and Apple is increasingly finding itself trailing rather than leading. Every few weeks, it seems, we’re treated to reports from Mark Gurman and others that describe the internal angst that AI is triggering at Apple, and about yet another plan it has to catch up.

But this past week has been particularly interesting. Apple delivered another blockbuster quarterly report with better-than-expected iPhone sales and a surprise iPhone milestone. Analysts grilled Apple about what it was doing to catch up to its Big Tech peers in AI, and Apple made some surprising concessions. And then CEO Tim Cook held a rare all-hands meeting with employees specifically to discuss AI and how important it is to company.

Here’s what’s happening

? Apple Intelligence: Some highs, some lows

Apple announced its first big AI push, Apple Intelligence, at WWDC in June 2024 but it then failed to deliver any of the new features in the first wave of new OS updates that arrived that September. The first Apple Intelligence features finally came to Apple’s devices in late October, and then the company slowly rolled out additional functionality via minor updates in December, January, and April.

Controversially, Apple never released the promised AI-powered “conversational” Siri update and it eventually revealed that it wouldn’t be able to do so until at least 2026. Apple was sued for false advertising with Apple Intelligence, and the company later removed the “available now” text from the Apple Intelligence page on its website.

A year after the initial Apple Intelligence announcement, Apple announced its ’26 OS updates at WWDC 2025. And though the primary focus was on the controversial Liquid Glass user interface that Apple will use across all its major OS platforms, the company didn’t shy away from discussing new Apple Intelligence features or the Siri debacle, as was expected. As I write this, Apple’s ’26 OS updates are available as public betas, and it plans to release each on schedule this September. But all eyes are on the future and whether, or when, Apple will update Siri and perhaps finally show some leadership in AI.

? Apple earnings

On Wednesday, Apple delivered a quarterly earnings report that was somehow both exceptional and troubling. The company reported a net income of $23.4 billion on record revenues of $94 billion in the quarter ending June 28, and three of its businesses–iPhone, Services, and Mac–saw double-digit revenue growth.

But Google/Alphabet revenues surpassed those of Apple for the first time in a year. And worries over Apple’s uncertain guidance on the future impact of chaotic U.S. tariffs halted a stock rally.

No one is concerned about Apple’s financial performance in the short term. But the company faces an even bigger issue in AI, a quickly evolving technology that’s emerging as an existential threat to the company. And AI is problematic for the company both short- and long-term. The events of this week demonstrate that this isn’t just a perception, and that Apple’s senior leadership sees the threat and is suddenly willing at act after the nonchalance of the previous year.

? Post-earnings conference call

I rarely listen in on Apple earnings conference calls. But after writing up its quarterly results, I saw that the timing was right and that I had the time to do so. And I figured it might be interesting, if only to compare it with Microsoft’s post-earnings conference call, which I typically cover in great detail.

It was quite interesting.

On the call, Tim Cook came off as robotic and bland as he clearly read his notes out loud word-for-word rather than using them as a reference and speaking normally. This was initially odd, given his confident persona at Apple’s events, which, granted, have all been prerecorded since the pandemic. But that initial weirdness was quickly forgotten as Cook revealed some “color”–this word came up again and again on the call–expanding on the information the quarterly results announcement.

Key among these new details were:

• iPhone revenues were a record for that quarter, thanks to growth in China and in emerging markets
• The iPhone 16 family is much more popular with customers than the iPhone 15 family, with “strong double digits” growth YOY. Apple CFO Kevan Parekh added that “the iPhone active installed base grew to an all-time high in total and in every geographic segment, and [Apple] reached a June quarter record for upgraders”
• The iOS 26, macOS 26, and iPadOS 26 are “by far the most popular developer betas” Apple has ever released
• Apple has now shipped 3 billion iPhones cumulatively since 2007
• Mac “had another strong quarter” thanks to the M4 MacBook Air. Parkeh added that “the Mac installed base reached an all-time high and [Apple] hit a June quarter record for upgraders.” But Mac revenues weren’t a record, and Mac’s usage share is lower today (8.69 percent) than it was one year ago (16 percent)
• Services revenues were an all-time quarterly record thanks largely to App Store revenues, which “grew double digits year over year, setting a June quarter record.” Parkeh added that cloud services “reached an all-time revenue record driven by the year-over-year growth of iCloud paying accounts,” while transacting and paid accounts reached new all-time highs, paid accounts grew double digits YOY, and paid subscriptions grew double digits. Apple now has “well over a billion paid subscriptions across the services” it offers
• Apple Music is 10 years old
• Apple incurred $800 million in tariff-related costs in the quarter, and it expects that figure to rise to $1.1 billion in the current quarter
• Apple’s installed base of devices reached “another all-time high,” though it didn’t reveal a number
• iPad revenues were down because of the difficult comparison against the launch of the iPad Air and iPad Pro in the year-ago quarter.” But the iPad installed base is at an all-time high, “and over half of the customers who purchased an iPad during the quarter were new to the product”
• Apple Watch upgrades were a quarterly record. Revenues from Wearables, Home, and Accessories were likewise down because of “a difficult compare on accessories due to the prior year’s iPad launches” referenced above. And as with iPad, the Apple Watch installed base is at an all-time high, “with over half of customers purchasing an Apple Watch during the quarter being new to the product”
• Apple Silicon is “at the heart of” the company’s Apple Intelligence, on devices and in its Private Cloud Compute datacenters, which are “also powered by Apple Silicon”

Speaking of Apple Intelligence, Cook also addressed AI explicitly and at length in his stiff opening remarks, with the most relevant bits highlighted below.

“We see AI as one of the most profound technologies of our lifetime,” he said. “We are embedding it across our devices and platforms and across the company. We are also significantly growing our investments. Apple has always been about taking the most advanced technologies and making them easy to use and accessible for everyone, and that’s at the heart of our AI strategy. With Apple Intelligence, we’re integrating AI features across our platforms in a way that is deeply personal, private, and seamless, right where users need them. We’ve already released more than 20 Apple Intelligence features, including visual intelligence, cleanup, and powerful Writing Tools. We’re making good progress on a more personalized Siri, and as we’ve said before, we expect to release these features next year.”

The Q&A at the end of the call was particularly interesting. And there were two major differences with the similar Q&A I covered when I wrote about the Microsoft post-earnings call this past week. The analysts on this call were not distracted by hand-waving and focused on the most important issues facing Apple. And each asked long-winded questions, often specifying that they would add a follow-up question in a strange “grab the mic” moment I’d never seen on a Microsoft call.

Anyway, the most important information that came out of this session includes:

? Yes, Apple is dramatically expanding its AI infrastructure spending.

Apple’s R&D spending has always trailed its Big Tech competitors, but you can see from its balance sheets that this spending is starting to inch up, probably because of AI. But the first questioner specifically asked about capital expenditures, how they were “up notably” this year, and what Apple’s plans were for the future.

“We’ve been investing in Private Cloud Compute, which is also in our first-party data centers,” Mr. Cook said. “The other piece, as you know, is we do have a hybrid strategy where in cases we do use third parties to make capital investments and we also invest in our own. So you are going to see an increase in cap-ex. We also, from time to time, have other investments in facilities and in tooling. But I would say a significant portion of the driver of growth that you’re seeing now is really driven by some of our AI-related investments.”

AI infrastructure spending is obviously a big topic right now. Microsoft spent over $80 billion on this in the past year, with an average spend of over $20 billion per quarter, and it expects to spend over $30 billion in the current quarter alone. One report claims that Big Tech has collectively spent over $155 billion building out AI so far this year, while another says that figure will rise to $364 billion by the end of 2025. What’s Apple’s commitment?

Apple’s capital expenditures were $2.15 billion in the year ago quarter, and they rose to $3.46 billion in this past quarter, a gain of 61 percent YOY. That is a big jump. But these figures are also tiny compared to the sums that Amazon, Google, and Microsoft are now spending.

Later in the Q&A, this came up again, indicating that the answer Cook provided above wasn’t detailed enough to inform future predictions about Apple’s finances.

“Cap-ex is clearly moving higher,” another analyst later asked. “I know you guys don’t typically guide [on] that number, but just kind of qualitatively, should we, as you lean in more on AI, can we really start to see that cap-ex, which is running close to about $4 billion annualized today, really start to move appreciably higher? Any color on that would be helpful.”

“Tim mentioned the fact that we are increasing our investments significantly on AI,” Parekh said, answering for Cook. “You are going to continue to see our cap-ex grow. It’s not going to be exponential growth, but it is going to grow, you know, substantially, and, you know, a lot of that’s a function of the investments we’re making in AI. As we mentioned, we also have other items that fall under that category, facilities, and some of our retail store investments. But I would say a lot of the growth [in cap-ex spending] is really being driven by AI. I would remind you that we do have a hybrid model, though, where we also leverage third-party infrastructure in addition to investing in our own first-party infrastructure.”

? AI’s impact on search

During hearings related to Google’s stunning antitrust defeat in the United States, Apple executive Eddy Cue claimed that the company was already seeing the first-ever decline in Google Search traffic conducted through Safari on the iPhone, and he attributed the decline to the growing popularity of AI chatbots like ChatGPT. This rang false and self-serving to me, as Cue was trying to prevent Apple from losing the $20-$25 billion in revenues it earns from Google. And in addition to Google denying this claim, Google’s recent quarterly earnings are the best evidence yet that Google Search traffic has only grown during this AI era.

“I think that consumers’ behaviors are evolving, and we’re monitoring it very closely,” Cook said when asked about this discrepancy. “Search access points … continue to be very valuable.”

Now, that’s an understatement. But it also seems to somewhat contradict Cue’s testimony despite its brevity.

?‍♀️ What’s up with Siri?

After a question about China, the next question focused on Siri and Apple’s difficulties updating Siri. Here, Cook stuck to the script, but then he provided a bit more detail about Apple’s AI spending.

“We’re making good progress on a more personalized Siri, and we do expect to release the features next year, as we had said earlier,” Cook answered. “Our focus from an AI point of view is on putting AI features across the platform that are deeply personal, private, and seamlessly integrated, and, of course, we’ve done that with more than 20 Apple Intelligence features so far, from Visual Intelligence to Clean Up to Writing Tools and all the rest. We are significantly growing our investment. We did during the June quarter, we will again in the September quarter. I’m not putting specific numbers behind that at this point, but you can probably tell in the guidance that things are moving up.”

The revelations continued.

“We are also reallocating a fair number of people to focus on AI features within the company“, Cook said. “We have a great team, and we’re putting all of our energy behind it. In terms of other products, I don’t want to really comment on specific other products, but we have an exciting roadmap ahead, and I could not be more excited about it.”

I highlighted that last bit only because it comes up again later. Hold please.

? Yeah, but what happens if Google can’t pay Apple for search placement?

This bit right to the bone, and it’s the type of question analysts never ask Microsoft. One analyst had asked why Services revenue growth was expected to decline into the single digits in the current quarter, and Parekh vaguely blamed tariffs and year-ago comparisons (with the 2024 iPad launches). But the next one wouldn’t let it go at that. Check out the boldness of this question.

“Tim, I know you said similar growth in Services and that’s predicated with Google payments continuing,” he started. “Is there any way for us to dimensionalize, or maybe just conceptually talk about options if the counter were to happen, if the payments were not allowed in some way? What are some of the things that Apple could do given that it is a significant chunk of profitability?

Woof.

“Yeah, I don’t really want to speculate on the court ruling and how they would rule and what we would do as a consequence of it,” Cook answered, shutting down the question.

Given Cook’s history, one has to think he’d be happy to speculate if there was a single indication that the courts were interested in protecting Google’s extravagant financial gift to Apple. But that’s not the case at all.

? Will AI lead to a decline in iPhone sales?

That same analyst asked a second biting question, this time about how AI advances might lead to “a world where dependence on screen-based devices significantly diminishes.” How was Apple preparing for this eventuality?

“When you think about all the things an iPhone can do, from connecting people, to bringing app and game experiences to life, to taking photos and videos to helping users explore the world and conduct their financial lives and pay for things and so much more,” he said, “you know, it’s difficult to see a world where iPhone’s not living in it. That doesn’t mean that we are not thinking about other things as well. But I think that the devices are likely to be complementary devices, not substitution.”

This I agree with one hundred percent. Since the rise of the modern smartphone era that started with the iPhone, the industry has wondered about “the next wave.” I’ve speculated that perhaps AI is that next wave, and Microsoft’s out-of-control spending on AI and its chaotic AI releases across the stack indicate that it certainly believes that to be the case. But it’s also fair to say that AI, as we understand it today, is something that makes existing computing platforms better. And so you might argue that devices like the iPhone and software product lines like Microsoft 365, each of which currently dominates their respective markets, will simply continue to do so. Assuming competitors don’t deliver more compelling AI features themselves.

? App Store, Epic Games, and anticompetitive steering

This one had nothing to do with AI, but with Epic Games running the rack against Google, Apple badly fumbling its compliance with a legal order in Epic v Apple](https://www.thurrott.com/apple/321776/apple-loses-again-in-epic-games-antitrust-case), and the many antitrust issues Apple now faces in the U.S. and Europe, I was curious to hear someone ask Apple’s top executives about how it could protect its crucial App Store revenues, the primary driver of its Services business.

“Did you see any impact that was notable from the Epic case and the steering dynamics that came after that?” an analyst asked. “And maybe just touch on what does that appeals process look like for me as you go forward?”

Before Cook could answer, Parekh stepped in.

“Let me take that one,” he said. “We had a very strong Services quarter. We had an all-time record, had the $27.4 billion, up 13 percent. The one thing I would also say is our Services performance is broad-based. So we also saw strength in developed and emerging markets. Both parts of the world had double-digit growth. We also saw a sequential acceleration across the majority of our categories, including cloud services, where I mentioned in the prepared remarks that we had an all-time revenue record.”

Then he finally addressed Epic Games.

“As it relates to the Epic decision, keep in mind, we only just introduced the change required by the court in the June quarter,” he continued. “And as you know, we don’t provide that level of detail, but in general I would say in the U.S., we had a double digit growth for the U.S. App Store, and we set an all-time record, and so we’ll continue to monitor the effects on our business, but we’ll continue to innovate and ensure that the App Store delivers the best experience for users and remains a great business opportunity for developers.”

Cook had nothing to add, not surprisingly. But between Epic Games, the U.S. and EU antitrust problems, and the possibility that Google will be forced to stop gifting Apple $20-$25 billion each year for Search placement, it’s possible that Apple’s high-flying Services business could come crashing down to earth in dramatic fashion. Again, not really AI related–and Apple has said it has no plans to charge customers extra for AI–but a serious problem. And one that Apple could solve by getting past its hubris and working with regulators for a change.

? AI for edge devices

After some questions about product manufacturing, the supply chain, tariffs, and the like, Apple was asked about whether AI models would be a commodity, as Microsoft CEO Satya Nadella has claimed, and where Apple might be headed with local and cloud-based AI devices. This was perhaps the most obvious non-answer of the day.

“I’m curious about your thoughts on AI for edge devices,” the analyst began. “You know, there are some people who think that LLMs could be a commodity in the future. Do you see a scenario where LLMs become a core part of your iOS, or is the SLM the way to go, and how to think about evolution of edge devices in a futuristic AI world, and is smartphone going to be the choice of device? I’m curious about your thoughts on it, broadly speaking.”

“The way that we look at AI is that it’s one of the most profound technologies of our lifetime, and I think it will affect all devices in a significant way,” Mr. Cook responded. “What pieces of the chain are commoditized and not commoditized, I wouldn’t want to really talk about today because that gives away some things on our strategy, but I think it’s a good question.”

? Apple is open to AI acquisitions

Last year, a lot of the speculation around Apple Intelligence centered on whether Apple could go it alone or would it need to partner with one or more other companies. To date, OpenAI’s ChatGPT is the only third-party solution that’s an integral part of the Apple Intelligence, and even that is optional. But Apple was known to be speaking with Google and Anthropic about integrating Gemini and/or Claude, respectively into Apple Intelligence as well.

This year, the speculation has turned to whether Apple, a company that strategically eliminates partners so that it can keep everything in-house, would acquire one or more AI companies to help advance Apple Intelligence more quickly. There were rumors in June that Apple was considering acquiring Perplexity, though we’ve heard nothing on that front.

The final question in the Q&A touched on this, with the analyst asking whether Apple would accelerate its AI roadmap through an acquisition or “just keep the organic focus.”

“We’ve acquired around seven companies this year,” Cook answered that they’re companies from all walks of life, and not all are AI-oriented. “We’re very open to [acquisitions] that accelerate our roadmap. We are are not stuck on a certain size company, although the ones that we have acquired thus far this year are small in nature. But we basically ask ourselves whether a company can help us accelerate a roadmap. If they do, then we’re interested, but we don’t have anything to share specifically today.”

So the call ended on a very interesting note. Given Apple’s go-it-alone tendencies, acquiring AI startups always makes sense. But here, Cook is signaling that Apple is looking at one or more major acquisitions, which very unusual and perhaps even unprecedented.

Most of Apple’s acquisitions are small, with undisclosed transaction amounts. Of those we know about, the biggest was Beats, for which Apple paid $3 billion in 2014. Apple kept the Beats brand and Beats headphone business, but it turned Beats Music into Apple Music. The only other major acquisition like this appears to be the acquisition of Intel’s smartphone modem business for $1 billion in 2019; this resulted in the company’s first-in house smartphone modem chip, the C1, which arrived in February in the iPhone 16E.

Compare those numbers to Microsoft’s top several acquisitions, and you can see how different these companies are: Activision Blizzard in 2022 for $68.8 billion, LinkedIn in 2016 for $26.2 billion, Nuance ($19.7 billion), Skype ($8.5 billion), ZeniMax ($8.1 billion), GitHub ($7.5 billion), Nokia ($7.4 billion), and aQuantive ($6 billion) were all dramatically more expensive than any company Apple has acquired.

Perplexity would be a terrific option based on my recent experience, and its Chromium-based web browser Comet is for now the most feature complete AI-powered browser out there. Imagine a world in which Apple integrates Perplexity AI across Apple Intelligence and–gulp–replaces Safari with Comet. Hm.

➕ But there is one more thing

Apple’s post-earnings conference call was chock-full of interesting information. But it is as interesting, I think, that Apple CEO Tim Cook this week held an hour-long, all-hands, and in-person meeting about AI with employees. According to Mark Gurman, this meeting was all about rallying the troops, which wouldn’t be all that interesting save for one salient fact. Apple rarely has meetings like this.

So why even bother? And why now?

? AI is bigger than all of us

The theme of this meeting was that AI is as “as big or bigger” as the Internet, smartphones, cloud computing, apps. And it’s crucial to the company that Apple emerge from the current uncertainty as a leader in this space.

There’s history here, of course: Apple wasn’t the first company with a personal computer, an MP3 player, a smartphone, or a tablet, but the company innovated in each to such a degree that it either came to define each market or dominate it completely. The goal, of course, is to do so again with AI, to start slowly, create meaningful differentiation, and then race to the front of the pack.

“We’ve rarely been first,” Cook told employees. But Apple invented the modern versions of the product categories noted above, he said. “This is how I feel about AI.”

That strategy is, of course, immediately obvious. I and many others more closely aligned with Apple have pointed this out in the past, raising the possibility of another late-to-market win for Apple.

☀️ Tim Cook has finally seen the light

AI is “as big or bigger” than any of Apple’s current product offerings. This is the Apple equivalent of Microsoft “betting the company” on AI, and it indicates that, after a series of false starts, Cook and Apple have finally gotten a wake-up call akin to the Internet awakening with Bill Gates that resulted in his “Internet tidal wave” memo of 30 years ago.

“Apple must do this,” Cook told employees. “Apple will do this. This is sort of ours to grab. We will make the investment to do it.”

That investment includes the 12,000 workers that Apple hired in the last year, with 40 percent of the new hires joining Apple in research and development roles. And a coming new Apple Silicon-based datacenter processor codenamed “Baltra” that will power AI experiences.

And it includes Siri, too. Of course it does.

?️ Apple is finally seeing results with conversational Siri

Apple senior vice president of software engineering Craig Federighi discussed the future of Siri with employees, noting that the original plan was to ship the conversational Siri update earlier this year. And how the problems Apple had completing this work, and the subsequent delays, were the impetus for the management changes Apple instituted, with Mike Rockwell, the former leader of the Vision Pro group, taking over Siri.

Federighi’s explanation for the problems with Siri mirrored public comments he made during several interviews the week of WWDC 2024. He said that conversational Siri required Apple to merge two systems, the old system for handling user commands and a new system based on generative AI models, and that this work proved more difficult than expected.

“We initially wanted to do a hybrid architecture, but we realized that approach wasn’t going to get us to Apple quality,” he told employees. “The work we’ve done on this end-to-end revamp of Siri has given us the results we needed. This has put us in a position to not just deliver what we announced, but to deliver a much bigger upgrade than we envisioned. There is no project people are taking more seriously.”

? Apple employees must use AI more often

Google, Microsoft, and other Big Tech firms have spoken internally and publicly about their use of AI in product development, but Apple has been mum on this topic. Until now.

“All of us are using AI in a significant way already, and we must use it as a company as well,” Cook directed employees. “To not do so would be to be left behind, and we can’t do that.”

Cook also pushed employees to deploy AI tools faster while urging its managers and service and support teams to do the same.

? Antitrust regulation and product design

The meeting also touched on a wide range of non-AI topics, including, interestingly, the impact of antitrust regulations on Apple’s offerings.

“The reality is that Big Tech is under a lot of scrutiny around the world,” Cook said. “We need to continue to push on the intention of the regulation and get them to offer that up, instead of these things that destroy the user experience and user privacy and security.”

I’ve written this many times, including above, but Apple, like Google, has yet to learn the lessons of Microsoft’s past antitrust troubles, and it should be working with regulators, not undermining the laws they must respect. This is a missed opportunity to preserve future revenues that, yes, will be at a lower level in some cases than is true today, but still more lucrative than what governmental agencies or regulators will otherwise impose.

But Apple, to date, has chosen a decidedly belligerent path forward with non-compliance and other stalling tactics. This harms Apple’s reputation with customers, undermines its marketing, and, most problematically, reveals the company to be as ruthless and obsessed with short-term profits at any expense as other Big Tech companies. Apple is often better than those competitors, but in this way, it’s even worse. This is a crisis of leadership and poor decision making.

? It’s not all about AI

Beyond all that, Cook and the other executives discussed several other topics at the internal meeting, including:

• The retirement of COO Jeff Williams
• Apple’s retail strategy, which includes more stores in emerging markets
• Plans to increase the viewership of Apple TV+
• Coming new healthcare features in Apple Watch and AirPods Pro
• Donations and community service by Apple employees
• Apple’s goal to be carbon neutral by 2030

And then there’s Apple’s “amazing pipeline of products,” which Cook also noted in the post-earnings conference call. This is expected to include major new products like a folding iPhone that’s scheduled for late 2026, but also several smaller advances like new AirPods Pros. And then, further out, a smart display, robots, smart glasses, and whatever else.

“I have never felt so much excitement and so much energy before as right now,” he told employees. “The product pipeline, which I can’t talk about … It’s amazing, guys. It’s amazing. Some of it you’ll see soon, some of it will come later, but there’s a lot to see.”