Can DeepSeek Save Apple? A Deep Dive into Apple's Challenges and Opportunities

Can DeepSeek Save Apple? A Deep Dive into Apple's Challenges and OpportunitiesDespite repeated predictions of its downfall, Apple maintained its position as the world's leading smartphone manufacturer in 2024, thanks to its robust ecosystem. Its Q4 2024 earnings report showed growth in both revenue and profit

Can DeepSeek Save Apple? A Deep Dive into Apple's Challenges and Opportunities

Despite repeated predictions of its downfall, Apple maintained its position as the world's leading smartphone manufacturer in 2024, thanks to its robust ecosystem. Its Q4 2024 earnings report showed growth in both revenue and profit. However, a closer examination reveals significant pressures. Firstly, core iPhone sales experienced negative growth, with the iPhone 16 series failing to significantly boost sales, falling short of London Stock Exchange (LSEG) expectations. Even during the peak holiday shopping season, iPhone sales declined troubling news for CEO Tim Cook. Secondly, Apple's performance was particularly weak in Greater China, the world's largest smartphone market. Total sales in China decreased by 11.1% in the quarter, significantly below market expectations. Counterpoint data shows iPhone sales in China plummeted by 18.2% in Q4, dropping to third place.

Apple's "smart" strategy bears some responsibility for the declining iPhone sales. The earnings report highlighted that the exceeding revenue and profit growth were primarily driven by software services revenue. Hardware product net revenue reached $97.96 billion, a 4.1% year-over-year increase, while software services net revenue hit $26.34 billion, a 13.9% year-over-year increase. This "Apple tax," the revenue share from the App Store, has become Apple's main profit source, reflecting Apple's greater profitability in services than hardware. Fundamentally, Apple is a software company, as Steve Jobs stated, "Apple is about putting great software in beautiful boxes," and self-developed hardware is the best way to showcase this software. Apple has used this to build an integrated closed-loop business model encompassing hardware, software, and services.

Cook attributed the poor performance in the Chinese market to channel inventory changes and the fact that Apple Intelligence hasn't launched in the region yet. In short, Apple Intelligence is directly responsible for the sluggish iPhone sales in China. This is a consequence of Apple's incremental innovation strategy. Faced with competition from domestic brands like Huawei, Apple struggles to persuade consumers to pay a premium, especially with Huawei's strong return to the high-end market, snatching significant market share from Apple. Over the past year, Cook has visited China multiple times, expressing continued commitment and investment, such as seeking local partners to support the launch of Apple Intelligence and enhance Apple's AI competitiveness in China. However, Apple's overtures haven't yet yielded positive results. Market analysis suggests these actions are part of a continued strategy to strengthen Apple's relationship with China, a crucial market as both its largest single consumer market and a key manufacturing hub.

Tang Chen believes smartphones remain the most mature digital product form, and the iPhone is crucial for Cook and Apple. Notably, Apple hasn't disclosed specific sales figures for Apple Vision Pro. Considering market enthusiasm and industry feedback, it currently struggles to replace mainstream smart devices like smartphones. For Apple, Apple Intelligence is not just about telling a new story amid a lack of innovation and homogenization in smart terminals, creating a differentiating selling point; it's Cook's trump card to stabilize stock prices and maintain its position as the world's most valuable company. Following the launch of Apple Intelligence, the capital market showed optimism towards Apple's stock price, with its market capitalization reaching new highs. However, Apple's foray into AI was too slow "a slow start means always lagging behind."

To counter the "dimension-reducing strike" of the large model era, Apple adopted a "shortcut": Cook attempted to seize the "AI" narrative and adopted a gradual opening strategy for Apple Intelligence. In Q3 last year, Apple Intelligence only supported English; it was later expanded to more regions in Q4, boosting sales of Apple hardware products.

However, the launch date for Apple Intelligence in the Chinese market, where iPhone sales have significantly declined, remains uncertain. Cook did not provide a specific timeline during the earnings call, only stating that Chinese language support would be available by April 2025. Considering safety, compliance requirements, and approval processes, integrating existing domestic large language models into mainland China Apple devices is practically Apple's only option. During this period, Apple has been rumored to be collaborating with major Chinese large model companies including Baidu, Alibaba, Tencent, ByteDance, and even Baichuan Intelligence. Earlier reports of Apple partnering with Baidu, integrating Ernie 4.0 into iOS 18 and the latest iPadOS and macOS, went viral but were subsequently replaced by rumors of collaborations with Tencent and ByteDance. While Baidu was arguably the most affected, for mainland Chinese Apple users, while Android and HarmonyOS users enjoy efficient AI services, the timeline for Siri's evolution into a fully functional Apple Intelligence remains uncertain.

The recent surge in popularity of DeepSeek has brought it into the global spotlight, adding a variable to Apple's collaboration with domestic large-model companies, giving Cook more options. He mentioned in the earnings conference call, "I think innovations that drive efficiency are a good thing, and you can see that with the DeepSeek model." This suggests Apple may be "changing its affections." Industry experts believe DeepSeek's strong performance could address potential internal and external AI experience "disconnects" when launching Apple Intelligence domestically. DeepSeek's low cost also aligns with Apple's strategy. The Information reported that Apple has paid tens of billions of dollars to use Baidu's Ernie 4.0, including per-use charges, model retraining, and fine-tuning costs. DeepSeek's low-cost, open-source model not only objectively helped Apple undercut Nvidia's stock price and reclaim the top spot in market capitalization but also provided the industry with a more affordable AI model choice with comparable quality.

Stock market data shows Apple's stock price dropped slightly in trading before the earnings report's release, but rose over 3% after hours, based on optimism about the future prospects of Apple's AI implementation.

Cook needs to be aware that Apple still needs to focus on product innovation. While Apple Intelligence will boost sales of Apple smart hardware in the short term, in the long run, large model development hasn't reached the tipping point where it can drive hardware sales. Currently, consumer usage habits for AI features on smartphones haven't been established. Although large models are a key focus for future smartphone manufacturers, they won't be the main driver for consumer upgrades in the short term. Many third-party research reports indicate that AI phones haven't yet become a central player in the smartphone market. A Canalys report shows that 57% of Chinese consumers have little to no interest in AI. Siri's integration of GPT-4, including writing assistance, photo editing, and custom emoji tools, hasn't excited users and has even been described as "rather bland." A SellCell survey reveals that 73% of users who have used Apple's AI features consider their value low or almost nonexistent. A 14-year iPhone veteran stated, "There are expectations, but they're not high."

DeepSeek could be a crucial element in the new narrative for Apple Intelligence, but it could also be a form of "killing with kindness." Cook told the market, "I think there's a lot more to come, the innovation of the iPhone is far from over, there's a lot of innovation space in smartphones, I'm incredibly optimistic about our product line."

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