We now know who holds the most power in Apple's deal with OpenAI

• Apple is integrating ChatGPT into its operating systems as part of its big AI push.

• It gets to do it without paying ChatGPT's creator, according to a new report.

• That's because Apple's power lies in its vast reach.

When Apple officially announced its partnership with OpenAI at WWDC on Monday, a big question remained unanswered: on what terms?

When Apple has previously partnered with an outside company on a core product, the value it brings to the table has been pretty clear, with its long-standing partnership with Google on search a case in point.

Google operates the world's most popular search engine but has made it a point to pay Apple each year to keep it the default on Apple devices. It's no small amount, either. In 2022, Google paid Apple $20 billion for that privilege.

So what would the terms be that bring Apple and OpenAI together?

In recent months, Apple has made no noise about an AI model of its own that can rival the performance of OpenAI's GPT-4o, the new premium model to power ChatGPT. It's a sign that it simply lacks one that can measure up favorably.

So, a fair question has been whether Apple would pay to integrate OpenAI's technology into its operating systems to give users as powerful a chatbot experience as possible.

Though its ambitions are different, Microsoft —which has partnered with OpenAI since 2019 — decided to invest an additional $10 billion into the ChatGPT maker last year to not only "accelerate AI breakthroughs" but to weave the AI into its products like Office and Bing too.

However, new details suggest Apple will not be handing cash to OpenAI anytime soon.

That's according to a new report from Bloomberg's Mark Gurman that said Apple was not paying OpenAI for the integration of its much-hyped chatbot into Siri.

Apple still holds the power

In part, Apple might be getting away without paying OpenAI because it has its own AI models set to hum beneath the surface of its devices. Apple Intelligence — the company's take on generative AI — will involve plenty of in-house technology.

But Apple can also avoid paying OpenAI for ChatGPT integration because its distribution power remains king.

OpenAI stands to benefit from its powerful chatbot gaining further reach thanks to the huge install base Apple oversees, which includes more than two billion active devices.

As influential tech analyst and Stratechery founder Ben Thompson noted, OpenAI can accept not being paid as its distribution through Apple devices could serve as a "play to acquire users and mindshare, with the potential of upselling those users" to a premium ChatGPT subscription.

Apple Intelligence, Thompson added, is designed "to maximize the advantages that Apple has in terms of being the operating system provider on your phone" while allowing OpenAI to come in with a "general-purpose chatbot" only.

Investors seem to have recognized Apple's power here, briefly pushing its stock above Microsoft on Wednesday. Only $11 billion separated the two companies after the closing bell.

What happens in the longer term remains to be seen.

Upgrade cycle

Apple has been battling declining iPhone sales in recent months in key markets like China, which means it will be banking on its new suite of AI features to trigger a big upgrade cycle later this year among consumers enticed by the idea of Apple Intelligence.

Apple is doing its bit to spur this upgrade cycle by making Apple Intelligence available on only its most advanced devices, such as the iPhone 15 Pro models, M1 iPads, and M1 Macbooks.

However, there's no guarantee that consumers will bite, as Apple CEO Tim Cook has already conceded that Apple's new AI features are "not 100%" and may be prone to hallucination problems that have proven a headache for competitors like Google.

That could all come back to haunt Apple down the track, especially if generative AI struggles to match the hype surrounding it.

For now, though, generative AI is everything in Silicon Valley. Companies trying to put the technology in everyone's hands know they could do worse than turn to Apple for help.

Read the original article on Business Insider