Can DeepSeek "Rescue" Apple?

Despite recent declines, Apple's robust ecosystem has kept it atop the global smartphone market in 2024. According to its latest fiscal fourth-quarter 2024 report, both revenue and profit increased. However, a detailed analysis reveals significant pressures.

iPhone sales, Apple's core product, have shown negative growth, with the iPhone 16 series failing to meet expectations, especially during the peak shopping season. Additionally, Apple's performance in Greater China, the world's largest smartphone market, has been notably disappointing, with sales falling by 11.1% in that quarter.

iPhone Sales Lagging: Apple Intelligence to Blame?

The financial report underscores the pressure: Apple's double-digit growth in revenue and profit was primarily driven by software services, not hardware. Net revenue from hardware products was $97.96 billion, up 4.1% year-on-year, while software services revenue reached $26.34 billion, a 13.9% increase.

For ordinary users, Apple's software service business is best known as the "Apple tax," referring to revenue sharing from the App Store. Selling services has become more profitable than hardware, a trend evident in recent quarters.

Fundamentally, Apple is a software company. Steve Jobs once told Bill Gates, "Apple is a software company." He explained that "Apple provides software in a beautiful box," and only Apple-designed hardware can fully showcase its software. Based on this, Apple has established a closed-loop business model integrating hardware, software, and services.

Regarding Apple's poor performance in China, CEO Tim Cook cited two reasons: changes in channel inventory and the lack of Apple Intelligence in the region, which failed to boost sales. In simple terms, the sluggish iPhone sales in China are largely attributed to Apple Intelligence.

This is a sequel to Apple's incremental innovation strategy. With domestic smartphones, led by Huawei, gaining traction, it has become challenging for Apple to easily convince consumers to buy. Huawei's strong return to the high-end market has taken a significant share of Apple users.

Cook has frequently visited China over the past few years, expressing his intention to continue cooperation and investment. For example, in implementing Apple Intelligence, he sought support from local partners to enhance Apple's AI competitiveness in China. However, Apple's overtures to the Chinese market have yet to receive positive feedback.

Market analysis suggests that Cook's initiatives are part of Apple's ongoing strategy to strengthen relations in the region, which is crucial as both Apple's largest single consumer market and a key manufacturing hub.

In Tang Chen's view, smartphones remain the most mature digital products today, and the iPhone's importance to Cook and Apple is self-evident. Notably, Apple has not disclosed specific sales figures for the Apple Vision Pro. Based on market enthusiasm and industry feedback, it is still difficult for it to replace mainstream smart terminals like smartphones at this stage.

For Apple, Apple Intelligence is not just about telling a new story or forming differentiated selling points amid innovation fatigue and smart terminal homogenization. More importantly, it is Cook's strategy to stabilize share prices and maintain the company's global market capitalization lead. For instance, after the release of Apple Intelligence, Apple's share price has been optimistic, hitting new highs repeatedly.

However, Apple's layout in artificial intelligence is relatively late. To cope with the challenges of the large model era, Apple took a shortcut: Cook attempted to seize the naming rights for "AI" and adopted a gradual opening strategy for Apple Intelligence.

Last year, Apple Intelligence launched in different regions, initially supporting only English. In the fourth quarter, it expanded to more regions, boosting sales of Apple hardware products.

DeepSeek: Cook's New Choice

However, for the Chinese market, where iPhone sales have significantly declined, it is still unclear when Apple Intelligence will be launched. Cook did not provide a specific timeline during the earnings call, only stating that Chinese support would be available in April 2025.

One thing is clear: considering security, compliance, and the time needed for filing and approval, equipping domestic Apple devices with existing large models in China is almost Apple's only option.

Rumors have circulated that Apple is in talks with large model enterprises like Baidu, Alibaba, Tencent, ByteDance, and even Baichuan Intelligence to integrate their large models onto domestic iPhones. The news of a strategic cooperation between Apple and Baidu once went viral, suggesting the Wenxin large model would be introduced into iOS 18 and the latest iPadOS, macOS.

However, later rumors indicated that Apple was negotiating with Tencent and ByteDance regarding related cooperation. While Baidu was significantly impacted, domestic Apple device users find it unpredictable when Siri, often described as clumsy and unintelligent, will evolve into the complete form of Apple Intelligence, especially as Android and HarmonyOS users experience efficient AI services.

Recently, with the surge in popularity of DeepSeek, which has become a global focus, cooperation between Apple and domestic large model enterprises has added another variable, giving Cook more options. He specifically mentioned during the financial report meeting, "Innovation that drives efficiency improvements is a good thing, and everyone can see this from the DeepSeek model."

This statement hints at the possibility of Apple shifting its focus. Industry insiders believe that with DeepSeek's strong performance in domestic implementation, Apple need not worry about a significant "disconnection" in AI experience between domestic and international markets.

DeepSeek's low cost also aligns with Apple's strategy. Tech media The Information reported that Apple paid Baidu tens of billions of dollars to use the Wenxin large model Ernie 4.0, including user call charges and costs for model retraining and fine-tuning.

DeepSeek's low cost has introduced a new open-source model beyond OpenAI. This model not only "helped" Apple hit NVIDIA's share price hard but also presented the industry with a more affordable AI model option that offers equally high-quality experiences.

The stock market has already responded positively. Despite a slight dip in Apple's share price before the financial report release, based on optimism about Apple's future AI implementation, its share price rose by more than 3% after-hours, despite the dismal performance in the Chinese market.

Cook must remain vigilant, focusing on product innovation. While Apple Intelligence will boost sales of Apple's intelligent hardware in the short term, the development of large models is still far from reaching a singularity that can drive hardware sales.

Consumer usage habits for AI functions on smartphones have yet to be formed. Although large models are a key focus for mobile phone manufacturers, they are unlikely to become the primary reason for consumers to replace their phones in the short term.

Many third-party research reports convey a core message: AI phones have not yet become a core player in the smartphone market. For example, a Canalys report shows that 57% of Chinese consumers have average or no interest in AI.

The more intelligent Siri, integrated with GPT-4o on the iPhone, along with tools for writing assistance, photo editing, and custom emojis, has failed to excite users and has even been described as "quite dull." A recent survey by the U.S. second-hand trading platform SellCell found that 73% of users who have actually used Apple's AI features believe they provide little or no value in terms of user experience.

"There are expectations, but not high," shared a loyal 14-year iPhone user about their views on Apple Intelligence. "The expectations are because others have it, and I want to try it too. But when I think about it carefully, I feel that there are limited scenarios where I can use it, and I'm afraid that I'll have to constantly fix AI's mistakes in the future."

While DeepSeek can become a significant plot in Apple's new story of intelligence, it is an overstatement to say it will "save" Apple.

Cook remains confident, telling the market, "I think there's still a lot to come in the future, and the innovation of the iPhone is far from over. There's still plenty of room for innovation in smartphones, and I'm incredibly optimistic about our product line."

Reference Materials:

Titanium Media, "Can DeepSeek 'Rescue' Apple?"

Tang Chen, "WeChat is Fighting Back, is Cook's 'Apple Tax' Unavoidable?"

China News Weekly, "Who Will Eat the 'Apple': Baidu, ByteDance, or Tencent?"