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Artificial Intelligence: The Single Biggest Threat to Apple Inc. (NASDAQ: AAPL)

Written by Jason Stutman
Posted April 15, 2017

For over a decade now, the biggest selling points of premium smartphones have been all about physical design.

But in the coming years, the consumer electronics market is poised to experience a radical shift — one that every investor should start paying attention to today.

When Steve Jobs officially unveiled the first iPhone to the world in 2007, there was enormous hype surrounding its groundbreaking touch interface — and for good reason. By blending input and display into a single place, Apple managed to redefine the mobile device entirely.

In the years that followed, Apple introduced a great number of incremental improvements and it was always the physical redesigns that stood out and spurred sales the most.

The iPhone 4 (2010) was the first major redesign for Apple. It had a sleek, modern look, and it was the first iPhone to feature a high-pixel count Retina display. It also introduced the world to the front-facing camera, which has become a staple of today’s premium smartphones.

The following year, Apple managed to nearly double its iPhone sales to 93 million units.

The changes to the iPhone 5 (2012) were less radical, but there were meaningful physical improvements nonetheless. The phone featured an extra-tall screen, which allowed for a bottom row of applications. It also introduced Apple’s Lightning connector, which could be easily inserted face up or face down.

Not long after, the iPhone 5S (2013) was introduced with Touch ID, enabled by a bold new fingerprint sensor.

And then there was the iPhone 6 (2014), Apple’s latest major redesign. This model introduced NFC for Apple Pay and extended its screen size by reducing the bezel footprint.

But in 2015 something weird happened...

That year, Apple released the iPhone 6S, and it was visually identical to its predecessor. If you held the two in your hand, you’d have a difficult time telling the difference.

Then in 2016, it was more of the same: The iPhone7 was nearly identical from a design standpoint. The only notable “addition” was actually the removal of its headphone jack.

For acute investors, this three-year lull in physical redesign exposed a notable chink in Apple’s armor: the company, which was once adding new and meaningful physical features to its phones as often as once a year, had begun to run out of ideas.

That is, Apple was running into a very unusual problem most companies never face: design perfection.

The Problem with Perfection

When it comes to physical design, there’s really not much to argue about: Apple has a reputation for being the best in the business.

But as the years have gone by, Apple’s design improvements have drastically reduced in significance.

And as a byproduct, its competitors have caught up. In certain cases, they have even surpassed Apple in terms of quality of design.

Samsung’s flagship Galaxy S line, for one, has had wireless charging for years. Apple may or may not feature wireless charging in the iPhone 8.

Google’s new flagship Pixel phone is another example. Its camera is arguably the best available on the market.

Of course, Apple is by no means lagging far behind its competitors, but the reality is that other manufacturers have reached design parity. Unless Apple has some radical new design up its sleeve, the company will continue to offer little more than a brand name above its competition.

What this likely means for Apple is further reduction in market share because consumers now have equivalent options. This is just a simple law of economics, and it’s why Google’s Android OS snagged a record market share with nearly nine in every 10 smartphones late last year.

It’s also why on Wednesday, TrendForce revealed that Samsung has already regained its top market share position following last year’s exploding Galaxy Note fiasco. The firm owned 26.1% of the smartphone market worldwide in the first quarter, versus Apple’s 16.9%.

That’s a stark contrast to the fourth quarter of fiscal 2016, where Apple stood at 20.3% market share and Samsung at 18.5%.

This is as much proof as you need that Apple has lost any true technological edge.

And it could be getting a whole lot worse for the major handset maker in the years to come.

Differentiation is Key

The only thing more troubling for Apple than product parity is product obsolescence.

In terms of design, Apple is at minimal threat from competing handset OEMs. With the smartphone near design perfection, there’s little left to differentiate any single premium from the other.

But where Apple faces serious competition within the smartphone market is at the level of software and ecosystems.

Specifically, Apple is coming in at a heavy disadvantage when it comes to artificially intelligent digital assistants.

While it’s true that Apple was the first to introduce a digital assistant with Siri, its ability to leverage AI to its advantage has been negligible compared to the competition. Both Google and Amazon have begun making significant strides with Amazon Alexa and Google Assistant over the last year.

Google Assistant is a particular threat to Apple for two reasons...

First, Android penetrates close to 90% of the global smartphone market. This means Google can show Apple up with a single software update the moment it develops a fully conversational AI. And make no mistake, this is Google’s objective.

Second, and this is also tied to Android market share, Google has access to significantly more consumer data than Apple — and it’s able to parse it all out. This is what’s referred to in the industry as a knowledge base, or as Google calls it, a “Knowledge Graph.”

According to various sources, Google’s Knowledge Graph contains 18 billion statements about 570 million entities, with a schema of 1,500 entity types and 35,000 relation types.

All told, the knowledge base is armed with 70 billion facts. This means you can ask Google Assistant a question, and instead of directing you to a website, it can answer you directly in 70 billion different scenarios.

For years, Google has been learning about us. It knows what questions we ask and the answers we’re looking for. It’s been collecting a vast web of knowledge. This unprecedented knowledge base is the heart of the company’s long-term strategy for absolute technological dominance.

Apple, on the other hand, can only dominate on the hardware front, and will face an enormous challenge breaking out of its vertical ecosystem. Apple’s isolation, which once served the company quite well, has suddenly become a major detriment.

Ben Rickard, head of mobile at MEC global solutions and EMEA, puts it this way:

What is becoming increasingly clear is that visual and branding identity will become less relevant in a world that is operated by voice and Natural Language Processing (NLP).

In other words, we’re going to soon stop looking at our phones and start talking to them instead as digital assistants become more conversational. Eventually, the form factor of mobile devices as we know them today will start to fade away.

Gartner, for one, projects that by 2018, 30% of our everyday contact with technology will be conversational.

And ComScore estimates that 50% of all web searches will be through conversation by 2020.

That’s great news for software- and AI-focused companies like Google. It’s terrible news for hardware-focused companies like Apple, Inc.

But more than any other business niche, it’s a winning formula for the makers of embedded microphones. No matter what the form factor of our future AI assistant, they’re always going to need a way to listen.

Until next time,

  JS Sig

Jason Stutman

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