John Ternus, senior vice president of hardware engineering at Apple Inc., talks about iMac computers during the Peek Performance event in New York, US, Tuesday, March 8, 2022. Photographer: Gabby Jones/Bloomberg via Getty Images
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an apple has maintained its dominance in consumer devices and built a $4 trillion market cap despite sitting largely on the sidelines of the artificial intelligence boom. But investors won’t be patient forever, and they’ll be looking to new CEO John Ternus for a clear strategy when it comes to playing in the world’s hottest market.
Tim Cook’s 15-year tenure as CEO of Apple ends on September 1, the company announced on Monday. Ternus, a longtime Apple hardware executive, took over, becoming the second leader since Steve Jobs left in 2011, less than two months before he died of cancer.
With Cook out, Apple is facing a number of challenges, including a complex supply chain necessitated by international tensions and rising memory prices due to unprecedented demand from AI buildout. But for Ternus, perhaps the most important aspect of his new job will be to get the company deeper into AI, where it has lagged behind many of its peers.
So far, Apple’s AI strategy has involved avoiding capital expenditures Microsoft, Google, Amazon again Meta commit to hundreds of billions of dollars a year in combined capex to fund new data centers and fill them with expensive AI chips. When it comes to building a basic AI model, Apple has also put in there, and is instead relying on Google’s Gemini to power its AI features, including a major Siri upgrade expected later this year following delays.
In 2024, Apple introduced Apple Intelligence, which includes image generators, text rewrites, the ability to summarize notifications and integration with OpenAI’s ChatGPT. Consumer response has been mixed, but Apple continues to sell boatloads of iPhones, and users are getting more AI options on those devices — from other companies.
ChatGPT and Anthropic’s Claude are currently the two most popular free iOS apps, with Gemini in fourth place and Meta AI in eighth. Meanwhile, Apple is betting that within a few years, most of the work will be done on the chip inside the phone, which will play to its strengths since the company has been integrating AI-capable silicon into its devices since 2017.
“By choosing a hardware leader in John Ternus, Apple may be showing that it still believes that the future of AI will be powered by tightly integrated devices, not just software,” said Timothy Hubbard, assistant professor of management at the University of Notre Dame.
Currently, Apple is experiencing a lot of growth in iPhone sales. In the latest quarter, iPhone revenue increased 23% from a year ago to $85.3 billion, a figure the company attributed to strong sales of the iPhone 17 models released in September.
Cook said at the time demand for the iPhone was “phenomenal.” The company is scheduled to report second quarter financial results next week. Cook will still be CEO for that report, but investors will have more questions directed at Ternus and where he sees Apple going.
AI-enabled hardware seems to be where the market is going beyond wearables, robots, virtual computing or something that Apple may not have shown yet. In January, Bloomberg reported that Apple will accelerate the development of three upcoming AI wearables all built around Siri: smart glasses, a pendant and AirPods with cameras.
Apple also expects to introduce a foldable phone, which Ben Bajarin, CEO of Creative Strategies, called “the most important hardware moment in years.”
“I think the big question is what comes after the iPhone,” Bajarin told CNBC in March. “These are mature stages and we don’t know what comes after that but we know it will be some kind of AI hardware.”
AI and services
Ternus, 50, will also face the challenge of pushing AI into Apple’s business services space, where the company relies on iPhone users paying for AppleCare subscriptions, iCloud, Apple TV+, and using Apple Pay. When consumers upgrade to paid versions of ChatGPT, Claude and other AI productivity tools and chatbots, Apple gets a cut.
Forrester analyst, Dipanjan Chatterjee, said that in the coming years, “the sea will be turbulent for Apple because there has been a big change in the way consumers use technology,” especially with artificial AI.
Ternus will also have to decide whether the company continues its emphasis on privacy, or whether it embraces AI-driven personalization. For Cook, Apple’s privacy-first approach to user data has long distinguished it from other tech giants like Meta and Google, which focus on allowing brands to target users with ads.
Gene Munster of Deepwater Asset Management told CNBC’s “Closing Bell: Overtime” on Monday that his company recently bought more Apple stock because of its hopes for “personal AI.”
“There’s an opportunity for Apple to tell investors a compelling story to buy this,” Munster said.
Nowhere in Monday’s press release announcing the CEO change did Apple mention AI. Instead, the sections on Ternus focused on his 25 years at the company and his major role in “the introduction of many new product lines, including the iPad and AirPods, as well as multiple generations of products across the iPhone, Mac, and Apple Watch.”
But it’s clear that when the Ternus season begins in just over four months, AI will have to be front and center. And Notre Dame’s Hubbard said Apple will have to return to its roots, at least when it comes to innovation.
“The very force that made Apple dominant — that rapid innovation is where Apple started, and maybe that’s where the company needs to come back,” Hubbard said.
-CNBC’s Jonathan Vanian contributed to this report.
WATCH: Expect more hardware innovation from John Terrnus
