Apple last week nixed its long-held “net cash neutral” target, a move analysts see as giving the company more flexibility to make massive infrastructure investments or acquisitions. Naturally, as AI is the only thing that seems to matter in tech these days, commentators rushed to speculate on potential acquisition targets in the AI space.
The thing is, this may not be about AI.
Now that Apple has confirmed John Ternus as its next CEO, the market can stop treating the company’s cash shift as speculative and start treating it as strategic. Ternus, a hardware‑first leader by background, understands the value of services and has pledged to expand Apple’s services business.
Services, services, services
The great thing about services is that they provide the company with a solid and predictable revenue stream to insulate it from fluctuations in product-driven business. We’ve seen this in the last few years, with Apple’s dramatically climbing services income acting as a cushion against slow product quarters, empowering the company to return successive record results. There is no doubt the high margins generated by services oils Apple’s business machinery.
“I look forward to continuing to expand that and continuing to look for the kinds of services where we’re really finding the opportunities between the hardware and software,” Ternus said, pointing particularly at Apple Pay.
Years of watching the company tells me that Apple tends to leave the truth in plain sight if you happen to be sensitive to it; I read that statement as suggesting the company is preparing to introduce its latest Apple Pay service updates.
Apple Card for the rest of us?
The most widely awaited of these would be the introduction of an upgraded Apple Card service with a new provider. The limitation of the Apple Card (other than the waning enthusiasm of card partner, Goldman Sachs and the long journey to find a new partnership with JP Morgan Chase) is that it is still only available in the US, despite global interest. It is challenging for Apple to meet that interest due to a smorgasbord of different data, financial services, and local regulations. Apple Card in India, for instance, would be challenged by local regulations that forbid banking partners from storing transaction data, while in Europe the reward structure would need to be revised to consider the much lower interchange fees charged for credit card transactions there.
Ultimately, whoever Apple works with on the service would have to accommodate credit risk and it’s probable the computer company will need to underwrite some of that risk. If it wants to expand this service internationally — perhaps with the provision of additional banking services in some nations — this would be a good use of Apple’s ongoing money mountain, enabling it to deepen its move into financial services.
A world of opportunities
Of course, Apple Card is far from the only service that could benefit from Apple’s decision to use cash more strategically. Beyond any potential AI acquisitions, the company could also take positions in streaming entertainment partners, for example; the ever-speculated on Disney purchase is just one of a multitude of options there, but Netflix also seems within Apple’s multi-billion dollar reach.
Apple also has the good fortune to sit at the crossroads of technology, the liberal arts, and health, so it could think about health insurance as a potential space for services expansion. Also, given the company’s continued move to rebuild its business along the lines of a closed loop manufacturing chain, at what point does it make sense for it to invest in its own clean energy supply?
Stop to think about it and there really are a ton of highly profitable options for major Apple investments that could drive the business forward, and many of these have nothing much to do with AI (except, of course, software). Perhaps that’s a good thing.
Smart about AI
The rapid pace of AI development and deployment almost certainly mean the fundamentals of the AI landscape will change swiftly. Server-based AI might remain the interaction for most of us, but high-value services will inevitably be found in on-premises, sovereign, ultra-secure, and/or edge device AI.
That rapid evolution means a billion spent on an essential component today could be meaningless in five years. Plus, with a multitude of emerging AI companies, it’s inevitable some — potentially with valuable technologies — will fail.
In this context, it makes sense for Apple to crouch, tiger-like, waiting to jump in to make strategic acquisitions as the competitive environment forces some of the smaller AI players to the wall. Apple won’t be alone in any potential bidding wars, but its decision to use its cash flow strategically means it might nail some of those deals.
Coming soon?
The timing of Apple’s news about its handling of cash matters. Now that shareholders have been told to expect it, the business can change direction.
Should we expect any immediate moves? If the company has any quick plans, it’s possible we may learn more at WWDC in June — or perhaps at the big iPhone reveal this fall, when the Cook-Ternus transition is complete. Ultimately, Apple’s next phase won’t be defined solely by what it does acquire, but in which parts of the business it chooses to invest.
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