AI may be against Apple’s business model
Apple’s rollout of Apple Intelligence has been less than stellar.
If you take a look at Apple’s financials at a high level, you will find that over time services has become a larger part of their revenue and especially a larger part of their gross margin. Services constitutes Advertising, AppleCare, Cloud Services, Digital Content (30% of all App Store sales + Apple Arcade/Music/TV), and Payment Services (Apple Card). In Apple’s closed system, almost all of this revenue is contingent on a large hardware base of iPhones, Macs, etc.
Products vs Services Revenue ($USD millions)
| Fiscal Year Ended | 2020 | 2021 | 2022 | 2023 | 2024 |
|---|---|---|---|---|---|
| Products Revenue | 220,747 | 297,392 | 316,199 | 298,085 | 294,866 |
| Services Revenue | 53,768 | 68,425 | 78,129 | 85,200 | 96,169 |
| Total Revenue | 274,515 | 365,817 | 394,328 | 383,285 | 391,035 |
| Products % of Revenue | 80.4% | 81.3% | 80.2% | 77.8% | 75.4% |
| Services % of Revenue | 19.6% | 18.7% | 19.8% | 22.2% | 24.6% |
There is no deep breakdown of Apple services revenue available, but let’s assume Digital Content and Cloud Services are a large part of Apple’s services revenue. Apple bettering their software would directly eat into their services revenue. For example, one of Apple’s top paid apps in 2025 was a VPN provider by the name of ShadowRocket. Apple could sit and take 30% of revenue while ShadowRocket deals with the overhead and maintenance of the app, or Apple could make their own VPN provider. If Apple chose to make their own VPN application, they would have to make up the lost revenue somewhere, either in an expensive product or higher iPhone prices.
A quick approximate calculation: ~$100B Services Revenue * 30% of which is Digital Content from the app store * 20% decrease in Digital Content revenue = $6 Billion dollars that would have to be made up in either new phone sales or apple charging for their own apps.
A good Apple AI may take away people’s want and need for 3rd party apps, and unless Apple charges extra to make up for lost revenue, they are in a bind. If they increase the phone cost and consumer elasticity is not there for a new iPhone 17, aka an iPhone 14 version 6, then they lose money on that side, if they bring in all the overhead to create an AI themselves it will show up on their costs. Additionally, the cost of the genius bar visits when new technology is introduced must be astronomical.
Apple, in my opinion, is in a very precarious state. While $6 billion is seemingly a drop in the bucket for Apple, services margins are almost double that of products. Margin compression could pull the stock down or slow growth. Additionally, new iPhone’s with new AI enabled chips may be more expensive to make, and apple will have to either increase prices, dealing with demand elasticity, or let the new phones eat further into their margins.
Apple’s steps into AI seemingly needs to be very cautious and calculated, not a great recipe for a new emerging technology, especially if your margins will be under pressure.