AI brings existential crisis for Apple, Salesforce and tech's old guard: Partner or perish

By Jon Swartz

The starter's pistol is still echoing, but the race for generative-AI supremacy is quickly coming into focus

The news hit like a thunderbolt across the artificial-intelligence landscape: Apple Inc. and Alphabet Inc.'s Google are in discussions to bring the latter's Gemini AI tools to iPhone software.

Apple (AAPL) would license Google (GOOGL) (GOOG) Gemini for some of the new AI features set for release on its iOS operating system later this year, according to a Bloomberg report. The companies already have an agreement that makes Google the default search engine on Apple's Safari web browser, which has drawn regulatory scrutiny.

Apple's move underscores the urgency of partnering with a generative-AI leader like Google on the fast-moving technology. Nvidia Corp. (NVDA) has paired with Cisco Systems Inc. (CSCO), ServiceNow Inc. (NOW), Amazon.com Inc. (AMZN), and Adobe Inc. (ADBE) in similar deals to bring those companies up to speed.

"Today, what we're seeing is, these legacy companies are playing catch-up," Jeff Samuels, chief operating officer at software company Iterable, said in an interview. "It happened with the internet, cloud and now AI. Larger, established companies get up to speed with partnerships, investments, even acquisitions. With AI, Microsoft led the way."

The starter's pistol is still echoing, but the race for generative-AI supremacy is quickly coming into focus.

Early leaders Google, Nvidia, Microsoft Corp. (MSFT), as well as a handful of startups like OpenAI and Anthropic, are piling up customers, revenue and market share.

But how are older, more established tech companies stacking up? For many, the solution is inescapable - partner or, possibly, perish.

That's because AI is driving the separation between some older tech companies and early genAI startups and adopters. Following the introduction of OpenAI's ChatGPT in November 2022, Microsoft quickly saw the potential, invested more than $10 billion in OpenAI and included genAI in its tools. [Google subsequently poured $2 billion into OpenAI rival Anthropic.]

Microsoft is the exception, however. Its aging tech brethren have had a harder time catching up as genAI grows by leaps and bounds. The chasm has only grown as some established companies try to pivot while others remain risk-averse.

"It took me $2 billion and 12 years to build this product. These companies are trying to reinvent themselves overnight," C3.ai Inc. (AI) CEO Tom Siebel said in an interview. "[Salesforce Inc. (CRM) Chief Executive] Marc Benioff takes his software stack from 2003 and slaps an AI sticker on it. IBM tries to rehabilitate Watson with Watsonx. Everybody puts an AI sticker on their box."

Salesforce counters Einstein AI package will deliver 1 trillion transactions this week, and its customers Gucci, Automatic Data Processing Inc. (ADP) and McLaren Racing. Last year, the company closed 1,300 Einstein-related deals.

Partnerships like those between Apple and Google, and Nvidia and ServiceNow, are increasingly becoming a staple of the tech community, because the companies and their customers are slowly moving toward genAI.

The AI boom is currently hyper-charging hardware makers that provide chips and servers for AI's heavy workloads. Software is harder to quantify, with the exception of Microsoft Copilot. Oracle Corp. (ORCL) has seen a big hike in cloud services revenue, where the company said earlier this month that it is building out more data centers to keep up with the increased demand for cloud computing, in part because of AI.

"Companies like SAP (SAP), Oracle, ServiceNow, Adobe, IBM (IBM), Workday (WDAY) and others have to envision a future where AI replaces many of the workflows their core offerings were designed to support," said Stephen Messer, co-founder of Collective[i], a genAI platform for business-to-business commerce sales.

"Salesforce is a shining example of a company that struggles to adapt because of how invested they are in an existing business model challenged by AI," Messer added.

Salesforce's generative-AI technologies include Einstein Copilot, a conversational AI assistant for CRM, and Einstein 1 Studio, a set of tools that lets Salesforce users embed AI across any of their applications. Among Salesforce's technology partners are AWS, Anthropic, Microsoft, Google, and OpenAI.

Nick Qureshi, an expert in digital-transformation strategy, said in a recent report: "Intel (INTC), IBM, and Oracle, despite their efforts, face challenges due to their relatively slower adaptation to the demands of AI innovation and application."

Even Adobe, viewed as a beneficiary of the AI boom, endured its worst stock slide in 18 months on Friday as the company's timeline for generating meaningful revenue from the technology underwhelmed investors. Shares of Adobe plunged 13.7% Friday - their largest single-day percentage decline since Sept. 15, 2022, when they lost 16.8%.

Read more: Adobe's stock slides toward worst day in 18 months, as AI story will take time

The companies best positioned to benefit from AI are those that have not only invested early in AI research and development but have also successfully integrated AI technologies into their products, services and business models.

Established companies are also at the mercy of large customers, who are in the early stages of co-piloting genAI. HP Inc. (HPQ) and Dell Technologies Inc. (DELL) are at the mercy of supply chains for AI PCs and servers, respectively.

Read more: Dell's big quarter, fueled by surge in AI-server demand, sends stock soaring 19%

"Older tech companies are approaching it with more caution. There is risk appetite, and some aren't as forward-leaning," Howard Wilson, chief financial officer at PagerDuty, said in an interview. "My own encounter with CFOs and CIOs is they see opportunity, but use cases with AI require a fair amount of complexity and sophisticated changes to business applications."

Brendan Burke, an AI analyst at PitchBook, believes semiconductor companies are the winners of genAI expectations, led by Nvidia's 242% stock jump over the past year.

Among chip makers, Advanced Micro Devices Inc. (AMD) (up 98%) and Intel (up 46%) have also surged, Burke said.

Enterprise AI sales so far have gravitated toward search, IT support, and customer support, he added.

The question in Silicon Valley is who will pair up next in the AI dating game. Many companies, like Google, IBM and Facebook parent Meta Platforms Inc. (META), are furiously reshaping their workforces through massive layoffs and hires to shift toward AI.

"IBM and Microsoft are best placed with their Watsonx and Copilot initiatives, in addition to their deep relationships into the CIO's office," Phil Fersht, founder and CEO of HFS Research, said in an email. "Salesforce should be well positioned but [is] currently pushing more 'AI sugar frosting' than anything with real meat. SAP and Oracle," he added, "seem to be in denial that the world is changing and [are] staying true to their traditional businesses in the hope this all blows over."

-Jon Swartz

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

03-23-24 0700ET

Copyright (c) 2024 Dow Jones & Company, Inc.