Apple Intelligence and the Growing AI Battles

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Hi, enjoy this weeks curated risk and business updates.

Earlier in 2024, Apple investors were growing concerned about the lack of a clear AI strategy.  Investors cheered strategic focus on AI when Apple abandoned its electric vehicle initiative to put more resources into AI (see Weighing The Risks #11 - Increasing AI Regulation And Apple’s Priority Shift for more details). Apple announced it’s AI strategy at its Worldwide Developers Conference this week which is focused on “personalized” AI, leveraging its cellphone and other device leadership position with consumers and its ability to process many AI tasks locally, providing users higher personalization while providing better privacy protections.  

The competition for AI dominance will continue to grow as Apple, Microsoft, Amazon, Google, Meta and Nvidia pursue their unique business strategies. For example, Microsoft’s investment and partnership with OpenAI is a key part of it’s AI strategy, but is not the sole focus. Microsoft is investing heavily in AI far beyond its OpenAI investment.  It is one of largest investors in AI talent, tools and technologies, has invested $1.5 billion into an Abu Dhabi-based firm and continues to build its own AI technologies that could begin to supplant OpenAI soon in some of it’s tools and applications.

Key risks companies should consider as they pursue AI initiatives and investments include:

• Training data - AI models rely on training data, and content owners have become aggressive in striking deals in some cases and pursuing legal action in others, for example the New York Times is suing OpenAI, Microsoft and others claiming that AI providers illegally trained their generative AI models on their content without permission. Other risks could include intentional data poisoning by competitors or bad actors and introduction of biases into AI models leading to discrimination.

• Lack of AI Model transparency - As examples of AI ghosts, false information, deep fakes proliferate, business customers, consumers and regulators will demand increased AI model transparency - which is uniquely challenging for AI tools to provide due the complexity of the models, desire to protect proprietary data and processes and the black box nature of AI models.

• Privacy and security - Privacy concerns continue to grow with the invasive nature of AI and its use for cyber attacks, deep fakes and misinformation campaigns. Improved user privacy is a key part of the new Apple Intelligence announced this week, where certain AI tasks will be processed on consumers' phones or other devices.

• Acquiring and retaining talent - the war for AI talent is growing - with Microsoft becoming the “world’s most aggressive amasser of AI talent, tools and technology.”

• Regulatory environment - Regulatory frameworks for AI are unsettled and M&A activity among the tech titans is coming under the microscope - meaning future deals with be more expensive and harder to pass regulatory reviews in the US and EU in particular.

• AI related costs including talent acquisition and compensation, cloud infrastructure, chips data storage and transfer fees will continue to grow.

• Partnerships and alliances may become strained leading the dramatic industry shifts and potential legal action.  For example, the Apple/Google search deal, Microsoft/OpenAI, Amazon/Anthropic deals will be challenging to maintain while each company pursues it’s internal AI strategies.

Request more information on DelCreo’s Risk Universe and risk assessment services.

As a reminder, here are our Risk Universe categories that we leverage to tackle and understand risk which include:

• External Risk

• Governance Risk

• Strategic Risk

• Product Risk

• Business Operations Risk

• Legal & Compliance Risk

• Financial Risk

• Technology Risk

We leverage our understanding of risk maps and risk universes to better advise our clients in strategic business decisions and to optimize the management of risk throughout the enterprise.

Weighing the Risks

Weekly Highlights

Three Key Ideas:

• External risks such as shifts in the labor market, regulatory and governance risks in the banking-as-a-service sector, and forthcoming EU regulations affecting the private credit market highlight the importance of staying informed about external factors impacting business operations.

• Governance risks related to responsible AI development and the evolving role of CIOs underscore the need for robust governance frameworks and strategic alignment of technology with business objectives.

• Strategic risks associated with AI adoption and innovation in companies like Apple emphasize the importance of strategic planning, innovation management, and competition monitoring in staying ahead in the rapidly evolving technology landscape.

Recommendations:

• To address these risks effectively, business and risk managers should adopt a proactive approach by staying updated on industry trends and regulations, implementing robust governance frameworks for AI development and technology adoption, and fostering a culture of innovation and strategic alignment across the organization.

Risk Universe Weekly Updates

External Risk

• Initial Unemployment Claims Increase by 8,000 as Labor Market Cools

  • The increase in initial unemployment claims, surpassing economists' expectations, suggests a potential cooling in the labor market, indicating a shift from pandemic recovery to economic stabilization. This trend, alongside reported declines in manufacturing and hiring in certain sectors, underscores the impact of macroeconomic factors such as interest rate changes by the Federal Reserve and industry-specific challenges on employment and economic activity.

  • The discovery of potential commingling of funds in the FinTech sector, as evidenced by the Synapse case, highlights significant regulatory and governance risks in the banking-as-a-service (BaaS) industry. Such instances could lead to increased scrutiny and stricter regulations, impacting not only the financial sector but also the broader ecosystem of digital banking services, potentially affecting consumer trust and market stability.

• Private Credit’s Valued Privacy Set to Be Eroded by New EU Rules

  • Regulatory Measures in the EU aim to enhance transparency in the private credit market due to concerns about its rapid growth potentially threatening financial stability. Efforts include new disclosure requirements for investment funds, stress testing links between shadow banks and the financial system, and urging traditional lenders to provide more information on the funding sources of private credit firms.

  • The expansion of the private credit industry into a $1.7 trillion market raises concerns about its impact on the financial system, such as unsustainable debt levels in certain industries and risks to banks that lend to private credit firms. Despite efforts to mitigate risks through regulatory measures, challenges remain in aligning standards and effectively assessing and managing risks associated with private credit activities.

• JPMorgan Says Investors’ AI Exuberance Will Extend to ‘Adopters’

  • The endorsement of companies adopting AI by top financial executives suggests a shift in investor focus towards AI adopters rather than technology providers, indicating potential market shifts and challenges associated with this transition.

  • Despite the growing interest in AI-driven firms, investors must carefully evaluate the risks involved, including economic uncertainties, industry disruptions, and technological challenges, to make informed investment decisions in this rapidly evolving landscape.

Governance Risk

• Governance’s Role In Shaping Responsible AI Development

  • The rapid integration of AI across industries has raised concerns about ethical innovation, prompting industry leaders to advocate for responsible AI development to mitigate risks associated with unchecked advancements.

  • Ethical challenges in AI development, including bias and privacy concerns, highlight the need for robust governance frameworks to ensure transparency, accountability, and equitable distribution of AI benefits, with key steps including defining core ethical principles, prioritizing responsible data practices, promoting transparency, and fostering collaboration with stakeholders.

• AI Puts CIOs in the Spotlight, Right Next to the CEO

  • The increasing trend of chief information officers (CIOs) reporting directly to chief executives, rather than chief financial officers, underscores the growing strategic importance of technology in shaping corporate AI strategies and driving business leadership.

  • This shift reflects a recognition of technology as a profit driver rather than just a support function, with CIOs now tasked not only with managing IT systems but also with spearheading AI strategies and guiding organizations through technology modernization initiatives to enhance business outcomes.

Strategic Risk

• Why Apple’s AI Debut Is Doomed to Disappoint

  • Apple's approach to AI at WWDC 2024 is anticipated to focus on integrating generative AI features across its operating systems, particularly emphasizing text summarization and generation as well as image editing capabilities, which may have implications for user convenience and productivity.

  • Despite expectations for Apple to introduce groundbreaking AI innovations, reports suggest that the company's plans may be more incremental than revolutionary, potentially reflecting a cautious approach driven by the need to ensure reliability and avoid errors given the vast user base of its devices.

• Apple leaps into AI with an array of upcoming iPhone features and a ChatGPT deal to smarten up

  • Apple's strategic move to integrate generative artificial intelligence (AI) into its devices, branded as "Apple Intelligence," aims to enhance user productivity and creativity while catching up with competitors like Microsoft and Google, indicating a response to competition risk in the AI technology sector.

  • The introduction of AI features, including the integration of ChatGPT into Siri and the rollout of advanced AI-powered tools and services, highlights Apple's commitment to innovation and its efforts to address concerns about its position in the AI landscape, potentially mitigating brand and reputation risk while also emphasizing its focus on user privacy and data protection.

Business Operations Risk

• Traceability is Key to Protecting Human Rights in Supply Chains

  • The emergence of stringent supply chain due diligence laws, such as the CSDDD and the Uyghur Forced Labor Prevention Act, requires brands and retailers to implement comprehensive traceability solutions to ensure compliance, mitigating supply chain risk and potential legal repercussions associated with human rights violations and environmental abuses.

  • With changing consumer behaviors emphasizing transparency and ethical practices, businesses must invest in advanced digital platforms with AI-powered traceability tools to manage complex supply chain processes, proactively identify and mitigate risks, and maintain brand integrity, thereby addressing customer support risk and enhancing brand loyalty in a competitive market.

• How the Right Software Can Boost Your Business

  • Implementing software in the workplace enhances efficiency, productivity, and security while facilitating scalability and growth, mitigating production/factory operations risk and business interruption risk by automating tasks, securing sensitive data, and providing insights for informed decision-making.

  • Enhanced data management and analytics improve customer experience by providing businesses with comprehensive feedback and insights, enabling personalized offers and targeted marketing strategies, thereby reducing customer support risk and enhancing brand loyalty.

Legal & Compliance Risk

• Big Tech Launches Campaign to Defend AI Use

  • The tech industry coalition Chamber of Progress, including Amazon, Apple, and Meta, is launching a campaign called "Generate and Create" to defend the legality of using copyrighted works for training AI systems, aiming to uphold fair use principles and address legal ambiguity in the use of AI-generated content.

  • Legal battles surrounding fair use, intellectual property, and copyright infringement pose risks to AI companies, prompting debates on expanding legal shields like Section 230 and advocating for legislation to protect AI companies from liability, while emphasizing the transformative nature of AI-generated content and the need for copyright holders to identify specific works used in training datasets.

Technology Risk

• Why IT Leaders Should Take a Franchise Approach to Data Management

  • Despite the massive potential of data to power emerging technologies like generative AI, many organizations are not utilizing 80% of industrial data, highlighting a significant technology risk in missing opportunities for smarter business decisions.

  • The franchise approach to data management presents a solution for IT leaders to harmonize IT with business units, enabling collaboration, data democratization, and responsible analytics development, ultimately leveraging data to drive business growth and innovation while mitigating technology platform operations risks.

• Can AI Replace Humans for Market Research? This Firm Is Doing It

  • Traditional market research methods face challenges of being slow and expensive, especially when targeting hard-to-reach audiences, but AI-based market research platforms like Evidenza offer a faster and more affordable alternative by leveraging artificial intelligence to create digital personas that mimic various demographics, providing researchers with quicker and more insightful data.

  • While AI-based research presents opportunities for faster insights and cost savings, concerns about accuracy persist, with questions regarding the balance between competitive advantage and misleading information. However, early results show promising correlations between AI-generated research and traditional methods, indicating potential for AI to augment market research efforts effectively.