Apple vs. OpenAI

0:05Last year, OpenAI released a promotional video featuring CEO Sam Allman. I think we have the opportunity here to kind of completely reimagine what it means to use a computer. In it, he's chatting with the famous product designer, Johnny Ive. Sam is a rare visionary. He shoulders... Johnny Ive used to be synonymous with Apple, but here he was cozying up with the CEO of OpenAI. Johnny is the deepest thinker of anyone I've ever met. What that leads him to be able to come up with is unmatched.

0:52This video is kind of a love fest, but it was also an announcement. OpenAI was getting into hardware. It was going to make an AI device. And Johnny Ive, who spent almost 30 years at Apple, was going to lead the team to do this. To basically displace Apple, to create a family of devices that will be built for the age of AI, that will be different from our smartphones, something new to build our lives around. Our colleague Rolf Winkler covers the tech industry. And he says OpenAI has been hiring a lot of former Apple employees and putting them to work on top-secret AI devices.

1:35Now, Apple is sending OpenAI a warning. On Friday, it filed a lawsuit. In a nutshell, Apple is accusing OpenAI of stealing its trade secrets.

1:50Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudsen. It's Wednesday, July 15th.

2:03Coming up on the show, Apple versus OpenAI.

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3:22All right, so OpenAI makes a chatbot, chat GPT. Why does it want to make a device? Why does OpenAI want its own family of devices? For a few reasons. One, they want to control their own destiny, right? If you want to reach consumers today, particularly the United States and the ones that have the most money to spend, the consumers with the biggest wallets, you have to go through the iPhone. You're a tech company. It doesn't matter how big you are. You want to reach your customer base? You have to go through the App Store. And that means you're in Apple's domain. You're controlled by them. And you're limited in what you can do.

4:03And in most cases, apps have to pay Apple a percentage of their revenue. Huge amounts of money. And if you're OpenAI, When you download ChatGPT through the App Store and a consumer signs up for a subscription, you pay them between 15 to 30 percent of your revenue. It's a big chunk of money. They want to have an AI family of devices that are, you know, built for the age of AI that aren't built for the age of apps and app stores. To get around Apple and gain control of its own destiny, OpenAI set out to make this family of devices. One of the first things it did was acquire Johnny Ives' startup, which he founded after leaving Apple.

4:47And OpenAI didn't stop there. It also started poaching Apple employees directly. The people who are the best at designing hardware work at Apple. They know the best processes. They know the best suppliers. They have the biggest brains for this kind of stuff.

5:04Apple was paying attention to all this. And last week, it took a swing. So let's talk about this lawsuit now. Walk me through the allegations. So there is a junior employee named Chang Liu, who, among other things, left Apple. And when he was trying to recruit another friend out of Apple, used that person's laptop to basically log into Apple's servers and take material, allegedly. Apple's lawsuit claims that Lou downloaded, quote, dozens of Apple's confidential hardware-related files. It also says Lou coached the former colleague on ways to, quote, avoid trouble with the security team, end quote, when copying the files.

5:47When you move from one company to another, you can't be expected to forget things in your own brain. So some of this can get a little, you know, is it theft? Is it not? I don't know. But when you use a laptop to log in as somebody else into another company's servers, that is something that will get a judge fired up. But Apple is saying there's more. Apple is saying it's not just this guy. The suit also names Tang Tan, OpenAI's chief hardware officer. Tan worked at Apple for 24 years, then went to Johnny Ive's startup, the one that was later acquired by OpenAI. And they're saying that Tang did things like asked job interviewees, job candidates coming from Apple to, quote, bring, quote, actual parts to interviews for, quote, show and tell.

6:39And that this also represents a breach. The lawsuit does not name IVE, but it basically takes a shot at the entire OpenAI hardware division. So this whole thing is, quote, rotten to its core and built on stolen intellectual property and spreading doubt about everything that OpenAI is doing here because it's all built on our stuff, right? While the allegations against Chang Liu sound pretty bad, Rolf says the allegations against Tang Tan might be a little squishier. Well, for instance, when you talk about bringing actual parts to interviews, ask some engineers and they'll say, yeah, that's not uncommon for engineering interviews.

7:22That's his resume or her resume. They built stuff. When you interview them, you want to talk to them about what they built, how they built it. Tan and Liu couldn't immediately be reached for comment. In a statement, a spokesperson for OpenAI said, quote, while we take these allegations seriously, we're not aware of any evidence that this complaint has merit. We believe in fair competition and allowing people the freedom to work wherever they choose. and were focused on building innovative technology that empowers people everywhere. The company has not yet responded in court. A judge will now evaluate Apple's claim and decide if the case can move forward.

8:01If it does, it will eventually lead to a process called discovery, which means Apple will be able to request internal documents from OpenAI and interview OpenAI employees. It's a question whether they've really got all the goods that they say they've got, but they've got enough goods probably to get a judge to give them discovery, which means they can start looking into what OpenAI is doing a little bit to see if OpenAI is in fact taking a lot of their intellectual property. At minimum, I think what it does is slow them down a little bit, make them think twice about how they're poaching Apple employees, what those employees bring with them.

8:40But if Apple finds more evidence and ultimately wins And if it turns out that there are Apple trade secrets that are sort of at the core of whatever OpenAI is building, well, then Apple can get injunctive relief. Apple can stop them from developing that thing and slow them down dramatically and say, you can't build that, right? You can't do that the way we did it. Coming up, why Apple is so worried about OpenAI.

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10:20For the last 50 years, Apple was the company that defined how humans interacted with computers. From making the home desktop something you had to have, to making the best-selling smartphone, they were pioneers. Steve Jobs, he didn't invent the graphical user interface for the mouse, but he popularized it. It's what it runs on. Your imagination. Introducing Macintosh Quadra, the most powerful Macintosh ever. And then he didn't invent the smartphone, but he certainly changed it entirely. And he completely reinvented how we use smartphones. This is the web. And this is a call on your iPhone.

11:11Why does Apple feel so threatened by open AI and by this sort of idea that there could be some other devices? I mean, everybody carries around an iPhone right now. They do. And that's the innovator's dilemma, right? If everybody carries around your device, if you're dominant, well, then who's going to replace me? Who might replace Apple? How about something that's better at AI? So now with AI, there's this next opportunity to redefine how humans interact with the primary computers in their lives, right? It used to be the desktop on our desk. Now it's the phone in our hands. In the future, who knows what it's going to be?

11:53But it could be some agent that we speak to through some different kind of device. You know, a lot of these companies have talked about pins. And so I think about, you know, Star Trek and Jean-Luc Picard wearing that thing on his chest and he taps it. Computer, you know, get me whatever. Computer, enhance image in section four delta. Computer, freeze. Computer, enhance far left figure and compare. What if the ad could just solve problems for me? You know, I just landed at the airport. instead of having to open up Uber and open up Lyft and compare prices and enter my address and figure out which car I want.

12:33Oh, and is it a personal or a business trip? So which credit card am I picking? What if I could just tap my chest and say, computer, book me a car going home. And the computer knows where I live. Knows that you're coming home from a business trip. So use the work card. Use the work card, all of these things. Then it's just much easier. And could you imagine a world where we don't open up apps and type in things on our phone with our thumbs all the time. What if we just talk to it? The problem for Apple, though, is that it doesn't have a very good large language model. Its AI technology is way behind.

13:12So, thus far, its devices have been powered by other companies' chatbots. First, OpenAI, and now Google's Gemini. And once it became clear that OpenAI wanted to make its own devices, Apple started to take a tough stance. And it took a page out of its own playbook. One situation that echoes down from the past is Android, right? Steve Jobs and Apple invented the iPhone and iOS. And Eric Schmidt, Google's then CEO, is working with his people. We can't cede this to Apple. We can't just give them the mobile revolution and not compete with them for it, at least. So they bought a startup called Android.

13:55And they developed Android into a competing platform. In 2010, Apple sued Google, claiming Android was created using stolen technology. Apple's then-CEO Steve Jobs called it thermonuclear war. But by the time he launched that lawsuit, HTC, Samsung, some of these Android players were already selling millions of devices. The horse had left the barn. You know, Android wasn't getting put back in a box. And so the best they could do more or less was, you know, maybe make them re-engineer some features that had been taken from the iPhone, get some monetary damages. But it didn't have a big impact, ultimately.

14:38So has Apple learned any lessons from that, that it's maybe applying differently this time? Maybe, because boy, oh boy, are they going after OpenAI a lot sooner. They're going after them before they've even released their product. Can they throw sand in the gears here and slow that down? And all of that gives Apple more time to catch up. And Apple's not asleep here. They're behind in AI, but they're catching up rapidly. For both Apple and OpenAI, the stakes are huge. OpenAI has spent massive amounts of money building out AI technology, and it needs to find ways to make more money. You know, being in the app store, selling us ChatGPT subscriptions, that ain't going to cut it long term.

15:23That's not going to pay for all of these servers, all these data centers that they're building everywhere. The billions and billions of dollars that they're spending and committing to spend. Hundreds of billions of dollars, Ryan. Hundreds of billions of dollars. To build all this out. They need a bigger strategy, and at least on the consumer side of it, that's going to revolve around devices. If what they're planning works and if they could get a device out the door that really does change how consumers operate in the world, right, really changes fundamentally what device we need to carry and we all need to buy that device, well, then that consumer strategy could certainly pay off.

16:07And for Apple, it means either being part of the future or being disrupted. We had a good story a few weeks ago about SpaceX prototyping an AI-like device that we would just talk to. Just like OpenAI wants to change the device paradigm, Elon Musk has always bristled at kind of having to go through Apple, right, for X, for various, many times he's had a consumer app. That's something he doesn't like. He wants to control his own device destiny, just like Sam Altman. Apple can't just cede that ground to all these really smart, really well-funded guys. It feels like we're like the very beginning of this sort of inflection moment.

16:51In this, there's sort of an undefined future and there's a fight over who's going to get to own it. You said exactly. I mean, this is the moment where we're going to get to define which company is going to control the next 20 years the way Apple has controlled the last 20. And maybe it's going to be Apple, but maybe it won't. Maybe it will be one of these other AI companies that gives us the next paradigm in computing.

17:24Before we go, do you work remotely or wish you did? Or are you stuck at home, missing out on office culture? We want to hear your thoughts on hybrid work, return to office mandates, and how you're navigating the two. Send us a voice memo to thejournal at wsj.com.

17:47That's all for today. Wednesday, July 15th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Melissa Korn and Berber Jinn.

18:01Thanks for listening. See you tomorrow.

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