Perplexity Has Apple and Google on Edge

The Search for Search

Apple, famously, does not do big deals. Its largest acquisition ever was buying Beats for $3 billion back in 2014, a deal that mostly seems to have been about getting Jimmy Iovine and Dr. Dre to come work there. So it is interesting that, according to Bloomberg, Apple is now internally debating a deal for AI search startup Perplexity, which was last valued at $14 billion.

But a deal for Perplexity isn't about talent, though surely that helps. It's about a $20 billion problem. The problem is Google.

For years, Google has paid Apple a staggering amount of money—estimates put it around $20 billion a year—to be the default search engine in Safari. You can think of this as Google paying for premium placement, but you can also think of it as Google paying Apple not to build its own search engine or make a deal with someone else. It has been, for both companies, a very good deal.

Now, the complication is that the US Department of Justice has an antitrust lawsuit that says this arrangement is illegal, and a judge could, at any moment, turn off the $20 billion spigot.

But even if the DOJ fails, there is an emerging existential threat: the very concept of search is changing. People are moving from typing keywords into a search engine and getting 10 blue links, to asking conversational questions and getting a direct answer from AI tools. This is a problem for Google, but it's also a problem for Apple's $20 billion. In a court hearing last month, Apple’s own executive, Eddy Cue, said as much. Here’s what he told the court:

For the first time ever in over 20—I think we’ve been at this for 22 years—last month, our search volume actually went down.

He added that the reason is because people are using ChatGPT and Perplexity, and that he also uses these tools at times. Whoops.

So naturally, the internal talks about buying Perplexity make a lot more sense. If your $20 billion-a-year deal is threatened by both antitrust regulators and technological obsolescence, you probably want a Plan B. And Perplexity is a very good Plan B. It has a well-regarded "answer engine" and a team of smart people who could help Apple build its own search future, freeing it from its reliance on Google.

Of course, a $14-billion-plus acquisition would be a huge, messy, and un-Apple-like move. The company could also just partner with Perplexity, adding it as a search option in Safari. But that is also complicated: Perplexity is reportedly nearing a deal with Samsung, Apple's biggest smartphone rival. And Meta, for that matter, also kicked the tires on buying Perplexity before it settled on its recent deal for Scale AI. It is a seller's market for good AI startups.

So Apple finds itself in a funny position. For years, it took billions from Google for the privilege of not having to worry about search. Now, it might have to spend billions to buy the solution to the problem it was paid to ignore. It is a very expensive way to stay in the game.

Your Fab, My Problem

The standard way to start a bar fight is to punch your opponent. The second, far more complicated method, is to punch your own best friend in the face, hoping he stumbles backward and knocks over your opponent's drink. US chip policy is getting dangerously close to option two. The US government is now reportedly considering a plan to make life much more difficult for the chipmaking factories that its key allies—South Korea’s Samsung and SK Hynix, Taiwan’s TSMC—operate in China. Here’s Reuters on the potential move:

The U.S. Department of Commerce is considering revoking authorizations granted in recent years to global chipmakers Samsung, SK Hynix and TSMC, making it more difficult for them to receive U.S. goods and technology at their plants in China, according to people familiar with the matter.

These authorizations, known as Validated End User or VEU status, are essentially a trusted-partner fast-pass. If you have VEU status, you don’t need to get a new license from the US government every time you want to ship a new American-made chip-testing gizmo or a spare part for your American-made etching machine to your factory in China. Taking that away makes running a fab a bureaucratic nightmare.

The logic, from Washington’s perspective, is that this gives them another lever to pull in trade negotiations. It’s a “tool in our toolbox,” as one White House official put it. But the tool is mostly being used on the heads of our friends. These are the same companies the US is paying billions of dollars in CHIPS Act subsidies to build new factories in Arizona. It is a weird dynamic.

The even weirder part is what happens if this policy works too well. If it becomes so difficult for Samsung or TSMC to operate in China that they pull back, who fills the void? The answer, of course, is China’s own domestic chipmakers (in particular, Huawei). You end up creating a protected, captive market for the very companies you are trying to compete with. As one industry analyst told Reuters, it would be a “gift” to Chinese competitors.

Nvidia’s CEO Jensen Huang, who knows a thing or two about this, has been saying as much for a while. He has lamented that US export controls are simply walling off the massive Chinese market and handing it to rivals like Huawei. Here's what Huang said back in May:

Power is quite cost-effective in China. And there’s plenty of land. And so the ban on [Nvidia] H20 is not effective for that reason. They’ll just buy more chips from the startups, from Huawei, and others. And so I really do hope that the US government recognizes that the ban is not effective and give us a chance to go back and win the market.

The policy places allies like South Korea and Taiwan in an impossible bind. Their most advanced technology relies on American equipment and software, but one of their biggest markets is China. Now, the US is telling them that to continue accessing the former, they have to make the latter much more difficult. It is a stark reminder that in the modern tech supply chain, your fab might be your problem, but it’s also, increasingly, everyone else’s.

The Scoreboard

• AI: Nvidia-backed Startup Bets on Synthetic Data for AI (ARPU)
• Semiconductor: South Korea to Raise Concerns to Us Over Potential Curbs on Chipmakers’ China Operations (Reuters)
• Software: Salesforce Not Taking Survival for Granted in AI Era, Top Strategist Says (WSJ)
• Social Media: TikTok ‘Continues to Work With’ VP Vance on Deal as Its US Fate Hangs in the Balance (SCMP)