WWDC 2018: The Customer Is Always Right

  • Today, Apple said loudly and clearly that the customer is always right.
  • There were more new features for users than there were new tools for developers: screen time limits, monitoring, and reports, grouped notifications, Do Not Disturb at bedtime, Siri shortcuts, new Safari privacy features, performance improvements for previous generation iPhones, and even third-party navigation apps on CarPlay. Apple is forgoing near-term benefits for developers and themselves in favor of a better user experience.
  • Apple is drawing a hard line between itself and other companies that rely on consumer data.
  • There are now 20M registered iOS developers building applications for 1.3B active devices.

Source: iMore

Democratizing Machine Learning. Apple spent the bulk of its limited developer-centric discussion on new ML tools. Specifically, Create ML on the Mac and Core ML 2 for iOS, which make it easy for developers to build ML techniques into their apps. When thinking about the ML announcements at WWDC, it’s important to note that the keynote is designed to inspire developers and the “state of the union” session (which followed the keynote) shows developers how to actually use these tools. As investors in the space, we’re excited to see Apple making it easy for entrepreneurs to harness the power of ML on Apple’s 1.3B+ device ecosystem.

As investors in the space, we’re excited to see Apple making it easy for entrepreneurs to harness the power of ML on Apple’s 1.3B+ device ecosystem.

No New Hardware. Apple will take some heat for the lack of hardware product announcements, but we did a quick check and found that 11 of the past 19 WWDC keynotes have not included any hardware announcements. We didn’t see a new iPad (which we continue to expect in the coming months), and any discussion of new Beats hardware with Siri integration was nowhere to be found 🤦‍♂️.

At the beginning of the keynote, Cook declared that WWDC 2018 was “all about software.” And he kept his promise. iOS, macOS, tvOS, watchOS – each one saw improvements that make those product lines more appealing. In many ways, Apple finished what they started with the software updates announced at WWDC 2017.

ARKit 2: a measurable step forward, but we’re not there yet. We are still believers that AR will transform human interaction, but it will take time. ARKit 2 is a measurable step forward, making it easier for developers to build compelling experiences with the additions of multiplayer sessions (allowing two or more people to share an AR experience) and a new file format (USDZ), which allows you to add AR content to existing media formats. While these two additions will clearly streamline AR development, mobile AR tech still lacks “persistence” (the ability of a virtual object to remain in place after a session has ended), as well as the mapping of the AR cloud (managing virtual data and privacy).

Apple Watch Improvements. Apple Watch is running away with the wearable space. Today, Tim Cook announced Apple Watch grew units by 60% last year (2017). While Apple Watch had a slow start in 2015, it appears to be picking up momentum. Apple doesn’t disclose the number of watches sold, but we estimate, in 2015, the company sold 5.7M, compared to 10.2M in 2016, and 16.1M in 2017. We believe that number will increase by 44% in CY18. We expect the Apple Watch business to grow in the mid-to-low 20% range through 2020, which implies Apple Watch will account for 6% of revenue in 2020 compared to 3% in 2017. Apple Watch is gaining momentum because Apple created the computer-on-your-wrist category allowing for significantly more advanced functionality compared to other wearables. For example, today, Apple announced walkie-talkie, new personal and group fitness features, Siri’s accelerometer integration, and a handful of Universities enabling student IDs on Apple Watch. Apple Watch’s measurable utility lead in the wearable space gives us confidence that the product can account for 31M units in 2020, nearly double the units sold in 2017.

Expect $32B in Apple Developer earnings in 2018. Apple announced that developers have earned over $100B since the App Store launched in 2008. That compares to $86B in earnings at the end of 2017, and $70B a year ago (June 2017).  While Apple reported that developer earnings grew just over 30% in 2017, we expect that growth to be closer to 20% in 2018, in line with the overall growth of Services. This implies that developers will earn about $32B this year, a number that we believe is big enough to continue to entice world-class developers to continue to code on iOS and macOS.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

WWDC Preview; Siri, AR, AI, Digital Health

  • Apple’s annual developer conference starts next Monday, June 4th.
  • Consistent with past WWDC’s, announcements will be software heavy. Most notably a preview of iOS 12 and the upcoming MacOS.
  • We expect Monday’s keynote to be highlighted by extending the reach of Siri (most likely adding new domains, opening HomePod to more capabilities, and integrating Spotlight), along with additional AI tools (new Core ML extensions).
  • We also anticipate new features around digital health (privacy and device management) and ARKit (development tools).
  • Expect Siri integration with Beats.
  • Collectively, these announcements advance the ease of use and intelligence of Apple’s mobile and desktop experiences.

Consistent with past WWDC’s, announcements will be software heavy. We expect the tone of this year’s developer conference to be similar to past years. Since 2000, we counted 47 software related announcements made at WWDC, 11 new hardware announcements, and 8 hardware update announcements. That compares to the past five years with 19 software, 3 new hardware, and 6 hardware updates. This year we are expecting 5 software announcements and 1 hardware-related announcement. 

New Siri domains. In our testing of Siri over the past two years, we found the product lags measurably behind Google Home and marginally behind Alexa and Cortana. In our December-17, 800 question Siri test, she was able to correctly answer 75% of questions compared to 66% in April-17. Siri would have been able to answer about 85% correct if she was more competent within commerce and information. That 85% would essentially be on par with Google Assistant. Siri on HomePod is more limited in the number of domains, so adding support for things like navigation and email would quickly improve the experience. Siri can also improve the information utility by simply integrating Spotlight Search.

AI extensions. At the 2017 WWDC Apple announced Core ML. Core ML is a machine learning framework that sits beneath apps and third-party, domain-specific AI models, but above processing hardware inside of a Mac, iPhone, iPad, Apple Watch, or Apple TV. Core ML allows app developers to easily incorporate third-party AI models into their apps. App developers don’t need to be experts in ML to deliver an experience powered by the technology within their app. In other words, Apple will take care of the technical side of incorporating ML, which allows developers to focus on building user experiences. Core ML currently has the 15 domains listed below. We expect new domains to be announced at this year’s WWDC. Digital Health. Apple has been a leader in the privacy movement. We expect further announcements related to new features that notify users when their data is being shared with developers. Additionally, iOS 12 will likely have new device management features to curb screen time and digital anxiety.

ARKit. We remain optimistic regarding AR’s potential. That said, the use cases of AR to date have lagged our expectations, due to a lack of reliable hardware and software to enable developers to build compelling AR experiences. We expect Apple to announce subtle new developer tools to improve the AR development process and ultimately yield more compelling AR applications.

Siri integration with Beats. The knock on HomePod is its $349 price is about 2-3x the price of a typical smart speaker. We believe Apple can advance its digital assistant ambitions with a $250 Beats-branded option that does not compromise HomePod’s $349 price point. We are currently modeling for HomePod to have a low-to-mid teens digital assistant market share, and this Beats integration does not change our market share outlook.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Autonomy & Apple as a Service

  • The New York Times reported that Apple has signed a deal with Volkswagen to manufacture electric T6 Transporter vans outfitted with Apple’s autonomous sensor suite to be used as self-driving shuttles for employees.
  • This is significant because it plays into the fourth pillar of our Apple as a Service investment thesis: optionality.
  • Autonomy is one component of optionality that is currently not reflected in Apple’s share price along with AR, original content, and health.
  • Coming soon: We’re working on a sensitivity analysis to frame up Apple’s opportunity in autonomous mobility.

As Apple’s market cap approaches $1T, it begs the question: can shares move higher? At Loup Ventures we believe the Apple story is well positioned for future appreciation based on a long-term, sustainable investing paradigm. We call this new paradigm ‘Apple as a Service,’ which includes four pillars: stable iPhone, Services, returning cash to investors, and optionality (AR, content, health, and autonomy). Yesterday’s New York Times report on Apple’s deal with Volkswagen to build autonomous vehicles gives us some clarity regarding the optionality component to Apple as a Service. Investors are currently not giving Apple shares credit, given it’s nearly impossible to model. Eventually, that tide will change, and we expect shares of AAPL to benefit from this opportunity.

What has been said? The Times report detailed Apple’s plans to build a small network of autonomous shuttles for inter-campus employee transport, now with the manufacturing muscle of Volkswagen Group. The report also said this project, which is long overdue, is taking up nearly all the attention of Apple’s car team, so it is reasonable to assume that the project will progress quickly. The T6 Transporter’s frame, wheels, and chassis will remain intact, but Apple will no doubt make serious changes to interior and exterior design elements, along with adding computing power, sensors, and an electric drivetrain (unclear from who).

Why Apple has an interest in autonomy. We believe Apple’s endgame is a software and services platform enabling autonomous mobility fleets. The concept of an autonomous service is a departure from Apple’s current hardware and content services business. Specifically, delivering their experience through third party hardware is a strategy that Apple rarely employs. That said, we believe, given the complexities of manufacturing a car (just ask Tesla) and the size of the opportunity, it makes sense for Apple to partner their way to autonomy.

The fruit of the Volkswagen/Apple partnership will likely yield an Apple-like experience based on the Times’ report that Apple’s talks with other automakers were ended due to disagreements on who would own the customer experience and data. This leads us to believe that Apple will have a considerable amount of input and control over the design and experience of the end product.

Tim Cook has said, “We are focusing on autonomous systems…It’s a core technology that we view as very important…We sort of see it as the mother of all AI projects.” Today those efforts are manifested in an autonomous shuttle for internal employee transportation, but this undoubtedly serves as a controlled proving ground for broader ambitions.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Apple as a Service Part 4: New Product Categories

  • Optionality around new product and service categories is the 4th and final pillar to our Apple as a Service thesis.
  • We expect a stable iPhone business (part 1), a growing Services segment (part 2), and capital returns (part 3) to move shares higher.
  • In part 4, we outline potential new product and service categories, including AR wearables, personal health, original video content, and autonomous vehicles, which represent additional growth drivers not yet reflected in investor thinking.
  • New hardware products generate new Services opportunities and the company will continue to develop both in tandem as it looks to expand its ecosystem.

AR wearables a great fit for Apple. Futurist Charlie Fink sums up AR best: “The world is going to be painted with data.” Tim Cook agrees, and in 2017 said, “AR is one of those huge things that we’ll look back at and marvel at.” Cook is doing everything in his power to advance the theme, as evidenced by three developments in 2017 including; releasing an AR development platform (ARKit), shipping dedicated AR optics in the iPhone X, and purchasing SensoMotoric (a wearable computer vision technology).

While the tech community believes in the long-term potential of AR as the future of experiences, most investors are understandably mixed about its potential, given the two most popular AR use cases today are Snapchat and Pokemon. Adding to investor skepticism is the failed consumer launch of Google Glass, released in 2014 and discontinued in 2015. As a society, we were not ready for people to wear cameras.

That said, we believe AR is real and Apple will be a beneficiary. We expect Apple’s AR theme to play out in three phases. First, this fall we expect 2 to 3 new iPhones to join iPhone X with advanced optics for AR (VCSEL arrays). Second, AR apps built using ARKit will slowly become the next gold rush for developers, led by games, ecommerce, and education. Last, we expect Apple will release Apple Glasses late in 2021.

This begs the question: are we ready for AR glasses? Not now, but eventually we will be. AR is better hands-free. We’re not made to experience the world holding up a tiny window. Our arms and eyes get tired. Glasses solve that problem, but they also create a problem by breaking a social dynamic around privacy. We expect minuscule wearable adoption until the utility of an AR wearable offsets the negative social dynamic. Simultaneously, the technology must advance to a point where the design of the glasses is not a negative factor (as we’ve seen with smart watches). Once that happens, wearables will likely go mainstream. We see the early flip phone as a helpful analogy. Around 2000, flip phones added cameras, and the privacy threat of a camera in everyone’s pocket created a negative social dynamic. Eventually, consumers got over it because the utility of the camera offset the negative social dynamic. In the future, we won’t be able to live without an AR wearable, and Apple will be there to sell us one.

We are pushing back our expected release of Apple Glasses from September of 2020 to December of 2021 based on recent meetings with several AR industry experts. While these people do not have direct knowledge of Apple’s plans, it is becoming clear that, as a category, AR glasses are a few years away. We’re looking for 10 million units in the first year, similar to Apple Watch’s first year. We’re using a $1,300 ASP, which yields a $13B business and should account for 3% of Apple’s revenue in CY22. See our updated model here.

Personal health and fitness Apple’s new hobby. Steve Jobs routinely referred to Apple TV as a “hobby” for the company. In 2018, the Apple TV business will generate an estimated $3-$4B in revenue. Apple Watch has well surpassed Apple TV; we estimate it will generate nearly $11B in revenue in 2018. Apple Watch is now the most popular watch in the world. And fitness is literally a hobby of Tim Cook’s. Lastly, we view Cook’s personal motivation to improve global health and wellbeing as an important factor here. The rubber meets the road with products like Apple Watch and AirPods along with software development tools including HealthKit and ResearchKit, but new wearables (and “hearables”) and new capabilities for existing products represent a significant potential growth driver for Apple in the personal health space. We estimate that Apple Watch, AirPods, and a new AR wearable (“Apple Glasses”) will generate over $71B in FY23, up from an estimated $12B in FY18.

The opportunity in original content. We continue to expect Apple to launch a rebranded, all-in-one Apple video and music offering in 2-3 years. As the company ramps its spending on original content at a clip of about 50% per year to more than $4b in 2022, it will need a new home for its video content (currently available through Apple Music and iTunes). While Apple’s original content spend of about $500M in 2017 is just a fraction of the $8B Netflix plans to spend on original content this year, we think they are committed to competing in the content space. That said, they already take a cut of subscriptions generated for HBO, Hulu, Netflix and others via Apple devices. This one-two punch in content will continue to drive consumers away from cable and satellite TV providers to a combination of over-the-top service providers, and Apple is well positioned to benefit both directly and indirectly from this shift. See more here for our thoughts on Apple’s original content strategy.

Apple’s plans in autonomy. Tim Cook has said, “We’re focusing on autonomous systems…It’s a core technology that we view as very important…We sort of see it as the mother of all AI projects.” While he notes that transportation is just one segment of autonomy, it is clear that Apple is working on autonomous vehicles, as they have recently expanded their fleet of test vehicles registered with the California DMV to 55, up from 27 earlier this year, and just 3 last year. While the company’s ultimate ambitions in autonomy are unknown, their public confirmation is noteworthy, and it is clear they are taking the opportunity seriously.

There are two ways we see Apple potentially bringing its autonomous systems to market. The first option would be to partner with a manufacturer to build an Apple-branded car, just as they do with the iPhone and iPad. By partnering with a manufacturer, Apple would have design control over the product and would be able to customize the user experience as much as possible. On the other hand, manufacturing a car is very different than manufacturing a smartphone. The second option would be to focus on developing software and license its technology to current auto manufacturers for use in their vehicles. Apple could be the OS of the future for cars. This may be the more likely option as it plays to a number of Apple’s strengths including voice, navigation, entertainment, security, and a developer ecosystem.

At the moment, Apple is likely pursuing both options under the R&D umbrella of Project Titan. The most near-term application of their efforts is an autonomous shuttle called PAIL (Palo Alto to Infinite Loop) that will transport employees around campus, likely to collect data in a semi-controlled environment. True to form, they’ll watch this market emerge and enter when the time is right – from both a product and a market standpoint.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make. 

Amazon’s Next Massive Market: Healthcare

  • CNBC reported on Friday that Amazon is building a health and wellness team inside its Alexa division to work on making Alexa a better tool for healthcare.
  • Amazon, Berkshire Hathaway, and JP Morgan recently announced plans for a joint healthcare company focused on reducing costs and improving care for their combined 1.2m employees.
  • The $3.3T U.S. healthcare industry is notoriously slow to innovate.
  • We think Amazon will change healthcare on three fronts: 1) Logistics: Help reshape the $453B Pharmacy Benefit Management industry; 2) AI: Alexa will help both patients and providers with everything from in-home care to allowing providers more time with patients instead of paperwork; 3) Cloud: AWS will continue to allow Amazon to partner with the world’s leading patient data networks.

Source: CNN Money

Dr. Alexa. Today’s news around Amazon’s new Alexa healthcare team got us thinking about Amazon’s prospects for breaking into healthcare.  Companies across the entire healthcare industry are quickly discovering that AI will be used in everything from operations to enhancing quality of life for patients. Imagine the safety, information, connectivity, and entertainment that an Alexa near every hospital bed could offer patients.

Amazon’s Medical History. Amazon’s first foray into healthcare came with a 2014 deal with Cardinal Health leveraging Amazon’s e-commerce capabilities to sell medical supplies to hospitals and clinics. Amazon announced another major move into healthcare when they, JPMorgan Chase, and Berkshire Hathaway outlined plans to start a company that would provide and manage healthcare for the three companies’ combined 1.2m employees, focusing particularly on reducing costs. Separately, Amazon announced that they have put their plans to become a pharmaceutical wholesaler on hold (for now). The company found it difficult to bring major hospitals on board due to their reluctance to deviate from the purchasing process they’ve grown used to. 

Amazon’s Next Moves. We believe Amazon will have a major impact on the $3.3T U.S. healthcare industry by leveraging three core competencies: Logistics, AI, and cloud infrastructure to transform delivery of care, population health management, and healthcare software services.

  1. Logistics: Logistical expertise will most directly impact the highly concentrated Pharmacy Benefit Management (PBM) sector. Rising drug prices and rising drug demand has driven considerable backlash recently among American consumers. We feel this could be a golden ticket for disruption to a cost-conscious, logistics expert like Amazon.
  2. AI: Alexa’s artificial intelligence could significantly reduce the amount of busywork for doctors and accelerate the adoption of in-home telehealth. From checklists to note taking to logging patient symptoms, Alexa could streamline many healthcare operational functions by eliminating menial tasks and allowing providers to spend more time with patients. In the home, patient rooms, and at senior living facilities, Alexa could do everything from reminding patients to take their medicine, to helping manage care for diabetics, to helping patients notify staff if they’ve fallen.
  3. Cloud: Amazon’s $5.4B AWS business is poised to provide incumbent electronic health record systems with the storage, analytics, and population health management tools needed to provide a full stack of services around patient data. Evidence of this came as Cerner, one of the world’s largest health technology companies, partnered with AWS to utilize the platform’s data analytics strengths to provide more real-time care coordination amongst providers. Cerner also looks forward to leveraging Amazon’s AI to take a more proactive approach to cross-sector population health and wellness, and we anticipate they will be one of many healthcare firms in the future using AWS in similar capacities.

Whole Foods + Healthcare. The acquisition of Whole Foods gives Amazon another unique product and product delivery method, although we can’t call it a core competency yet. Food as medicine will be an important part of healthcare’s future and, as a leading grocer, Amazon is well-positioned here. Whole Foods locations also provide Amazon with the physical presence, and the brand recognition in health and wellness, to potentially address the need for more convenient healthcare clinics.

Bottom line. Amazon’s aspiration to be “Earth’s most customer-centric company” provides it with seemingly unlimited growth potential (and uncanny ability to find success in new markets). While they may be king when it comes to e-commerce, their entry into the healthcare market will likely prove to be one of their toughest tests to date. They face an extremely complex and concentrated industry and the regulatory quagmire that comes with it. Amazon has its work cut out in convincing the healthcare system that it belongs at the table, but it’s made sensible first steps and we’ve learned not to bet against them.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.