Apple’s Original Content Is Further Along Than You Think

  • Apple has 16 new shows in the works, comparable to Netflix in 2013 (its first year of original programming) when it had released 13 originals.
  • We expect Apple to spend $900M on video content in 2018, growing to $4.2B by 2022.
  • Original video content is defensible and adds to Apple’s Services segment.

We believe Apple’s investment paradigm is shifting, centered around the Services segment. In CY18, Services should account for 14% of revenue, growing to 20% by CY23. Content is an emerging part of the Services pillar, as evidenced by the success of Apple Music, now with over 50M paying subs. Original video content is a new category for Apple and represents optionality to Services revenue growth and is not yet reflected in the value of AAPL shares.

Framing up the opportunity. While off to a disappointing start, (Carpool Karaoke and Planet of the Apps), we believe Apple is making measurable progress in original video content that will begin to contribute to Services growth starting in 2019 or 2020. Content could ultimately account for $10-$15B in annual revenue (Netflix will do $16B  in 2018) and 3-5% of overall Apple revenue.

Key content hires. At the helm of the company’s content efforts are Jamie Erlicht and Zack Van Amburg, who Apple hired away from Sony in 2017. Erlicht and Van Amburg ran Sony’s primetime series division since 2005. They will report directly to Eddie Cue, who runs Apple’s Services business. Apple has also hired an array of industry veterans from a range of backgrounds including streaming platforms like Hulu and Amazon Studios, and mainstay media companies like WGN America and Legendary Entertainment.

Apple’s content pipeline:

  • Amazing Stories – Apple plans to spend ~$5M per episode on a 10 part sci-fi/horror series originally created by Steven Spielberg in 1985. Source
  • Are You Sleeping – A thriller drama series based on true crime novel by Kathleen Barber. Source
  • Central Park – Comedy that tells the story of how a family of caretakers living in Central Park ends up saving the park & the world. Source
  • Dickenson – Documentary about the early life of poet Emily Dickenson starring Hailee Steinfeld. Source
  • Home – Will offer viewers a “never-before-seen look inside the world’s most extraordinary homes” and the minds of the people who created them. Source
  • See – Straight-to-series epic world-building drama set in the future. Source
  • Untitled Damien Chazelle Project – Details of the series’ plot are under wraps. This project will be the first time Chazelle has written and directed every episode of a series. Source
  • Untitled Kristen Wiig Project – Comedy series produced by Reese Witherspoon, inspired by Curtis Sittenfeld’s upcoming short story collection “You Think It, I’ll Say It.” Source 
  • Untitled M. Night Shyamalan Project – Straight-to-series psychological thriller. Source
  • Untitled Morning Show – Morning show drama starring Jennifer Aniston and Reese Witherspoon. Source
  • Untitled Ronald D. Moore Project – Ronald D. Moore, developer of Battlestar Galactica, explores what would have happened if the global space race had never ended. Source
  • Swagger – Profile on the early life and career of NBA star Kevin Durant.  Source
  • Little America – Based on a series of true stories featured in Epic Magazine that paint a portrait of America’s immigrants. Source 
  • Foundation – Based on Isaac Asimov’s iconic science fiction novels published between 1942-1993. Source
  • Shantaram – Drama series based on “Shantaram,” a 2003 novel about a man who escaped an Australian prison only to hide out in the slums of Bombay. Source
  • Little Voices – Tells the story of finding authenticity in the crowded and diverse New York musical landscape. Source

Apple is about 5 years behind. At first glance, it appears Netflix’s lead in original content is insurmountable. Netflix will end 2018 with close to 1,000 original titles and spend an estimated $3.5 billion on new titles this year. Keep in mind that almost half of that content is outside of the U.S. That compares to Apple, which has 2 titles out today and another 16 in the works (to be released in 2019 at the earliest), expecting to spend about $900 million this year. However, history is on Apple’s side, given that just five years ago Netflix had 13 original titles including the debut season of House of Cards. In other words, with the right resources, which Apple has, Apple’s original content titles can ramp from just under two dozen to potentially over one hundred. We note that Apple has stated they are focused on quality vs. quantity.

Apple’s Advantage. It’s an understatement to say that the video streaming landscape is competitive. Apple, once again, is late to the game but has an opportunity to change the game. Specifically, Apple can change the game around content streaming customer acquisition. Just like Netflix, HBO, and Hulu, Apple’s stories and production quality are first class. What separates Apple is the company’s access to 1.3B active devices through which they can subtly encourage adoption. Apple Music’s market share gains over the past two years are a testimony to the power of coupling Services with widely adopted hardware. An unrelated advantage is Apple’s brand, which, at its core, represents quality and attention to detail, and should translate into favorable initial adoption.

Apple Music’s market share gains over the past two years are a testimony to the power of coupling Services with widely adopted hardware.

How will Apple’s video content be distributed? Consuming video on Apple devices is confusing. Between the iTunes Store, Music, TV, Podcasts, Books, and News apps, it is unclear where to discover and consume Apple’s video content. This presents an issue as they attempt to bolster content offerings going forward. While it is unclear how the video streaming service will be branded and delivered, we expect the iTunes Store to fade away, folding its content into the existing Music, TV, Books, and Podcasts apps.

Content is an emerging area of investment. It’s no secret that original content will be an emerging area of investment for Apple in order to boost the increasingly important Services revenue line. The good news is that cord cutting is undeniable and consumers are now paying for multiple monthly streaming services. Multiple streaming services means there will be a handful of content provider winners. We think that over the next 5 years Apple will ramp its original content investment from an estimated $900m this year to an estimated $4.2B in 2022.

UPDATE: On Friday, June 5th, Apple announced a “unique, multi-year partnership” with Oprah Winfrey. She will work with Apple to, “create original programs that embrace her incomparable ability to connect with audiences around the world.” This is a high-profile win for Apple, as Oprah brings with her a global brand and experience across television, print media, film, and more. This marks the 17th project that Apple has in the works.

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.’

Key Apple Supplier Reiterates Favorable Outlook Ahead of Fall Launch

  • Finisar (FNSR) is Apple’s 3rd largest VCSEL array supplier, accounting for about 5% of iPhone X VCSEL arrays.
  • Tonight the company reported earnings for the Apr-18 quarter.
  • Finisar continues to expect a ramp in VCSEL demand in their Oct-18 quarter, suggesting more iPhone models will incorporate Face ID and 3D sensing for AR.

Finisar is Apple’s 3rd largest VCSEL array supplier, which enables 3D sensing applications such as facial recognition through a flood immolator and dot projector on the front of the iPhone X. While VCSEL revenues were suppressed in the quarter due to seasonality, Management’s commentary remains mostly in-line with the previous quarter, with the company still expecting to see a ramp in demand in the Oct-18 quarter from Apple.

What they said. In line with Management’s expectations, Finisar’s VCSEL revenue (about $5 -7M in the quarter) was down sequentially as a result of seasonality in the quarter. While demand for VCSELs will be flat in the Jul-18 quarter, the company highlighted they continue to anticipate a ramp in the Oct-18 quarter in anticipation of a key customer’s (Apple) new product launches. Finisar also highlighted the new Sherman facility remains on track to go live in Fall 2018. Note this facility is the new 700,000 square foot capacity expansion initiative the company announced shortly before Apple awarded Finisar a $390M contract for future orders.

Read on iPhones. Finisar’s comments are in-line with previous comments, so we are not making any changes to our iPhone estimates. That said, we believe Management’s comments around an Oct-18 quarter ramp suggests this fall the Apple will introduce multiple new iPhones incorporating Face ID 3D sensing technology. In addition, with the Sherman facility going online this fall, we believe demand for VCSELs will accelerate into 2019 as more phones and other products integrate 3D sensing technologies. This, in turn, will be a key adoption driver to augmented reality (AR) applications.

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.

FAANG vs the World

In venture, our job is to swing for grand slams because venture returns follow a power law function where your biggest winner is going to provide the majority of your return. Base hits do not add up to a grand slam, even if they let you score a run.

Enough baseball.

In a way, the same observation applies to the public markets. We all know the power of the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google), but it’s even more apparent when we put it into context with numbers. As of June 6th, those five stocks totaled over $3.25 trillion in market cap. By comparison, the 610 other stocks in the Technology sector total $5.6 trillion in value (excluding any FAANG stock in the Technology sector).

And FAANG dwarfs the unicorn market too — the 65 known US-based unicorns as of the end of May total just about $340 billion in value, a tenth of FAANG. Certainly, some of these unicorns will continue to grow, but is there one we can justifiably argue will be big enough to insert itself into the FAANG conversation? Maybe Uber or Airbnb. Maybe Magic Leap if it delivers on its vision. Maybe some company that figures out artificial general intelligence.

Whatever the next FAANG-type company might be, it has to do something grand. Facebook and Google have transformed information consumption, Apple gives us products to interact with that information, and Amazon lets us have anything we want delivered to our door. They’ve meaningfully changed the world. Perhaps grand slam is too common to describe this occurrence. The FAANG companies are really quadruple doubles. Who plays baseball any more anyway?

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 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.

Thoughts on ARKit 2.0 at WWDC

  • In our meetings with AR companies at Augmented World Expo (AWE) this week, it’s clear the industry is waiting for Apple to announce ARKit 2.0 at WWDC.
  • Improvements in persistence and multiplayer functions are two of the most requested additions for ARKit 2.0.
  • Separately, we believe Apple could announce a new iPad with Face ID and advanced 3D-sensing for AR apps.

Multiplayer and persistent sessions most requested ARKit developer features. We believe Apple will announce ARKit 2.0 at WWDC next week. After meeting with several AR companies, it’s clear there are two important tools that developers need in order to advance AR, including improvements to multi-player and persistence. Multiplayer allows several participants to view the same virtual layer simultaneously and from different angles. The use case for multiplayer is straightforward for gaming, but non-gaming could be powerful as well. Take, for example, multiple engineers simultaneously working on a machine using AR. The second most requested feature, persistence, involves virtual objects remaining in place between sessions. For example, if you place a virtual picture on the wall, exit, then resume a session, the picture should maintain its position. This is a difficult but necessary component of compelling AR experiences.

iPad with Face ID. Face ID is currently on iPhone X only, but we believe, consistent with other reports, it will be added to the iPad this year. The advanced 3D-sensing needed for Face ID requires a VCSEL (vertical-cavity surface-emitting laser) array next to the front-facing camera. We expect this feature to be added only to the iPad Pro lineup. This would also help short-range AR, but front-facing AR has very limited use cases. We expect Apple to add a higher-powered, rear-facing array to iPhones and perhaps iPads within the next several years.

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.