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. 

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.