Feedback Loup: College Panel

We recently hosted a panel of 8 college students from the University of Minnesota. The goal was to better understand how millennials think about social media, communications, video, VR, AR, the selfie generation, the future of work, and privacy. Here’s a summary of what we learned:

Text Is Dying

  • Quote: “Texting replaced email, and photos have replaced text messages”.
  • Message: Text is being used less frequently by each of our panelists. They view text as a formal way to communicate. Snap, Facebook and Instagram are the preferred communication platforms, with Facebook settings being switched to photos only. The panelists mentioned tech platforms promoting messaging within games as a way to maintain usage.
  • Takeaway: Text is slowly going away, replaced by video and photos. Text is viewed more as a formal way to communicate.

Fake News

  • Quote: “I like Snap for news.”
  • Message: Our panelists get their news from a wide variety of sources. 7 of 8 panelists are not concerned about fake news. Snap was the most popular way to aggregate news from traditional sources (3 of 8), followed by mainstream news outlets; e.g., CNN and WSJ.
  • Takeaway: Professional news is still respected but not paid for by these college students.

The Future of Work

  • Quote: “It’s scary. If we can’t have cashiers, truckers and fast food jobs. . . how will people live?”
  • Message: College students know they are entering a workforce that will have dramatic changes over the next 30 years. They have concerns about who’s going to control everything as resources become more concentrated. The University of Minnesota offers a class titled “Size of the Future” that addresses the risk of job loss to automation. The group did consider these changes when thinking about a career, with an increased interest in a more technical education that feels more defensible. Ultimately these students believe that the negative impact of lost jobs will be partially offset by the positive impact of new industries being formed.
  • Takeaway: College students understand that the workforce is changing. They envision social challenges emerging from displacement of workers with lower levels of education. But they believe a college education will ensure that their futures are safe.

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Jump Ball for the OS of the Future

As we watched the run up in SNAP shares since its IPO last week, we wondered how much of the move was based on potential revenue growth of more than 2x in 2017 or investors buying in to Snap’s long term vision as a camera company. Their vision suggests Snap wants to expand its position as an AR platform and compete for the jump ball of the next computing paradigm. That led to a bigger question: who is best positioned to win in AR and own the OS of the future? Here we weigh in on who’s most likely to grab that jump ball.

Counting Down to Tip Off

One of our core beliefs is that every 10-15 years a new computing paradigm emerges that changes the way humans interface with technology. Each paradigm shift creates an opportunity to own a new OS layer. In the late 80s it was the PC, ultimately powered by Windows, Mac and Linux. In the late 90s it was the Internet. We would argue that Google and Amazon provided the closest thing to an OS for the web. In the mid 2000s it was mobile, which is owned by iOS and Android. It’s obvious that the biggest value lies in owning that OS layer as evidence by the market caps of Apple ($730b), Google ($575b), and Microsoft ($490b).

What We Know About The AR OS Layer

We know that over the next few years, most AR functionality will happen through existing mobile OSes (iOS and Android); however, we also know that AR wearables – in order to drive a true paradigm shift – will need their own OS. It seems likely that there are 2-3 winners as the AR OS given what we saw in PC, Internet and mobile.

This is necessary because developers and hardware manufacturers need reach and scale to maximize profits, so they will only build for the biggest audiences. If there are more than 3 OSes, reach and scale will be difficult to achieve.

We also know that there will likely be at least one OS solution that is closed and one that is open. This is another commonality across the PC, Internet, and, mobile. Mac, Amazon, and iOS represent closed or integrated systems. The end-to-end experience is largely controlled by one player that allows some restricted development on the platform. Windows, Google, and Android represent open systems that allow broader utilization by third parties. Closed systems tend to be first to market, and the tight integration of software and hardware offer a user friendly experience that promotes early adoption. Open systems tend to follow, enabling third-party developers to innovate on hardware or software features while utilizing a standard, consumer-adopted OS. This means that hardware tends to become a commodity and, while there are definite challenges around miniaturization and battery today, we expect AR wearables to go the same way.

AR Is A Culmination Of Several Core Disciplines

Another core belief we hold is that the future of computing must build on prior technologies while introducing revolutionary changes; the AR OS will be no different. The winners of the AR OS layer will combine camera hardware with an OS that uses computer vision to map the real world and augment it with a layer of information and present it in a user-friendly interface. The OS will also need to incorporate artificial intelligence including the ability to interpret and interact with user speech as well as environmental sounds. But camera and UX design are just two of the more visible pieces of the AR stack. Supporting those elements are maps with points of interest, organized informational data, social data, a developer community, content, and payments. Unsurprisingly, that definition of the AR tech stack puts established companies like Google, Apple, Microsoft, Facebook, and Amazon in the best position to be AR platform winners because they already have many of the big pieces in place.

Below is a scorecard that ranks many of the major players in AR in each of these core disciplines. We note that low scores in the table represent categories of potential M&A for the corresponding company.

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Apple Working With Tesla Is A Fairy Tale

There’s been a lot of talk about Apple buying Tesla, but what if Apple simply made a $10 billion equity investment in the company instead? It sounds so good — Apple working with Tesla. In theory, it would make our lives so much better. Imagine all of the things you love about your iPhone, perfectly integrated with all the things Tesla owners rave about. The two tech giants could take over the auto industry over the next 20 years as consumers embrace electric vehicles and automation. Unfortunately, an investment from Apple, nonetheless an acquisition, would be hard to pull off. At the end of the day, that might be better for consumers if not investors.

Before we discuss why it won’t happen, let’s go over why it sounds so good.

For Tesla. A $10 billion cash infusion would all but eliminate any current or future cash problems for the company. While $10 billion equity investment would cause about 20% dilution today, it’s likely it would have a long-term benefit on Tesla stock given the removal of the cash question. Aside from the cash, we believe Apple could and would want to provide resources from their world class hardware, software, and AI teams to make Tesla’s the entertainment system and autopilot better. The investment would likely remove Apple as a potential direct or indirect competitor. Additionally, Tesla’s Model 3 could be showcased in Apple’s 490 retail stores in 20 countries.

For Apple. Investors would feel like they are actually doing something with their cash, which should be a positive for AAPL’s multiple. Apple would be investing in a company that has the potential to be multiple times bigger over the next decade. They would not be spending on the impossible, which would be building its own car to try to catch Tesla, but rather investing in making the leader even better. The impact of AI and robotics on the automotive sector is one of the next mega tech trends, and Apple would have a pole position within that theme.

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When Will Apple Win Its First Oscar?

We think Apple will win an Oscar in the next five years. That’s how long it will take for Apple to scale its original content spend from less than $200m today to $5-7b. The reason why expect $5-7b in Apple original content spend in five years is because Apple must catch up to Netflix and Amazon, the former of which will likely be spending more than $10b per year at that point. Before diving more into the question, here are a few key data points that we think are relevant to the discussion:

  • Amazon recently beat rival Netflix to be the first streaming service to receive significant Academy Award acknowledgement for Manchester By The Sea, with 6 nominations including one for best picture.
  • Netflix has received a total of five Oscar nominations, all in the best documentary category, since it began purchasing the rights to original content.
  • Apple is serious about content. The company will debut two exclusive shows, “Planet of the Apps” and “Carpool Karaoke”, this spring on the Apple Music platform.
  • Revenue from Apple’s Services segment, including the iTunes Store and Apple Music, is a key growth driver for Apple over the next several years. See more on Apple’s Services business in our piece, The 5 Focuses, which outlines Apple’s top five priorities, including Services.
  • We expect 2017 original content spend of about $7b from Netflix, and $6b from Amazon. Amazon includes a la cart cost.  Excluding a la cart we estimate Amazon original content spend is $4b. While we expect Apple to increase its content spend gradually over several years, the company has more than enough resources to participate in the same way.

As we’ve written before, we believe Apple innovates by taking small but deliberate steps forward (see our piece on Apple’s baby steps here). They did it with the iPod, they did it again with the iPhone and the iPad, and we see them doing the same in original content for their entertainment platforms. On their most recent earnings call, Tim Cook said, “In terms of original content, we’ve put our toe in the water doing some original content for Apple Music, and that will be rolling out throughout the year. We’re learning from that, and we’ll go from there.” His comments remind us of the way the company has talked about Apple TV for the last decade, often describing their work in the category as “pulling a string” to see where it leads.

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Apple’s Thundering Baby Steps Into AR

Loup Ventures and Tim Cook share at least one thing in common. We both agree that AR will transform how humans interact with each other, removing the clumsy touchscreen, replacing the smartphone, and most importantly, expanding the utility of computing. An AR wearable from Apple is a long ways off.  Over the next five years, we see the iPhone as Apple’s play in AR, which will be a driver for their all-important Services business.

We’re closely watching Apple’s moves in AR and Tim Cook’s recent interview with The Independent caught our attention.  Not because Cook said something new about AR, but because the frequency with which he’s talking about a future product category is unprecedented in the 14 years we have been covering Apple. If you’re interested, Cook told The Independent: “The smartphone is for everyone… I think AR is that big. It’s huge. I get excited because of the things that could be done that could improve a lot of lives. And be entertaining.”

“The smartphone is for everyone… I think AR is that big. It’s huge. I get excited because of the things that could be done that could improve a lot of lives. And be entertaining.” – Tim Cook

Cook’s talking about AR because innovation is the persistent question at Apple, and his comments support our belief that the next five years of Apple’s innovation will focus primarily on augmented reality. The smartphone is the world’s window into augmented reality today. While this will change driven by augmented reality hardware in the future, we would expect the next five years of AR innovation will happen mainly through the device in our pockets.

It’s A Big Deal When Apple Talks About Future Products, Because It’s Rare.  Apple doesn’t talk much about future products. The best example is going back to July 19th, 2006, six months before the iPhone was announced.  During the earnings call, a question was asked regarding music-enabled phones putting increased pressure on MP3 players and the iPod in particular. Apple’s then CFO Peter Oppenheimer responded, “As regards to cell phones, we don’t think that the phones that are available today make the best music players. We think the iPod is. But over time, that is likely to change. And we’re not sitting around doing nothing.”  Oppenheimer’s comments were significant because it was a rare tip of Apple’s hand about a future product. Under Cook Apple has strived to remain secretive around future products, but that’s more difficult given Apple’s revenue has grown to $218B in 2016, 10x larger than the $21B the company generated in 2006.

So, What Has Cook Said About AR So Far?  On July 26th, 2016, Cook made his first comments on AR during an earnings call in response to a question about Pokémon Gocommenting, “We are high on AR for the long run. We think there are great things for customers and a great commercial opportunity. And so we’re investing, and the number one thing is to make sure our products work well with other developers’ products, like Pokémon.” Below is a list of what we could find related to Cook’s public AR comments.  Notably, on the last two Apple earnings calls analysts have not asked about AR, most likely because everyone knows it coming.

  • “AR can be really great. And we have been and continue to invest a lot in this.” Apple earnings call, July 2016
  • “I think AR is extremely interesting and sort of a core technology. So, yes, it’s something we’re doing a lot of things on behind that curtain that we talked about.” Washington Post, August 2016
  • “[AR] gives the capability for both of us to sit and be very present talking to each other, but also have other things visually for both of us to see.” ABC News, September 2016
  • “I do think that a significant portion of the population of developed countries, and eventually all countries, will have AR experiences every day, almost like eating three meals a day, it will become that much a part of you.” Utah Tech Tour, October 2016
  • “Augmented reality will take some time to get right, but I do think that it’s profound.” BuzzFeed, October 2016
  • No mention of AR on the Apple earnings call, October 2016
  • No mention of AR on the Apple earnings call, January 2017
  • “I get excited [about AR] because of the things that could be done that could improve a lot of lives and be entertaining.” The Independent, February 2017

Three big questions remain: How quickly will Apple jump into AR? What form(s) will it take? And what does it mean for their business?

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