1.204 Billion

A Nod To Greg Packer. For those who were tuned in, June 29th 2007 lived up to the hype. Apple had been aggressive with TV advertising going into the iPhone launch, resulting in average lines of 350 people at the three stores we surveyed on iPhone launch day in New York, San Francisco and Minneapolis. News media was everywhere leading up to the release, often interviewing Greg Packer (pictured below) who camped out at Apple’s flagship 5th Avenue store for several days to be the first iPhone buyer. Since then, Apple has sold 1.204 billion iPhones (includes our Jun-17 estimate).  Lots has been written about how the iPhone has impacted our society. We simply think of it as an extension of our hands.  Industries have crumbled under the weight of the iPhone: Phones (Blackberry, Nokia, Palm), cameras (point and shot cameras, video cameras, Flip Video, which was purchased by Cisco), MP3 players (iPod, Creative, Samsung, and the Zune), GPS (Garmin and TomTom), and the Taxi industry, to name a few. More importantly, almost every industry that was not destroyed by the iPhone was made better by it.

The Early Disappointment.  All of the hype going into the iPhone launch led to analysts, present company included, inching up expectations for the opening weekend sales of around 500k units. Investors were hoping for even more. On Monday, July 24th, AT&T (iPhone’s exclusive carrier) reported activations of 146K in the iPhone’s first two days, well below expectations. Shares of AAPL traded off 4% in the next two days as investors asked “is the iPhone DOA?”.

The Slow Road To 100m.  It took Apple 4 years to sell a total of 100m iPhones. 2012 was the breakout year, with the company selling 136m phones. The iPhone was here to stay. At least for now.

Embracing The Innovator’s Dilemma: iPhone’s Handoff To Apple Glasses. The near-term the outlook for the iPhone is bright. We expect the next iPhone cycle to see growth of 15% and iPhone will account for 63% of Apple’s revenue in 2017. Then things slowly change; in 2019 we expect iPhone revenue to be up just 1% y/y. For FY20-FY22 we have iPhone revenue declining by 3-4% and accounting for 48% of overall sales in FY22 as Apple Glasses slowly gains market adoption. In 10 years, we expect the iPhone to be around, but it will be a much smaller part of Apple’s business as Apple Glasses grows. This hand off between iPhone and Apple Glasses will be choreographed by Apple as the company once again embraces the innovator’s dilemma and upgrades consumers to a superior device.

Apple Glasses In FY20. Our best guess is that Apple Glasses, an AR-focused wearable, will be released mid FY20. This is based on the significant resources Apple is putting into AR, including ARKit and the recent SensoMotoric Instruments acquisition. We believe Apple sees the AR future as a combination of the iPhone and some form of wearable(s). With an average sale price for Apple Glasses of $1,300 we expect initial demand to be limited at just over 3m units compared to 242m iPhones that year. This equates 2% of sales in FY20, increasing to 10% ($30B) in FY22 when we expect the ASP to be about ~$1,000. Early on, our Apple Glasses growth curve is based on the iPad’s early growth curve. Eventually, we expect a steeper growth curve for Apple Glasses vs. the iPad, and we believe the product line will continue to increase as a percentage of sales for the next ten years.

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.

How the Future of Voice Search Affects Marketers Today

Written by guest author Lindsay Boyajian at Conductor

Since Amazon announced its acquisition of Whole Foods, the running joke across social media has been, “Jeff Bezos said to Alexa, ‘Buy me something on Whole Foods,’ and Alexa bought Whole Foods.”

This quip highlights the shortcomings that plague voice search. Today, voice recognition technology is very much flawed and often falls short in delivering on the user’s intent.

Despite its weaknesses, voice search is promising to be the user input of tomorrow. The major tech companies are investing heavily in the technology— Apple has Siri, Amazon has Alexa, Google has Google Assistant, and Microsoft has Cortana. Even with the technology in its nascency, Google reports 20 percent of queries on its mobile app and Android devices are voice searches.

And thanks to artificial intelligence and machine learning, voice search is improving quickly. It improves with every user interaction, becoming more apt at understanding user intent. With the technology advancing, more users will adopt voice search, fueling the growth cycle.

The work that is going into voice recognition technology today will power the next evolution in computing— augmented reality.

Augmented Reality & Voice Search

Augmented reality (AR) represents a new computing paradigm. Augmented reality overlays digital assets on the real-world environment. The technology promises to change how users interact with the digital world.

Soon, everything from office activities to shopping will be experienced through augmented reality. For instance, a shopper will be able to put on a lightweight pair of AR glasses to visualize in 3D what different couches will look like in her home. Some AR experiences like this are already offered today through head-mounted devices like Hololens and Meta. However, these devices are only available to developers and still have their limitations. They are not ready for mass consumer adoption.

The principal user input for augmented reality devices (excluding hardware input accessories like keypads and clickers) is gesture and voice. The issue with gesture controls is user discomfort and fatigue. Many experts agree that voice will be the primary input for these devices.

As the augmented reality space matures so will the importance of voice search.

The tech company with the most advanced voice recognition technology will have an advantage in augmented reality computing.

Optimizing Organic Search for the Future of Voice Search

Although mass consumer adoption of AR hardware is still years away, brands that optimize for voice search early will lead in organic and search marketing when the technology becomes ubiquitous.

Voice search behavior differs from traditional search patterns. Consumers approach voice search using natural, more conversational language. The queries are often longer and delivered as questions.

The result for marketers is that content optimized only for keywords will falter, while content that delivers value and matches the intent of the user will see improved organic search performance. To do this, marketers need to develop a deeper understanding of their customers to deliver content that provides relevant and timely value. This approach to marketing is known as customer first marketing.

Customer first marketing is not new. More and more brands are quickly adopting a customer-centric marketing approach. Relevant and contextual content drives traffic, fosters customer engagement, and builds loyalty. The rise of voice search and its link to the future of augmented reality only makes adopting a customer first marketing strategy even more advantageous for brands and marketers.

This piece originally appeared on LinkedIn. For more, follow Lindsay Boyajian on Twitter and LinkedIn

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.

Apple 5-Year Model; Expect Apple Glasses In FY20

We are publishing our Apple model with forecasts out to 2022 including Apple Glasses, an AR wearable, starting in 2020. By year end of 2022, we see net revenue of $292B and EPS of $13.20, up from $221B and $8.74 in FY17 (Street at $227B, and EPS $8.95) in FY17. Gross margin stays close to constant as Apple Services’ higher margin offsets declining iPhone hardware gross margin. The auto opportunity is not in our model. Here are our 5 takeaways.

Services: Steady, Growing, Profitable. We expect steady growth from Services over the next 5 years. In Mar-17, Services accounted for 13% of revenue and grew at 18% y/y. We believe that in 2022 Services will account for 21% of revenue and grow at 14% y/y. Our confidence is supported by the predictability of Services over the past two years, along with our belief that AR apps will be a catalyst for consumer spending on apps over the next 5 years. This segment should remain about 2x more profitable than Apple’s hardware business with a ~60% gross margin, with gains in margin from Services offsetting the loss of margin in hardware. Our gross margin for Apple overall goes from 38.9% in Mar-17 to 38.4% in FY22.

iPhone: Growth Peaking In FY19, Then Slowly Decline As Apple Glasses Emerge. We expect iPhone revenue to grow at 15% in FY18 (essentially the next iPhone cycle) and account for 64% of revenue. We’re modeling for 12% unit growth as the next iPhone should inch up ASPs to $674 from FY18 from $651 in FY17. We believe tough comps after the next iPhone cycle will have a negative impact on iPhone growth in FY19, and in FY20 we believe Apple Glasses will start to impact iPhone sales. For FY19 we’re modeling revenue up 1% y/y and units up 3% as ASPs drift down to $663 as more AR-related features (e.g., cameras and sensors) are included in base iPhones. For FY20-FY22 we have iPhone revenue declining by ~3-4% y/y and units down 1-2% based on continued ASP pressure to $620 in FY22. We expect iPhone will account for 48% of sales in FY22. In 10 years we expect the iPhone will be around, but be a much smaller part of Apple’s business as Apple Glasses slowly gains market adoption.

Apple Glasses In FY20. Our best guess is that Apple Glasses, an AR-focused wearable, will be released mid FY20. This is based on the significant resources Apple is putting into AR, including ARKit and the recent SensoMotoric Instruments acquisition. We believe Apple see’s the AR future as a combination of the iPhone and some form of a wearable. With an average sale price of $1,300 we expect initial demand to be limited at just over 3m units compared to 242m iPhones that year. This equates 2% of sales in FY20 increasing to 10% ($30B) in FY22 when we expect the ASP to be about ~$1,000. This growth curve is modeled after the iPad initial growth. We expect a different growth curve for Apple Glasses vs. the iPad, and believe the product will continue to increase as a percentage of sales for the next ten years.

AirPods: Bigger Than Apple Watch. Over the next 10 years, we anticipate that AirPods will be bigger than the Apple Watch as the product evolves from simple wireless headphones to a wearable, augmented audio device. While both AirPods and Apple Watch should continue to grow, we see AirPods contributing about the same amount of revenue as Apple Watch by FY22. We expect the AirPods ASP to increase from $159 today to $200 in FY22 as the product shifts to augmented audio.

Auto: Not In Our Model. We excluded auto from our model because Apple’s go to market strategy is unclear. In an interview with Bloomberg, Apple CEO Tim Cook confirmed Project Titan, Apple’s car project. Cook referred to this as “the mother of all AI projects.” While the project hasn’t been a well-kept secret, Apple’s public confirmation is noteworthy. Cook referred to the three specific areas: self-driving technology, the electrification of vehicles, and ride-hailing as “three vectors of change happening generally in the same time frame.”

How Will Apple Go to Market in Auto? There are three ways we see Apple potentially bringing its car technology to market. The first option would be to partner with a manufacturer to bring an Apple-branded car to market. The second option would be to focus on developing software and implementing it across as many car platforms as possible. Lastly, but unlikely, the could enter as a fleet service.

  • Partner With a Manufacturer. Apple could partner with a manufacturer to bring its own branded car to the market, 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. Apple could even acquire a car manufacturer to do this. Some think it makes most sense for Apple to acquire Tesla, but we have already written about why this is most likely a fairy tale.
  • Develop Software for Autonomous Vehicles. Another option is for Apple to 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. In order for widespread adoption of fully autonomous vehicles, cars would need to have hardware and software integrated into their design that would not only operate the vehicle, but also communicate with surrounding vehicles at all times. In this scenario, Apple would expand its presence in the automotive market significantly and further expand the halo effect of their product lineup into autos.
  • Fleet Unlikely. We do not expect Apple to operate a ride-hailing service.

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.

Suppliers Heavy Hints on the Next iPhone with Meaningful AR Implications

Last night, Finisar (FNSR) reported the Apr-17 quarter and made comments that all but ensure they will be one of two or three suppliers of VCSEL lasers for the high-end version of the next iPhone. Based on timing comments, we expect the next iPhone to be announced in September and ship in October. VCSEL lasers will add advanced 3D sensing capabilities for augmented reality applications.

What They Said. On last nights earnings call, Finisar management did not mention Apple by name, but they highlighted they expect to see volume VCSEL orders in their second fiscal quarter, which is the October quarter end of this calendar year. The company anticipates shipping “millions” of units during the quarter, but management also went on to say they anticipate unit shipments to be in the “10s of millions” in future quarters, which gives us further confidence 3D sensing and AR applications will be one of the focus features in the next generation of iPhones. In May of this year, Lumentum was the first VCSEL supplier to announce they anticipate volume shipments to begin in the second half of 2017.

We also want to highlight Finisar acknowledged they are shipping VCSEL lasers to multiple customers, but one customer (aka Apple) is accounting for the majority of total demand. We believe Finisar and others supplying VCSEL lasers are supply constraint and shipping everything they can manufacture. We believe Apple has secured a high percentage of all VCSEL lasers created, which we view as a large competitive advantage and will make Apple a leading AR player in the smartphone space.

Advanced AR. Apple is putting the hammer down in AR. The company already has more than 100m AR-enabled iPhones (iPhone 7) in use today, and all versions of the next iPhone will be AR-enabled. Incorporating these high-end VCSEL lasers into the iPhone will enrich the augmented reality experience. Coupled with the release of the ARKit at WWDC in early June, Apple is positioning itself to become a leader in this next generation tech movement. Separately, Apple is cornering the market for the VCSEL sensors.

Higher Margins. We also believe the iPhone enabling 3D sensing will be positive to the company’s bottom line. We anticipate the high-end iPhone SKU will incorporate a low-end and high-end VCSEL laser. The low-end will be front facing, while the high-end laser will be on the back side of the device. We believe the low-end lasers will cost $2 – $3, while the high-end lasers will range from $3 – $4. When factoring in manufacturing costs the total bill of materials could cost ~$20. We believe the high-end iPhone will market for ~$950, which the company will have added ~$100 to the price to incorporate 3D sensing. This nets in an 80% gross margin  up sell to the AR rich iPhone, compared to Apple’s overall gross margin of ~40%.

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.

Interest In Buying Next iPhone Higher Than Last Year

Survey Shows Interest In Upgrading to Next iPhone Higher Than Last Year. The weekend before WWDC, we surveyed 501 U.S. consumers regrading their intent to purchase the next iPhone, expected to be released early to late this fall (possibly delayed a month, see below for details). Of the 220 current iPhone users we surveyed, 25% plan on buying the next iPhone at release, up from 23% in our previous survey in early March 2017. This compares to last year when our survey found 15% of iPhone owners planning to buy an iPhone 7 at its launch in 2016. The iPhone 7 data point is based on a survey we conducted while at Piper Jaffray in July 2016. 

AR Interest High Among Expected iPhone Buyers. When asked about augmented reality features, interest is high among those expecting to purchase the next iPhone (even though this survey was conduct before Apple’s ARKit announcement on June 5th). We found that 54% of respondents that intend on purchasing the next iPhone indicated interest in AR features, compared to 26% percent in our March survey. Among those not planning on buying an iPhone, interest in AR was much lower at 14%.

AR Interest Low Among Android Users. Overall, just 20% of the 501 respondents indicated interest AR. The message that the next iPhone will have more AR features is resonating with loyal iPhone users but Android users have far less interest in AR. As expected, the 18-29 age group showed the highest interest level in AR at 26%.  

2017 iPhone Should Mark A Step Up In iPhone Growth.  The increase in iPhone growth from the coming iPhone cycle is already factored into shares of AAPL. We are modeling for iPhone unit growth to increase from 0% for the iPhone 7 cycle to 8% for the upcoming iPhone cycle. We expect iPhone revenue growth to increase from flat during the iPhone 7 cycle to 11% for the next iPhone cycle. Revenue growth outpacing unit growth is attributed to an ASP increase from $651 (current iPhone cycle) to $674 due to the addition of a new high-end iPhone SKU with 3D depth mapping which we expect to start around $1,000 vs. today the high-end entry level (128 GB) iPhone 7 which is priced at $869. This new high-end SKU should run about $47 per month on the iPhone upgrade program, compared to $41.58 today for the entry level iPhone 7.

Expect iPhone Announcement In September, Shipping In October. Previously we had expected Apple would announce and ship the new iPhone in Sept. 2017, maintaining their annual fall launch of new iPhone hardware (iPhone 5, 5S, 6, 6S, and 7 each shipped in Sept.). Based on a recent conversation with a component supplier, we now expect the new iPhone to be announced in Sept. and ship in Oct. given challenges with the OLED curved screen. This delay would result in a shortfall in the Sept-17 iPhone units of ~10m units (now expect 39m units compared to the Street at around 49m). We expect 6m units to be shifted to the Dec-17 quarter and 4m into Mar-18. We expect the iPhone will be at supply demand equilibrium earlier in the Mar-18 quarter.

Thoughts On The Name. We have been referring to the next iPhone as “iPhone X”; however, Apple has been simplifying their naming schemes across product lines (e.g., “iPad” and “iPad Pro,” dropping the numerical value to show its position in the lineup). All that to say, we now think Apple will refer to the new iPhone as “iPhone” and “iPhone Plus.”

Additional Survey Details.   

  • Total sample size: 501 U.S. consumers
  • iPhone 7 users: 63 of 501 (13%)
  • iPhone 6s users: 61 of 501 (12%)
  • iPhone 6 users: 64 of 501 (13%)
  • Other iPhone users: 32 of 501 (6%)
  • Total iPhone users: 220 of 501 (44%)
  • iPhone users planning to upgrade to next iPhone: 54 of 501 (25%)
  • More interest in AR: 100 of 501 (20%)
  • Less interest in AR: 80 of 501 (16%)
  • Unchanged in AR: 319 of 501 (64%)
  • 18-29 (19%)
    • iPhone users: 48 of 96 (50.o%)
    • Purchasing the next iPhone: 13 of 96 (13.5%)
    • More interest in AR: 25 of 96 (26.0%)
    • Unchanged interest in AR: 59 of 96 (61.5%)
    • Less interest in AR: 12 of 96 (12.5%)
  • 30-44 (27%)
    • iPhone users: 66 of 135 (48.9%)
    • Purchasing the next iPhone: 25 of 135 (18.5%)
    • More interest in AR: 32 of 135 (23.7%)
    • Unchanged interest in AR: 80 of 135 (59.3%)
    • Less interest in AR: 23 of 135 (17.0%)
  • 45-59 (22%)
    • iPhone users: 40 of 110 (36.4%)
    • Purchasing the next iPhone: 12 of 110 (10.9%)
    • More interest in AR: 22 of 110 (20.0%)
    • Unchanged interest in AR: 78 of 110 (70.9%)
    • Less interest in AR: 10 of 110 (9.1%)
  • 60+ (31%)
    • iPhone users: 64 of 156 (41.0%)
    • Purchasing the next iPhone: 20 of 156 (12.8%)
    • More interest in AR: 19 of 156 (12.2%)
    • Unchanged interest in AR: 101 of 156 (64.7%)
    • Less interest in AR: 36 of 156 (23.1%)
  • Male (48%)
    • iPhone users: 99 of 240 males (41.2%)
    • Purchasing the next iPhone: 44 of 240 (18.3%)
    • More interest in AR: 54 of 240 (22.5%)
    • Unchanged interest in AR: 153 of 240 (63.7%)
    • Less interest in AR: 33 of 240 (13.7%)
  • Female (51%)
    • iPhone users: 119 of 257 (46.3%)
    • Purchasing the next iPhone: 26 of 257 (10.1%)
    • More interest in AR: 44 of 257 (17.1%)
    • Unchanged interest in AR: 165 of 257 (64.2%)
    • Less interest in AR: 48 of 257 (18.7%)
  • Plan to purchase next iPhone 71 of all 502 U.S. consumers (14%)
    • iPhone users: 54 of 71 (76.1%)
    • More interest in AR: 38 of 71 (53.5%)
    • Unchanged interest in AR: 31 of 71 (43.7%)
    • Less interest in AR: 2 0f 71 (2.8%)
  • Not planning to purchase next iPhone 430 of all 502 U.S. consumers (86%)
    • iPhone users: 166 0f 430 (38.6%)
    • More interest in AR: 62 0f 430 (14.4%)
    • Unchanged interest in AR: 289 0f 430 (67.2%)
    • Less interest in AR: 79 0f 430 (18.4%)