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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Feedback Loup: Snapchat

We think customer feedback is a critical (but too often overlooked) component of understanding where technology stands today and where it’s headed in the future. Our Feedback Loup series provides real customer feedback on the technologies shaping our future. Snap’s IPO is a perfect opportunity to step back and gather comments from Snapchat users on their habits and practices from frequency to filters.

Snap’s public offering is great for the tech industry and is a huge accomplishment for the company. We summarized our thoughts in an open letter to the company, touching on managing expectations while chasing a bold long-term vision. We’re big fans of the direction they are heading with their core AR capabilities and budding hardware lineup. We recently argued that Snap is an augmented reality powerhouse because Snap combines market-leading AR technology with dedicated cameras, like Spectacles, to deliver an unmatched user experience.

But we wanted to bring the Snap story to life, gather some real user feedback and, for novices, show you why people love using Snapchat. So we asked 32 college students – a small “buzz” survey within a core demographic – about how they use Snapchat. Here’s some of what we heard:

Key Data Points from our Buzz Survey of College Students:

  • 66% snap more today than they did 6 months ago
  • The average user snaps 37.8 times per day
  • 69% send more than 5 snaps per day
  • 41% could recall a specific ad they saw on Snapchat

We know Snapchat’s global user base is growing rapidly. Our data suggests that college Snapchat users are also using the service more often. 66% of the students we spoke with said they snap more now than they did 6 months ago, 28% snap less frequently today, and 6% snap roughly the same amount.

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Snap’s IPO And The Road Ahead

Snap priced its IPO at $17 per share, implying a $23.6 billion market cap.  To put the valuation in perspective, we think Snap could grow revenues by 100% to ~$800 million in 2017 and believe some buy side investors think the number will be closer to $1 billion.  Therefore, Snap is trading at about 29.5x our CY17 revenue expectation and 23.6x the early bullish whisper.  For comparison, Facebook trades at about 10x the Street’s CY17 revenue estimate of $37.8 billion.  There is a vast difference in forward growth that helps justify the difference in multiples: 100%+ y/y growth for Snap this year vs 36% for Facebook.  Snap is obviously at a much different stage in its lifecycle as a company vs Facebook and is actually attacking social networking from a different angle – the camera.

We believe investors will have questions over the next year as to what being a “camera company” means.  Philosophically, we think of it as Snap trying to own the tech stack one step above social.  The camera has already established itself as the future of communication.  Snapchat, Snap’s flagship product, relies on smartphone cameras to enable its service.  Without connected cameras, Snapchat doesn’t exist.  By trying to own, or at least influence, the camera layer itself, Snap evolves beyond a social media app into an enabler of communications.  In that sense, Snap’s focus on the camera is not all that dissimilar from Facebook with its experiments with VR and AR.  The difference is Snap appears to be all in.

Trying to own the camera layer may come through multiple products.  Most obvious is software that uses and enhances current cameras.  Snap already does this with products like Lenses.  We expect the company to continue to develop software that utilizes the camera both in core Snapchat and perhaps outside of it as well.  The second camera product is Spectacles, which we view as the most useable AR glasses on the market today.  There is next to no learning curve because the glasses focus on one simple task: recording video through a camera.  Spectacles aren’t the future of AR, but they are a baby step toward the next phase that will add a little more functionality.   Beyond Spectacles, we believe the company is experimenting with other hardware, which may be other consumer wearables or may be products they look to partner with existing hardware manufacturers.

We don’t know how the stock will react tomorrow or over the next year.  What we do know is that the camera is at the centerpiece of communication already, and if Snap can find a way to own the camera they will be rewarded handsomely.

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.

Is Snapchat the Real Augmented Reality Powerhouse?

Written by guest author Lindsay Boyajian, CMO at Augment 

Snapchat has been acquiring companies and releasing augmented reality features, setting itself up to be an AR global leader.

When you think of augmented reality (AR), names like Microsoft Hololens, MagicLeap, Vuforia and Blippar come to mind. When you think of social media, you think of Instagram, Snap, Linkedin and Facebook. However, one of these social media players is an augmented reality company in disguise—Snap, Inc.

Snapchat, owned by Snap Inc., is one of the biggest AR companies today. Over the past few years, Snapchat has been rolling out more and more features to its ephemeral photo sharing app that are blurring the line between our physical and digital worlds.  These features plus a string of acquisitions point to Snap’s ambitions beyond photo sharing.

Snapchat’s evolution

In July 2014, we saw Snapchat’s first move towards AR with geofilters. AR overlays digital assets on the real environment. With geofilters, users could now place location-based image tags on their photos.

In June 2015, Snapchat introduced branded geofilters, allowing brands to pay for custom geofilters to reach Snapchat’s coveted millennial audience. In other words, Snapchat began monetizing augmented reality ads. McDonald’s was the first company to launch a geofilter campaign, and today nearly all the major brands have followed suit. AR has become Snapchat’s secret moneymaker.

Geofilters were just the start. Later in 2015, Snapchat came out with lenses or facial filters. Lenses are filter overlays that augment your face. Snapchat acquired Looksery, a facial recognition startup, to power this feature. This represents one of Snapchat’s first acquisitions in the AR space (Hint: more to come).

In June 2016, Snap made a quiet acquisition of Seene, a computer vision startup that allows users to make 3D selfies from their mobile devices.  Seene can scan and recreate 3D objects on-the-go, which has a number of different AR use cases.

In November 2016, Snapchat took lenses even further when it released a new feature called “world lenses.” World lenses allow users to apply an animation or effect to the environment. For instance, users can overlay falling hearts on the background of their photos.

Each iteration of lenses shifts Snapchat further into the realm of AR and hints at its larger ambition in AR.

Nothing points towards this more than Snapchat’s recent acquisition of AR startup Cimagine. Cimagine allows users to visualize products in the real world environment through their mobile devices.   Snap’s interest is Cimagine’s 3D visualization technology that allows models to be placed and anchored in space without trackers or markers.  With Cimagine’s technology, Snapchat will be able to further enhance the AR experience for users and brands by offering more life-like visualizations.

Is Snapchat becoming a hardware company?

This evolution was just the beginning. In November 2016, Snap Spectacles hit the market. Spectacles are a clear signal that Snap is thinking not only about AR content, but also hardware. Specs are Snapchat’s $130 sunglasses with a camera inside that take short videos for Snapchat. Specs use Bluetooth to seamlessly sync video content from the glasses to your Snapchat app.

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