Simplicity Series: Augmented Reality

Last week we wrote about simplicity as a driving force behind the world’s biggest technology offerings. We’re extending our thoughts on simplicity into a series that explores the necessity of simplicity in frontier technology. First, we’ll dive into AR.

Simplicity for AR in 2018 must start with a question: “What does AR do?” Not in the literal sense. We all know it overlays digital information on the real world. What the question needs to answer is what undeniable and unduplicable benefit AR confers to its users. What can only AR do?

The smartphone put a powerful computer in your pocket that lets you work and play from everywhere. Apple makes the smartphone so simple anyone can pick it up and start working and playing instantly.

What can only AR do?

The Internet connected you with the world’s information. Google sorts it for you. Amazon lets you buy things you find.

What can only AR do?

The answer isn’t that it puts a computer with the world’s information in your eye. That’s only marginally better, maybe not even, than what we have now. Marginally better is fine as an emerging feature on smartphones today, but it won’t drive mass adoption of AR wearables that people wear all day long.

The problem is more obvious when asked what the killer use case of AR is. To be clearer, a use case the average consumer could engage in every day. It’s not envisioning a new couch in your living room or getting step-by-step instructions or doing facial/object recognition. AR doesn’t have the advantage of email, messaging, and web browsing as the smartphone inherited from the Internet. Because AR is a true paradigm shift in how we interface with computers, we need to rethink communication, information collection, and information consumption specifically for AR. That hasn’t happened in a meaningful way yet.

Our tone here is tough, but only because we think the AR space has been taking a pass at answering this hard existential question in favor of experimentation with hopes that customers figure it out for them. We remain bullish on the future of AR and think the answer to our core question here might have something to do with the relative “nearness” of information it creates. To elaborate, we’ve evolved from a limited keyboard-style interface to a touch interface to a mixed reality interface that might incorporate gestures, thoughts, voice, etc. Interacting with information is becoming much closer to how we interact with the real world. This answer isn’t perfect, but we think it’s in the right direction.

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.

Investing in Enjoy

We’re investing in Enjoy as a counter-automation play on the future of retail. Read our thesis on retail’s future here. In short: retailers must either embrace full automation or compete on experience by focusing on uniquely human capabilities: creativity, community, and experience. We call it “empathic retail.” Enjoy delivers the future of retail by focusing squarely on empathic retail. Enjoy hand delivers products bought online from the world’s premier companies and delivers them with an experience. The service comes at no additional cost to consumers and it’s fast, with nearly 50% being delivered the same day.

Amazon is changing consumer expectations related to the price, availability, and delivery of products and services. But the in-person retail experience is outside of Amazon’s core competencies. Enjoy offers its premier companies (including AT&T, Sonos, DJI, and others) a high-touch, personalized delivery and setup service. Enjoy optimizes the customer experience, reduces returns, and increases customer satisfaction.

At the same time, automation technologies are already replacing retail jobs. Enjoy offers its team of Experts (delivery and setup employees) flexible work, salaried, with benefits – a transformative employment model for the new retail workforce. In our view, Enjoy is creating the optimal go-to-market channel for premium brands in the automation age.

Enjoy’s CEO, Ron Johnson, has spent his career innovating in retail. His experience as VP of Merchandising at Target, SVP and head of retail at Apple, and as CEO of JCPenney, along with his network of leaders at consumer electronics and luxury goods brands, uniquely positions Enjoy for success in these markets and beyond.

We’re excited to be a part of delivering retail’s future with the team at Enjoy.

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.

3 Reasons Amazon Will Buy Target This Year

Amazon is the world’s largest online retailer, about five times bigger in that space than Walmart and its Jet.com subsidiary. Yet despite Amazon’s deep online roots and dominance over Internet shopping, I believe it will buy Target in 2018.

After digging into the realities of both companies, it becomes clear that Amazon buying Target isn’t as bold of a prediction as one might think. Here are three reasons why a merger makes sense.

Offline sales will always be a big part of retail.

It’s no secret that online retail is slowly killing offline. My firm, Loup Ventures, estimates that in the fourth quarter of 2017, about 10% of total U.S. retail sales, or about $125 billion, were online. The longer-term question is: How much of total retail will eventually happen online? Based on our analysis of U.S. retail sales by category (excluding gas and restaurant expenditures), 55% of total retail sales should eventually happen online.

Even if half of commerce shifts to online, that still leaves a massive market offline at 45%. People in the future will still want to pick up groceries at a local store. As retail changes dramatically going forward, the biggest winners will promote both online and offline opportunities.

They both pursue affluent customers.

 Amazon’s acquisition of Whole Foods last year confirmed that the online giant’s focus is on the high-income consumer. Market research firm GfK MRI estimates the median household income for an Amazon shopper is $90,100, similar to Whole Foods at $95,200. Target reports its average shopper earns $87,000. These far exceed the U.S. median household income of $55,322.

By buying Target, Amazon would solidify its dominance of the high-income consumer. Conversely, if Amazon were to acquire a company targeting lower-income customers, such as Dollar Tree, Amazon would steer its focus away from its core consumers. In my years of observing tech companies, I’ve seen that owning a demographic usually yields the best results.

Brick and mortar will get more advanced.

Over the following 10 years, I’d expect Amazon to convert Target and Whole Foods stores to an automated model with few employees. Stores would be monitored by computer vision systems; shelves would be stocked by robots; customers would be helped by service robots that understand natural language; and checkout would resemble Amazon Go locations, where customers simply walk out with their purchases. In this future, the lines between online shopping and automated brick and mortar stores would blur, as cost-focused stores become more like smart warehouses. The few employees working in stores would focus on delivering personalized service based on mutual understanding and empathy, which would enable retailers to differentiate themselves.

Any number of factors could derail such a combination, including government intervention. But sometimes mergers make too much sense to ignore. Amazon buying Target is one such situation.

This note was originally published on Fortune.

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.

The Underappreciated Beauty of Simplicity in Tech

Simplicity is underappreciated. In many things. But most obviously right now in our world of consumer technology.

Simplicity is a requirement of mass adoption. Look at the iPhone, Google, Amazon, and Uber as examples: The iPhone never shipped with a manual. Turn it on. Press the screen with your finger. It just works. Google gives you a box with two buttons. Type what you’re looking for and hit enter. There’s your answer. Amazon lets you order anything you can imagine. Even with one click. Then it shows up on your doorstep a few days later. Even sooner with Prime. Uber: I’m here. Take me there. Ok, done.

None of these products has a learning curve. They’re dead simple to use and they just work. You can make similar arguments for Facebook, Twitter, and Airbnb. Probably not Snapchat, and perhaps that is their biggest weakness.

This isn’t to say that simple products don’t have extremely complex technical underpinnings. Almost no iPhone or Google user has any conception of the software that enables their seamless technology experiences. The part they touch makes the technology disappear.

In this new wave of innovation, technology seems to be embracing itself. Tech is cool. Tech is sexy. And it feels like we’re trying less to hide tech with ease of use. With a friendly, non-tech face. That’s a mistake. In the consumer world, AI, robotics, VR, AR, even cryptocurrency, none of these will see mass adoption without the same simplicity employed by the incumbent giants.

Simplicity is also underappreciated in investing. It’s easy to overthink things and build reasons why something can buck the reality of otherwise. We’re trying to employ the concept of simplicity in our investments. We’re not afraid to invest in complex tech, but when we do, we make sure the tech hides behind a friendly front that’s simple enough for mass adoption.

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 Readies to Fight for Your Monthly Video Wallet Share

Conclusion. Get ready for another $10 a month drag on your credit card. It’s a rebranded, all in one Apple video and music offering in 2-3 years.

An Emerging Area of Investment. It’s no secret that original content will be an emerging area of investment for Apple, given it will boost the increasingly important Services revenue line. The good news is the trend of more cord cutting is undeniable and consumers paying for multiple monthly streaming services. Multiple streaming services means there will be a handful of content provider winners. The bad news is Apple’s efforts in content have been limited to “learnings” (Carpool Karaoke and Planet of the Apps). We think that will change over the next 5 years as Apple ramps its original content investment from about $500m in 2017 to our estimate of $4.2B in 2022. It’s worth noting this will still lag our 2022 estimates for original content spend (excludes catalog spend) by Amazon at $8.3B which will likely surpass Netflix at $6.8B.

Fighting To Reach 75m Subs. We define a winning content platform as having 75m+ monthly subs. That’s a tall order given it’s a crowded field with more than 200 subscription video services in Sep-17 (Parks Associates). These video services are working to catch up to the creative achievements of existing players. In 2017, HBO won 29 Emmys, (most for the 17th straight year), Netflix won 20, NBC 15, and Hulu 10. Looking at monthly subs, today’s leaders are Netflix (estimated to end 2017 with 115m subs) and Amazon (~80m global Prime subs). Hulu is the 3rd largest with 12-15m U.S. subs, but that doesn’t clear our 75m hurdle. Apple should be able to quickly expand their sub base given they have a running start with just over 30m Apple Music subs that will have access to the video offering for the same $10 per month. Even though Apple employs the “iTunes Store” nomenclature to sell most of its video content, we expect an all in one offering (music and video) to take the form of a rebranded Apple Music sometime in the next 2-3 years.

This note puts Apple’s content ambitions in context with the other players.

Apple. With over 30m Apple Music subs, Apple aims to bundle the music offering with an expanded selection of original content video (essentially two shows today) and will steer clear of license catalog content. Apple cares about original content because it will grow Apple’s Services business. Services will account for about 14% of revenue in CY17, growing at a high-teens rate for the next several years, which is more than double the growth rate of Apple’s hardware business. Separately, Services carry a gross margin which is around 2x Apple’s overall GM of 38%. We note content margins are slightly higher than Apple’s current business based on other streaming services’ margins that are around 45%. As Apple continues to invest in original content over the next few years (we estimate it will be around $800m-$1B in 2017), Services gross margin could decline by 3-5%, which would pressure overall Apple gross margin (currently at 38%) by about 0.5%. We expect will generally have a positive view of this growth vs. margin trade off given this is an investment in a measurable revenue generating in addition to Apple’s core business.

Adding Talent & Shows. Apple announced in early November they are developing a new TV show for its streaming service starring Jennifer Aniston and Reese Witherspoon. They beat out bids from Netflix and Showtime for the rights and could possibly spend over $10 million an episode, according to WSJ. The show, which doesn’t have a script yet, will follow the lives of morning news talk show anchors (think Today Show or Good Morning America). This is the second major content announcement for Apple recently, after announcing it is teaming up with Steven Spielberg to reboot his Amazing Stories series. On top of these two upcoming shows, Apple has been filling the ranks of its programming team with experienced entertainment executives. In late October Apple hired Jay Hunt, a rock star in UK original content, and in June hired Jamie Erlicht and Zack Van Amburg from Sony. Separately, these hires tie back to the acquisition of Beats and Jimmy Iovine joining Apple. Iovine was instrumental in bringing Erlicht and Amburg to Apple and has been the point man for Apple’s push into the original programming. Iovine has deep knowledge and a wealth of experience in the music industry — we consider him a “tastemaker” — and will likely work to expand their video offering into original programming, alongside their existing audio offering.

Rebranding Apple Music & iTunes. Obviously, what is offered with ‘Apple Music’ and in the ‘iTunes Store’ is more than just music, and is another data point Apple lags behind on name changes. Looking back, they were ‘Apple Computer, Inc.’ until 2007 when Steve Jobs decided to ditch ‘Computer’ to better reflect the products the company sold (the first iPhone model was released in 2007). In 2016, they dropped ‘Store’ from their physical retail locations, indicating the stores are more of an experience than simply a place where you buy things (e.g. Apple Fifth Avenue, Apple Lincoln Park, or “I need to stop at Apple”).  With the rebranding and expansion of its content library Apple’s positioned to be a player in original programming.

Netflix. With 115m subs globally  (54m in the U.S) and expected to spend $7-8B in content in 2018, Netflix is the gold standard for over-the-top original programming. Over the years they have won 37 Emmy awards on 128 nominations, and hoping to increase that as they are expect to release 80 original films in 2018. Netflix’s strategy is to keep a steady stream of diverse content coming, as opposed to HBO for example with a few high-profile releases. They certainly have those prestige shows – Stranger Things, Narcos, The Crown, to name a few – but that is not the (sole) objective. Instead, Netflix focuses on offering a content library with a broad range of appeal to its diverse subscriber base, seeking overall commercial success ahead of critical successes here and there. They’re also rolling out this strategy internationally by continually entering new markets and even offering original shows in the local language for those international markets. Currently, native-language shows are available in Spain, Japan, Mexico, South Korea, Brazil, France, and Italy. Netflix has the largest library, budget, and geographic reach of the streaming services and will continue to be a formidable force for many years to come.

Hulu. Subs of 12-15m, U.S. only. Hulu will spend around $2.5 billion on content in 2017. While Amazon and Netflix will both spend more than twice that this year, it’s important to remember that Hulu is only available in the US, while Amazon and Netflix are both distributed internationally. Hulu also is not aiming to be a leader in original programming, instead using it to supplement their focus on licensing quality content from major TV networks. However, they have still had success with their original programs. The Handmaid’s Tale won an Emmy for Outstanding Drama Series, the first such award for a pure streaming service. They have begun bundling their service with others’, notably offering college students both Hulu and Spotify Premium for only $4.99/month. They have Cinemax and HBO add-ons to their service as well, though there are no discounts involved and are simply integrated into the Hulu app. Hulu’s approach is to offer as much quality content as possible, both originals and programming licensed from major networks (recently added 7,500 episodes in Q3).

Amazon. Subs of -90m Worldwide. We believe Amazon Studios’ content spend is budgeted at $4.5 billion for 2017, and they have recently communicated will increase in 2018. On the Sep-17 earnings call, Amazon said they were “bullish” on video given it helps drive more engagement and purchases on Amazon. Prime Video is only available to Amazon Prime members, and Prime members (as expected) spend about 3x more money than non-members. Amazon recently announced they’re expanding Amazon Studios, even after they’ve had management shakeups in the unit in the past month. Amazon Studios’ head resigned amid sexual harassment allegations, and they’ve added new heads of both scripted and unscripted content. Coupled with these management changes is a strategy change. CEO Jeff Bezos had indicated he’s looking to find a high-profile series with global appeal, and recently acquired the rights for a TV show based on J.R.R. Tolkien’s writings (i.e. The Lord of the Rings). Amazon paid $200-$250 million for the rights to the Tolkien IP (Bezos paid $250 million for The Washington Post in 2013), and will shoot two seasons for a reported $100 million each, bringing the financial commitment to nearly $500 million. This has the potential to legitimize their video entertainment ambitions in the eyes of non-Prime customers.

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.