Snap’s Pain is AR’s Gain

On Wednesday, Snap reported earnings for the first time. Most investors saw Snap’s results as a disappointment, primarily because they missed on revenue and didn’t meet DAU expectations. Investors expected Snapchat to reach about 168 million DAUs, but they only reached 166 million DAUs. That’s bad news for Snap, but good news for the field of Augmented Reality.

Competition is Heating Up in AR. Facebook is going directly at Snapchat with Instagram Stories. Since launching in August 2016, Instagram Stories has eclipsed Snapchat in DAUs. Facebook and Instagram understand the importance of AR in the future, and made a commitment to invest heavily in the area.

At F8, Mark Zuckerberg threw down the gauntlet, making it very clear that AR was an important area for Facebook and Instagram in the future. Facebook has taken an open approach to its camera, giving developers a set of tools with which they can create apps that run on Facebook’s camera platform. By opening this up, Facebook will see more, and better AR content within its application. Snapchat will likely follow suit and open up its camera for other developers as well.

Ultimately, the increase in competition between Snapchat and Facebook will push AR forward faster.

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.

Facebook Planting A Flag In AR

Facebook reported Q1 earnings last night and briefly discussed its augmented reality and virtual reality efforts on the call. Following the trend of F8 last month, CEO Mark Zuckerberg spent more time talking about augmented reality than virtual reality. Zuckerberg reiterated that the camera is the focal point of near-term AR and made it sound like Facebook is unashamedly taking a page out of Snapchat’s playbook as a “camera company.” Facebook’s opening up of the camera to third-party developers is a play to establish the company as the platform where AR developers go to create applications, although we believe that Apple and Google’s ownership at the OS layer will enable the richest application development.

Zuckerberg also highlighted computer vision applications beyond the type of facial manipulation that is so popular in social now. He mentioned the ability of the camera in Facebook to recognize objects in the real world and then give the user the ability to interact with them to receive information or even make a purchase. Facebook, like Google and Apple, should have a real play in object recognition, but the interesting thing about this concept is that it expands the use cases of Facebook beyond communication.

The reason that filters and facial masks work well in social is because they’re meant to be shared. Using the camera within Facebook or Instagram to get product information or make purchases is a departure from the core use case of the platform. It will be interesting to see how Facebook’s vision differs from Google’s given their natural play on organizing the world’s information.

While we expect Facebook to keep investing in both platforms, the slight tone shift says that Facebook intends to be a major player in AR despite being late to the game.

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.

Facebook Pushes Further Into AR

In an interview with Recode following Facebook’s F8 conference, Mark Zuckerberg laid out his rationale for Facebook’s big bet on augmented reality:

“Think about how many of the things you use [that] don’t actually need to be physical. You want to play a board game? You snap your fingers, and here’s the board game. You want to watch TV? You don’t need a physical hardware TV, you buy a one-dollar app ‘TV’ and put it on the wall.” – Mark Zuckerberg

To push towards this future – and in an attempt to own the underlying technology – Facebook launched its “Camera Effects Platform,” an open platform for developers to build AR-features and lenses for the Facebook in-app camera. Zuckerberg also confirmed to Recode that Facebook is building “AR hardware” and shared his thoughts on the future of AR and VR; among them:

  • There will be demand for separate VR and AR products in the future.
  • The technology doesn’t yet exist to create the AR glasses that industry leaders are envisioning.
  • Building VR products today will help build the AR products of the future.
  • AR will be a bigger business than VR.

Our take: AR will enhance the smartphone, then replace it. It’s consensus that AR will be bigger than VR over at least the next 10 years — and we agree. AR will enhance the smartphone, then replace it in that time frame. But if you look out further than that, perhaps 30+ years, the immersiveness of VR has the potential to be so good that it rivals base reality. This will require advances in both artificial intelligence and neuroscience, not just digital enhancement. If VR can create alternate worlds as rich as the real one, we think the opportunity would surpass anything humans have created to date.

Facebook gets it, and they are investing accordingly. In fact, the biggest players in the space will collectively spend over $51B on R&D in 2017, of which we estimate $4B will be AR-related spend.

From Google’s work on Glass (2013) and Tango (2014) to Microsoft’s investment in Hololens to Apple’s uncharacteristically vocal pursuit of AR as a core technology, the biggest players are determined not to miss out on the next dominant computing platform and the AR technology underneath it. In fact, in our assessment, Facebook lags behind other incumbents including Google, Apple and Microsoft. But they’ve got a foothold in social and, today, AR is expanding through social – the most forward-thinking AR application is Snapchat. Everyone else is following fast and F8 is a clear indicator that Facebook is doubling down on AR in the race to own the OS of the future.

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.

AR Is Going to Be Apple’s Next Hit

Apple is increasingly focused on being a dominant player in augmented reality (AR), and for good reason: The future of the company depends on it.

AR includes any technology that uses digital information to seamlessly enhance the real world. Over the next 10 years, AR will replace the screen as we know it, including those of smartphones and tablets. Apple generated 69% of its revenue from the iPhone and 7% from the iPad last quarter; additionally, the company takes a cut of all software sold on those platforms. If Apple doesn’t find a way to dominate AR, it could see three-quarters or more of its business disappear as new AR-focused hardware supplants the smartphone as our interface to the world.

The good news for Apple is that it’s culturally built to make the move from the smartphones of today to the AR-optimized smartphones and wearables of the future.

AR is delivered through our smartphones, and many of us use the technology without even thinking about it. For example, Snapchat’s lenses allow users to change what their face looks like in messages, adding dog ears or an aquarium background. Another example is the Pokemon Go craze of 2016; gamers visited real-world locations to catch characters in the game.

These early applications may seem gimmicky, but the AR of the future will enable far more utility. Use cases like dynamic visual how-to manuals for hands-on work, facial recognition to help recall details about a relationship with someone you’re with, earphones that filter out background noise so you can only hear your conversation in a noisy environment, and clothing that adjusts its temperature based on the weather will make us wonder how we ever lived without true AR.

Google, Microsoft, and Facebook are also competing in the AR space. While Google holds an advantage in building up a data base to use with the technology, Apple holds a trump card over all the others: design.

To enable persistent, seamless augmentation of the real world, compelling AR will require the adoption of wearables. The most talked about device for AR delivery is some form of connected glasses. While glasses will likely be an enabler of AR beyond the smartphone, audio devices, watches, and even connected clothing also belong in the AR category. As with all clothing and accessories, consumers will require wearable AR devices to look fashionable, unobtrusive, and not obviously a computer (Google Glass failed at all of these). Therefore, design, not function, is the most important factor for AR to make the leap from a smartphone feature to the computing interface of the future.

No one makes more fashionable electronics than Apple. Neither Google nor Microsoft has the core design competency to create compelling consumer product designs for wearables, which means they will most likely be relegated to primarily providing software. That puts Apple in the familiar position of integrating premium hardware and software.

We’ve seen this game before. Microsoft dominates PC market share, with Apple a distant second. Google’s Android dominates smartphone market share, with Apple again a distant second. In both cases, Apple offers the best user experience by controlling both the hardware and software, which allows the company to capture an outsized portion of industry profits relative to their total unit share.

So what’s next for Apple in AR? True to their typical pattern of innovation, Apple is taking baby steps. First, AirPods, the company’s new wireless earphones, represent an early AR product that enables a constant connection with the voice-activated personal assistant Siri. The AirPods show Apple’s design advantage and remain limited in supply given the high demand for them. Second, Apple announced its Clips video app last week, which lets users add effects to video messages like they can with Snapchat’s lenses. Third, the next iPhone, coming this fall, is rumored to include a 3D mapping chip that would enable Apple and third-party developers to interact with a user’s environment in new ways—Apple’s first AR-optimized smartphone. The AR-optimized smartphone bridges the gap from the smartphones of today to the AR wearables of tomorrow, extending the runway of the smartphone as the predominant AR device for the next three to five years.

Beyond these baby steps, Apple has been uncharacteristically vocal about its interest in AR. In February, CEO Tim Cook said he views AR as “a big idea like the smartphone.” However, Cook also admitted, “AR is going to take a while because there are some really hard technology challenges there.” The main challenges include miniaturization of the components necessary to deliver a high-quality experience and battery capacity. Apple is probably already working on a wearable glasses product, but 2019 would likely be the earliest we see Apple Glasses for one reason: user experience. Apple will not release a product that is half-baked and provides a poor user experience. A two-year wait for Apple Glasses may be disappointing, but Apple has shown that it is comfortable entering a market well after its competitors so long as it offers a better product.

Steve Jobs killed off Apple products that weren’t exceptional because he knew that if he didn’t do it, someone else would. That guidance remains deeply ingrained in the company’s DNA. Apple’s AR dilemma isn’t whether or not to kill the iPhone, but how long it will take the company to viably do so. It’ll be worth the wait.

This note was originally published on Fortune.com

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.

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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