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.