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.

Feedback Loup: Snapchat Announces Diminished Reality

On Tuesday, Snapchat rolled out new features to its platform, including an infinite snap timer, looped videos, emoji drawing, and a magic eraser. With the new snap timer and looped videos, recipients will now be able to see a picture or video until they choose to exit the snap. Once the recipient exits the snap, it is deleted. These are nominal improvements but they show the direction and emphasis of Snap’s R&D as well as it’s technical chops in the field of Augmented Reality.

We are most excited about the Magic Eraser feature, an example of Diminished Reality. The Magic Eraser allows users to remove objects from a photo, by scanning the surrounding colors and filling in over a selected area. Let’s play a quick game of Photo Hunt. How many changes do you see?

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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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