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.
A few quick notes to explain the rankings. First, we didn’t rank camera even though that is a key factor, because we believe camera hardware is already commoditized. Every one of these players will have access to a relatively high quality camera in their OS efforts. By category:
- UX design: We ranked the companies by their current capacity for UX design. On this basis, Apple ranks first given their ability to make simple, user friendly software products.
- Maps: Having a core competency in Maps means owning proprietary map data. Google is far and away the leader; Apple and Microsoft are the only other players providing mapping services. Facebook leverages Here for maps.
- Informational data: This category intends to rank how much purely informational or knowledge data the companies have access to. Again, Google is the obvious leader given its indexing of the web. Microsoft is second with Bing. We give Apple, Amazon, and Facebook lower data scores given that they do not focus on broad information collection like a search engine, but do have to domain specific data. Amazon, for example, likely has the best collection of commerce related information data of any of these players.
- Social: Unsurprisingly, Facebook has access to the best social layer for an AR OS, followed by Snap. We gave points to Google for Gmail/Hangouts, Apple for iMessage/FaceTime, Microsoft for Outlook/Xbox, and Amazon for Twitch.
- Developers: Given the rapid growth of mobile payouts, we ranked Apple and Google highest for developers. We believe they also benefit from a “cool” factor that Microsoft lacks, likely because Microsoft isn’t meaningful in mobile. We ranked Facebook slightly behind given that many web developers integrate Facebook into their services. We ranked Amazon 5 for its developer relations through AWS, although those developers aren’t specifically for an Amazon platform in the same way as the other players.
- Content: We believe that YouTube, with over one billion hours of video viewed a day, makes Google the top content platform, followed by Amazon. We rank Facebook third given the rapid growth of video on their platform. Snap holds its own again the giants through its broad partnerships with media groups to create content for Snapchat.
- Payments: We ranked payments based on technology, not adoption. While adoption is important, we believe having underlying payments tech is more important than adoption in building a new OS. We ranked Apple highest with Apple Pay and its hardware based security solution, which we view as slightly more secure than Google’s Android Pay or Microsoft Wallet, as they are cloud-based solutions. Facebook and Snap do not currently have mobile payments solutions that extend beyond their platforms.
We realize that spending doesn’t equate to success, but we view spending as a proxy for how determined these companies are to win the jump ball. The five biggest players in the space will collectively spend $51b on R&D in 2017.
A Closer Look At The What The Key Players Are Doing Now:
- Google: Google was an early experimenter with Glass (2013) and Tango (2014), though neither of those efforts have established an AR OS. While it’s easy to criticize the discontinuation of Google Glass, it simply turned out to be a before-its-time experiment. Tango, on the other hand, looks like a for-its-time experiment. There is already one Tango-enhanced device: Lenovo’s Phab 2 Pro and Acer has also developed a Tango-ready phone. Both devices utilize three rear-facing cameras to enable Tango’s AR experience. We see Google as the most likely winner for the open AR OS, which could evolve from a combination of Android and Tango, augmented by its machine learning efforts. Google will likely also make its own hardware in a limited fashion like it does with “hero phones” today (e.g., Pixel).
- Apple: Apple has aggressively let the market know that it intends to be a player in AR. Tim Cook has made public comments about the company’s interest in AR six times in the last seven months. The next iPhone, if it integrates a dedicated 3D mapping chip as expected, could be the first AR hardware to gain mass adoption (more than 100m units a year). The iPhone’s new chip will not only enable developers to create unique AR experiences on the iPhone, but Apple may also show off the capabilities of the chip with help from Prime Sense and Metaio, two of the company’s more recent AR software acquisitions.
- Microsoft: Microsoft may be the furthest along in AR today with the Hololens and its Windows Holographic OS. Philosophically, we believe that Microsoft knows it missed mobile despite being one of the early players in the space with Windows Mobile. Thus, we think the company is determined not to miss AR. The biggest challenge for Microsoft will be that its doesn’t quite match up to Google in most of the core competencies to win in AR. Microsoft’s best competency lies in productivity, which we don’t view as a necessity to win the AR OS battle.
- Facebook: Facebook was early to recognize the opportunity to own an OS with Oculus. In 2014 at the time of the Oculus acquisition, Zuckerberg commented, “We’re making a long term bet that immersive virtual and augmented reality will become a part of people’s daily lives.” Over the past three years Zuckerberg has been Oculus’s headline product evangelist, which emphasizes his determination to be a force in VR & AR for the long term. Zuckerberg has also characterized VR as 5-10 years ahead of AR. While there is definite overlap between VR and AR – and we believe Facebook is experimenting on both – it seems the company is more focused on VR at this point. We think this makes sense given the company’s relative weaknesses in the AR stack (maps and informational data), which are less relevant in VR. Social is their core competency, which, alongside content, are the two most important elements to winning the VR OS layer.
- Amazon: We don’t expect Amazon to make a play on AR wearables, although we do think they are a player in AR through Alexa, an open OS. Alexa-powered devices will eventually include cameras that will enable computer vision, giving Amazon the ability to interact with both speech and sight. Bigger picture, we believe Amazon wants to maintain its authority as the OS layer for commerce. They will insert themselves into both open and closed AR platforms in the future and they don’t consider owning the platform as an imperative.
- Snap: Communication is a key use case for AR, which represents Snap’s biggest advantage. The camera is already the basis for communication today, not text. That trend will be even more pronounced in the future. Snap’s focus on the camera as a communication tool gives it a singular focus around which to develop great experiences. Spectacles are an early example. However, it’s hard to envision Snap winning the AR OS battle given that they can’t offer incremental features beyond social to developers. For this reason, we think it is Snap’s goal to do one thing extremely well: communication in AR. In this sense, they could be an intermediary between developers and the larger OSes that enables unique AR functionality beyond the tools created by the OS owner. We still view this role as highly valuable, but not in the same league as owning the OS itself.
Putting It All Together
Maybe our conclusion is disheartening: in the foreseeable future, some combination of Google, Apple, and Microsoft is likely to win the AR OS race. While not exciting, it’s logical. Apple and Google, prior OS winners, won the mobile layer. Part of the reason is that these shifts are well defined and the existing players are carefully positioning themselves to be sure that they have a seat at the table. The good news is that the future won’t always be owned by the incumbents. As we move away from purely digital technologies into ones that combine the sciences — biology, chemistry, psychology – the opportunities for new major players will emerge.
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.