The Empathy Economy

Op-ed published February 7, 2018 on Business Insider

Throughout history, different eras have begotten different heroes of productivity in industry. In the 80s, the stock broker was the rock star of the business world. In the late 90s and 2000s, it was the computer programmer. For the last decade or so, it’s been the data scientist. As the work of data scientists and engineers creates the Automation Age, the next industrial rock star will be the customer service specialist.

Before you scoff at the idea of what may be considered a lower-level job today, ask yourself what happened to the stock broker? When’s the last time you talked to one or even heard of one? Jobs ebb, flow, and disappear. The importance of a function today is not equivalent to the importance of that same function tomorrow, and it never will be.

Humans have three core capabilities with which robots cannot compete: creativity, community, and empathy. As we enter the Automation Age, where the fear of robots replacing human work is likely to come true, those three skills will enable the future of human productivity. The last of the three, empathy, should well be considered the most important.

Empathy is what most makes us human – the capacity for mutual understanding. As the Automation Age eliminates rote and some not-so-rote tasks, it will create an opportunity for humans to capitalize on empathy. The manifestation of empathy in industry is through unique and memorable customer service, no matter the business. Welcome to the Empathy Economy.

The Empathy Economy is an intentional spin on the Sharing Economy. Just as the Sharing Economy was a byproduct of a super connected world via the Internet and smartphones, the Empathy Economy will arise through the result of job loss from automation. Uber, Airbnb, WeWork, and countless other business have changed the way humans think about asset ownership and even asset leasing. If users own assets, they want to get more out of them. If users need assets, they want instant access to them on demand without the burden of ownership. The Sharing Economy, as with all functional economies, is efficient in matching two complementary desires. The Empathy Economy will similarly match humans or businesses who desire empathic services with those willing to offer them.

We see 3 core opportunities within the Empathy Economy:

  1. Services that augment human empathy: For example, a lightweight CRM tool that enables employees to instantly recognize customers when they walk in the door, remember details about their lives, and know their preferences for service at the business.
  2. Services that build empathy: For example, a simulated environment that puts trainees through various situations to help them understand why another person feels a certain way and how to best serve them.
  3. Marketplaces that match buyers and sellers of empathy: For example, a platform that makes freelance customer service experts available for various tasks that might require a human touch to differentiate and enhance a particular service.

Today’s businesses must adopt automation technologies and embrace the Empathy Economy simultaneously by leveraging empathic customer service specialists as the face of their automated tools. In other words, people will act as a truly human skin on the work being produced by robots.

In the future, H&R Block will leverage AI to automate every customer’s taxes, but it’s also likely that they’ll need a human, who may only have cursory knowledge about accounting, present the sensitive reality that a customer owes the government a few thousand dollars in taxes; or perhaps the joy that they’ll be getting a few thousand dollars in refund. Either way, the human presentation creates a differentiated customer experience that can be distinctly H&R Block. Using only automation as their selling point, which every other tax prep service will also have and may only vary slightly, will necessitate a race to the bottom in price. In this example, H&R Block could benefit by adopting services that help augment and build empathy as the core skill of their customer service specialists.

Another outcome of the Empathy Economy could be Target leveraging a marketplace for freelance workers with specific product expertise and high empathic qualities to deliver orders to local customers with personalized service. Similar to the tax example, this moves the discussion away from price towards experience, which can command a premium.

You may be wondering why empathy is the greatest opportunity in the triumvirate of uniquely human traits. Creativity and community already exist in a structured sense in our societies. Creativity has always been a democracy, but the Internet made the distribution of creativity available to all. There are numerous ways, both online and offline, to share creativity and get paid for it, YouTube and Patreon as examples. These platforms will only become more important in the Automation Age. As for community, traditional institutions provide this now – governments, churches, schools, local businesses, etc. Technology will help these institutions continue to evolve with automation; however, trusting relationships between people will remain the heart of community because, by definition, it has to.  Empathy doesn’t yet seem to have a defined structure for application in our world. We know it’s important and the best businesses find ways to implement empathy into their culture, but it’s still a nebulous, unmeasurable thing. The Empathy Economy will change that.

It’s cliché to say that empathy is in short supply today because every generation probably has the same sentiment. The good news is that automation will force humans to be more human, and the Empathy Economy will create opportunities for humans to monetize a uniquely human capability. True empathy isn’t easy, but it’s the most powerful expression of humanity. In a world full of robots, empathy can only become more valuable.

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.

iRobot’s Earnings Disappointment Doesn’t Change Long-Term Story

Heading into the Q4 print we were confident iRobot would report better-than-expected revenues and guide 2018 sales above street expectations (see note here), which they did, but we incorrectly judged the magnitude lower EPS could have on the stock. Shares of iRobot finished down 30% due to investors concerns with decelerating revenue growth and lower-than-expected profitability. That said, with the revenue outlook being inline with our expectations and the lower earnings forecast being largely attributed to increased marketing and R&D spend (and not price erosion), we remain believers in the long-term iRobot story. Following iRobot’s results our two key takeaways are 1) the domestic robot market is and will remain one of the fastest growing robotic markets over the next 3 years and 2) iRobot will continue to lead the wave of home robot adoption.

20% Growth Through 2020. In addition to providing 2018 guidance that implies 20% year/year revenue growth, iRobot expects this type of growth to continue through 2020. Although investors view 20% growth as a deceleration over prior years, we view this forecast as in-line to our estimates and higher than most longer-term consensus models. Given Management’s history of providing conservative guidance, we think there is room for these numbers to go higher as we make our way throughout the year. Demand will be driven by increased Roomba and Braava sales from both domestic and international homes.

iRobot Leading Domestic Robot Wave. The company announced they will be rolling out a slate of new products in 2H18, which is expected to account for 25% of total sales. While the company did not give much detail on these new products, we anticipate they will enhance both the Roomba and Braava product portfolios. The company continues to heavily invest in R&D, and we believe the company will soon expand their core presence outside of vacuums and wet-floor products.

Link to model here.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. 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.

Tesla Earnings: Continue to Wait… and Believe

Conclusion. Our confidence in Tesla’s ability to capitalize on the EV and autonomy opportunity remains unchanged. Our perspective that reaching this EV and autonomous future will take longer than most think, but be bigger than most think also remains unchanged.

Musk commented that Tesla will, “Productize the factory,” adding, “anyone could have made that car (Model T), but not anyone could make River Rouge (Model T production line).”

Updating our Model 3 thinking. We are factoring in comments from Tesla’s Q4’17 Update Letter that call for an increase in capex largely related to retooling for the Model 3 ramp. The company added on the earnings call that part of this capex spend will include, “significant investment in our required up front for the next phase of Model 3 production… Way more than 50% (of the capex) is the Model 3.” We believe retooling could cause a temporary step down in production in the fall of 2018, and as a result, are lowering our Model 3 production target to 168,400 from 182,000. Our revised numbers are in line with Street estimates as of yesterday’s close. Our weekly Model 3 production number exiting 2018 remains unchanged at 7,150 vehicles. Importantly, our 2019-2023 Model 3 numbers remain unchanged.

Link to model here.

Autonomy. One new insight from the earnings call was Musk’s commentary into why Tesla’s vision suite (camera, radar, and ultrasonic sensors) should eliminate the need for LiDAR. The dumbed-down version is Musk believes in taking the “hard path” and using a sophisticated neural net to solve passive object identification with cameras instead of using lidar as a “crutch.” In the long run, he believes this path will not only cost less and look better, but will produce a superior system capable of seeing through rain and sleet, and performing in more complex situations. This is important given that if Tesla is successful in using its vision suite instead of LiDAR, every Tesla produced today will be upgradable to full autonomy with a software update, which would catapult the company into the lead position in the race to autonomy.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. 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.

Key iPhone X Suppliers Provide Robust 2H18 Outlook

Special thanks to Austin Bohlig for his work on this note. 

Two of Apple’s key iPhone X component suppliers, Lumentum (LITE) and AMS AG (AMS), reported strong Dec-17 quarter results and more importantly provided upbeat 2018 outlooks. Both company’s supply key components going into the flood illuminator and dot projector on the face of the iPhone X (see below), which allows for 3D sensing and enables augmented reality applications such as facial recognition. While Apple recently guided for lower-than-expected iPhone sales in the Mar-18 quarter, we believe the robust 2018 guidance and capacity expansion initiatives indicate two things. First, iPhone X demand is healthy, and we continue to expect iPhone X will account for about 25% of total iPhones in FY18. Second, 3D sensing, as well as augmented reality applications, will remain a core feature and be added into new iPhone SKUs to be introduced in Fall 2018.

Lumentum – Lumentum is the world’s leading vertical-cavity-surface-emitting laser (VCSEL), which is the key component going into the flood illuminator and dot projector. The company reported 3D Sensing revenues of ~$200M, which exceeded the company’s expectation and is up from $40M in the Sep-17 quarter. Due to seasonality, the company expects 3D sensing revenues to be down $60 – 65M in the Mar-18 and Jun-18 quarters. However, the company continues to see strong order flow and aggressively adds VCSEL capacity. But most importantly, Management indicated 3D Sensing volume should “more than double” in 2H18 over 2H17, which we believe a high percentage of these orders will be going into current and new Apple SKUs this fall.

AMS AG – AMS is an Austria-based semiconductor that provides additional optical components for the iPhone X that enables 3D sensing applications. While the company positively preannounced last Monday, they waited to issue guidance until they announced earnings this morning.  In-line with Lumentums comments, AMS foresees a very strong second half 2018, based on currently available forecasts, with substantial sequential revenue growth rates in the second half year, similar to 2017. AMS anticipates high volume ramps in its consumer business to drive this strong expected second half development. AMS also decided to accelerate new internal production capacity for VCSEL laser products in the second half 2018 and beyond. Lastly, AMS increased their 2016 – 2019 revenue outlook to 60%+ CAGR over this time period, which bodes well for the future for AR.

What this means for Apple. iPhone X demand is healthy, and we continue to expect iPhone X will account for 25% of total iPhones sold in FY18. Given Lumentum and AMS strong 2018 outlook, we believe 3D sensing will remain a key feature in iPhone SKUs, as well as augmented reality (AR) applications. However, both companies are beginning to work with more Android related customers, and it is not 100% clear what percentage of these sales are going to Apple. Importantly, both Management’s team’s comments around contributions from new wins, we believe the majority of these sales will continue to go Apple.

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.

Don’t Overthink AAPL: Growing Device Base & Increasing Revenue Per Device

Growing Device Base & Increasing Revenue Per Device. We attribute the after-market reversal in shares of AAPL to investors getting a handle during the call on Apple’s long-term opportunity. Tim Cook went out of his way to reinforce Apple’s massive and growing active device base. To summarize: 1.3B active devices including 240M Services subscribers. Couple this with the iPhone ASP increase of 15% y/y and the Apple story remains very compelling.

Updated Model. We’ve updated our Apple model, available here.

Was 2 New iPhones 1 Too Many? Apple stumbled in it’s most recent effort to expand the iPhone product line with 2 new models in 2017 (iPhone 8 and iPhone X), one potential cause of the iPhone unit miss. Apple sold 77.3M iPhones, below Street estimates at 80M. So, we were wrong; Apple didn’t nail the 2017 iPhone launches. We think it was partly due to the more complex buying decision between iPhone 8 and iPhone X and partly due to the iPhone X’s limited availability in the quarter. However, iPhone X has been the top-selling iPhone every week since it launched, which drove iPhone ASPs up 15% y/y to $796 vs. the Street at $756. Herein lies Apple’s long-term opportunity: a growing active device base coupled with increasing revenue per device.

Herein lies Apple’s long-term opportunity: a growing active device base coupled with increasing revenue per device.

ASPs are rising and Services revenue growth continues (up 18% y/y). Apple remains on pace to double its 2016 Services revenue by 2020. More importantly, however, Services revenue is an important part of increasing revenue per device. Net-net, we think the iPhone unit miss is more than offset by the ASP and Services story.

Key Data Points + Our Take:

  • Apple has 1.3B active devices, up 30% in 2 years. This is higher than the 1.2B active devices most thought.
  • Apple has 240M subscribers across their Services offerings, up 58% y/y and up by 30M subs in the past month. Apple clearly wanted to reinforce its massive, growing, and loyal base of users.
  • iPhone ASP was $796 in Dec-17 vs. the Street at $756 and vs. $695 y/y. This is a material positive as we consider the value per Apple user.
  • The stock treaded water after-market. Reaction tonight is a win for AAPL shares. Keep in mind AAPL is 7% off its all-time high and the company just guided well below expectations. Investors are on-board with Cook’s message that this is about the installed base and Services subscribers. Investors seem to be taking over from traders who had owned AAPL for the iPhone X cycle.
  • We estimate that Apple sold 8.4M Apple Watches in the Dec-17 quarter, up 10% y/y.

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.

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