E3 Leaves VR Fans Wanting More

Fans of virtual reality gaming didn’t hear quite as many announcements as they were hoping to last week at E3. While Sony and PC platforms announced some impressive titles launching in VR, Microsoft was silent about VR despite releasing the most powerful console to date. It was Nintendo however, that made a surprise announcement about its efforts in VR.

During its press conference, Nintendo unveiled that Mario Kart is arriving at a location-based VR with VR Zone Shinjuku, a 40,000 square foot arcade from Bandai Namco, offering 15 different VR games. The facility is set to open on July 14th. One of the most anticipated games to be showcased at the facility, Mario Kart, gives gamers the chance to sit in a go-kart and put on a VR headset, racing their friends virtually. This is Bandai Namco’s second foray into location-based VR arcades, after opening up “VR Zone Project I Can” in Tokyo last year.

Time will tell if Nintendo further adopts the location-based approach, and brings more of its games to the increasing number VR arcades across the world. Location-based VR is a great way to introduce VR to a higher number of consumers. These VR arcades help defray high costs, provide ample space for VR gaming, and offer a fun, communal VR experience. However, given the declining cost of VR gaming, we view this as stepping-stone technology that won’t be the final place for VR gaming. Eventually, VR gaming will be home-based, just as console video-games replaced arcades of the past.

In contrast to Nintendo, Sony continues to release VR content to its PlayStation VR console. At E3, Sony announced major titles in VR including Skyrim and Doom VFR. Previously, Sony’s VR titles were non-major titles that were developed specifically for the VR experience. Major titles reaching its VR platform is a big step forward for VR gaming and a positive indication for the space.

Microsoft has yet to bring VR gaming to the Xbox, instead choosing to place a bigger bet on Mixed Realty, focusing on their new MR platform for PCs coming this fall. When Project Skorpio was announced last year, it seemed all but a certainty that it was a move to compete directly with Playstation VR, and bring VR gaming to the Xbox One. However, Microsoft tempered expectations before E3. Microsoft’s Phil Spencer shared his belief that VR console gaming is typically done in family rooms and needs to have wireless headsets in order for it to be done right. While the newly announced Xbox One X is powerful enough to support VR, owners likely won’t see VR support until 2018. Until then, Microsoft remains focused on its Mixed Reality platform coming to PCs this fall.

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.

Suppliers Heavy Hints on the Next iPhone with Meaningful AR Implications

Last night, Finisar (FNSR) reported the Apr-17 quarter and made comments that all but ensure they will be one of two or three suppliers of VCSEL lasers for the high-end version of the next iPhone. Based on timing comments, we expect the next iPhone to be announced in September and ship in October. VCSEL lasers will add advanced 3D sensing capabilities for augmented reality applications.

What They Said. On last nights earnings call, Finisar management did not mention Apple by name, but they highlighted they expect to see volume VCSEL orders in their second fiscal quarter, which is the October quarter end of this calendar year. The company anticipates shipping “millions” of units during the quarter, but management also went on to say they anticipate unit shipments to be in the “10s of millions” in future quarters, which gives us further confidence 3D sensing and AR applications will be one of the focus features in the next generation of iPhones. In May of this year, Lumentum was the first VCSEL supplier to announce they anticipate volume shipments to begin in the second half of 2017.

We also want to highlight Finisar acknowledged they are shipping VCSEL lasers to multiple customers, but one customer (aka Apple) is accounting for the majority of total demand. We believe Finisar and others supplying VCSEL lasers are supply constraint and shipping everything they can manufacture. We believe Apple has secured a high percentage of all VCSEL lasers created, which we view as a large competitive advantage and will make Apple a leading AR player in the smartphone space.

Advanced AR. Apple is putting the hammer down in AR. The company already has more than 100m AR-enabled iPhones (iPhone 7) in use today, and all versions of the next iPhone will be AR-enabled. Incorporating these high-end VCSEL lasers into the iPhone will enrich the augmented reality experience. Coupled with the release of the ARKit at WWDC in early June, Apple is positioning itself to become a leader in this next generation tech movement. Separately, Apple is cornering the market for the VCSEL sensors.

Higher Margins. We also believe the iPhone enabling 3D sensing will be positive to the company’s bottom line. We anticipate the high-end iPhone SKU will incorporate a low-end and high-end VCSEL laser. The low-end will be front facing, while the high-end laser will be on the back side of the device. We believe the low-end lasers will cost $2 – $3, while the high-end lasers will range from $3 – $4. When factoring in manufacturing costs the total bill of materials could cost ~$20. We believe the high-end iPhone will market for ~$950, which the company will have added ~$100 to the price to incorporate 3D sensing. This nets in an 80% gross margin  up sell to the AR rich iPhone, compared to Apple’s overall gross margin of ~40%.

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.

Amazon Is Building The Future of Retail by Rebuilding The Past

Earlier today, Amazon announced that it has agreed to buy Whole Foods for $13.7B, supercharging Amazon’s food effort. The market for groceries is roughly $500B, of which Amazon will immediately own $15B. Amazon is expected to do a total of $180B in total retail sales in 2018, but could exceed that number as it builds on its grocery platform.

In our piece on The Future of Retail we identified three viable categories in the future of retail: 1) Online Shopping; 2) Automated Brick & Mortar; 3) Empathic Offline Retail. And we think Amazon gets it:

They’re playing the long game, aggressively denying short term gains to establish itself as the owner of the operating system for commerce in the future. But Amazon also gets the fact that not all retail is best suited for the internet, which is why we’ve seen them dabbling in automated brick & mortar concepts.

With its purchase of Whole Foods Amazon is taking another big step forward in its attempt to lead in all three categories.

1. Online Shopping. Check. Amazon is already the clear leader.

2. Automated Brick & Mortar. The Whole Foods purchase positions Amazon to experiment with concepts like Amazon Go in a big way, pushing forward its efforts in automated brick and mortar. As we wrote previously:

This automated model works best for commoditized goods from large chain retailers and grocery stores where price is the primary selling point. Categories in which personalized service, a unique experience, and technical expertise matter less. In these commoditized categories, reducing human overhead means lower prices, which will help retailers defend their territory.

Amazon Fresh was previously available in close to 20 cities in the US. Whole Foods gives Amazon an additional 456 brick & mortar locations from which it can test automated concepts.

3. Empathic offline retail. Whole Foods is arguably one of the best grocery experiences built for scale, leveraging three uniquely human capabilities: creativity, community, and experience.

When it comes to integrating Whole Foods into Amazon’s current efforts, we see the first step as the addition of 1-hour delivery, through Amazon’s Flex network, from Whole Foods. This is likely to take 1-2 years before it is implemented across the entire Whole Foods store base. Next, we see the Amazon Go concept being integrated, although it will be some time before it’s rolled out on a larger scale. We don’t expect Amazon Go to be widespread until at least 2021.

The degree to which Amazon succeeds in each of these three categories is the degree to which they will be the dominant operating system of retail in the future, and they are well on their way. And Amazon sees the synergies between these categories. Whole Foods’ physical assets (real estate, warehousing and distribution capabilities, etc.) will accelerate a retail flywheel for Amazon to expand their brand as the everything store, available everywhere consumers think to shop.

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.

Apple Confirms Self-Driving Car Project

In an interview with Bloomberg, Apple CEO Tim Cook confirmed Project Titan, Apple’s car project. Cook referred to this as “the mother of all AI projects.” While the project hasn’t been a well-kept secret, Apple’s public confirmation is noteworthy. Cook referred to the three specific areas: self-driving technology, the electrification of vehicles, and ride-hailing as “three vectors of change happening generally in the same time frame.”

“We’re focusing on autonomous systems…It’s a core technology that we view as very important…We sort of see it as the mother of all AI projects…It’s probably one of the most difficult AI projects actually to work on.” – Tim Cook

We wrote previously about Apple’s self-driving car project, but there hasn’t been a public statement as clear as Tim Cook’s comments today about Apple’s efforts on the car front.

At the end of the interview, Cook shared: “Autonomy is something that is incredibly exciting for us. We will see where it takes us. We are not really saying from a product point of view what we will do. But we are being straightforward in that it is a core technology that we view as important.” So, how will Apple turn the technology into a product?

“Autonomy is something that is incredibly exciting for us. We will see where it takes us. We are not really saying from a product point of view what we will do. But we are being straightforward in that it is a core technology that we view as important.” – Tim Cook

How Will Apple Go to Market? There are two ways we see Apple potentially bringing its car technology to market. The first option would be to partner with a manufacturer to bring an Apple-branded car to market. The second option would be to focus on developing software and implementing it across as many car platforms as possible.

  • Partner with a manufacturer. Apple could partner with a manufacturer to bring its own branded car to the market, just as they do with the iPhone and iPad. By partnering with a manufacturer, Apple would have design control over the product, and would be able to customize the user experience as much as possible. On the other hand, manufacturing a car is very different than manufacturing a smartphone. Apple could even acquire a car manufacturer to do this. Some think it makes most sense for Apple to acquire Tesla, but we have already written about why this is most likely a fairy tale.
  • Develop software for autonomous vehicles. Another option is for Apple to license its technology to current auto manufacturers for use in their vehicles. Apple could be the OS of the future for cars. This may be the more likely option. In order for widespread adoption of fully autonomous vehicles, cars would need to have hardware and software integrated into their design that would not only operate the vehicle, but also communicate with surrounding vehicles at all times. In this scenario, Apple would expand its presence in the automotive market significantly and further expand the halo effect of their product lineup into autos.

At the moment, Apple’s is likely pursuing both options under the R&D umbrella of project Titan. True to form, they’ll watch this market emerge and enter when the time is right – from both a product and a market standpoint.

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.

Interest In Buying Next iPhone Higher Than Last Year

Survey Shows Interest In Upgrading to Next iPhone Higher Than Last Year. The weekend before WWDC, we surveyed 501 U.S. consumers regrading their intent to purchase the next iPhone, expected to be released early to late this fall (possibly delayed a month, see below for details). Of the 220 current iPhone users we surveyed, 25% plan on buying the next iPhone at release, up from 23% in our previous survey in early March 2017. This compares to last year when our survey found 15% of iPhone owners planning to buy an iPhone 7 at its launch in 2016. The iPhone 7 data point is based on a survey we conducted while at Piper Jaffray in July 2016. 

AR Interest High Among Expected iPhone Buyers. When asked about augmented reality features, interest is high among those expecting to purchase the next iPhone (even though this survey was conduct before Apple’s ARKit announcement on June 5th). We found that 54% of respondents that intend on purchasing the next iPhone indicated interest in AR features, compared to 26% percent in our March survey. Among those not planning on buying an iPhone, interest in AR was much lower at 14%.

AR Interest Low Among Android Users. Overall, just 20% of the 501 respondents indicated interest AR. The message that the next iPhone will have more AR features is resonating with loyal iPhone users but Android users have far less interest in AR. As expected, the 18-29 age group showed the highest interest level in AR at 26%.  

2017 iPhone Should Mark A Step Up In iPhone Growth.  The increase in iPhone growth from the coming iPhone cycle is already factored into shares of AAPL. We are modeling for iPhone unit growth to increase from 0% for the iPhone 7 cycle to 8% for the upcoming iPhone cycle. We expect iPhone revenue growth to increase from flat during the iPhone 7 cycle to 11% for the next iPhone cycle. Revenue growth outpacing unit growth is attributed to an ASP increase from $651 (current iPhone cycle) to $674 due to the addition of a new high-end iPhone SKU with 3D depth mapping which we expect to start around $1,000 vs. today the high-end entry level (128 GB) iPhone 7 which is priced at $869. This new high-end SKU should run about $47 per month on the iPhone upgrade program, compared to $41.58 today for the entry level iPhone 7.

Expect iPhone Announcement In September, Shipping In October. Previously we had expected Apple would announce and ship the new iPhone in Sept. 2017, maintaining their annual fall launch of new iPhone hardware (iPhone 5, 5S, 6, 6S, and 7 each shipped in Sept.). Based on a recent conversation with a component supplier, we now expect the new iPhone to be announced in Sept. and ship in Oct. given challenges with the OLED curved screen. This delay would result in a shortfall in the Sept-17 iPhone units of ~10m units (now expect 39m units compared to the Street at around 49m). We expect 6m units to be shifted to the Dec-17 quarter and 4m into Mar-18. We expect the iPhone will be at supply demand equilibrium earlier in the Mar-18 quarter.

Thoughts On The Name. We have been referring to the next iPhone as “iPhone X”; however, Apple has been simplifying their naming schemes across product lines (e.g., “iPad” and “iPad Pro,” dropping the numerical value to show its position in the lineup). All that to say, we now think Apple will refer to the new iPhone as “iPhone” and “iPhone Plus.”

Additional Survey Details.   

  • Total sample size: 501 U.S. consumers
  • iPhone 7 users: 63 of 501 (13%)
  • iPhone 6s users: 61 of 501 (12%)
  • iPhone 6 users: 64 of 501 (13%)
  • Other iPhone users: 32 of 501 (6%)
  • Total iPhone users: 220 of 501 (44%)
  • iPhone users planning to upgrade to next iPhone: 54 of 501 (25%)
  • More interest in AR: 100 of 501 (20%)
  • Less interest in AR: 80 of 501 (16%)
  • Unchanged in AR: 319 of 501 (64%)
  • 18-29 (19%)
    • iPhone users: 48 of 96 (50.o%)
    • Purchasing the next iPhone: 13 of 96 (13.5%)
    • More interest in AR: 25 of 96 (26.0%)
    • Unchanged interest in AR: 59 of 96 (61.5%)
    • Less interest in AR: 12 of 96 (12.5%)
  • 30-44 (27%)
    • iPhone users: 66 of 135 (48.9%)
    • Purchasing the next iPhone: 25 of 135 (18.5%)
    • More interest in AR: 32 of 135 (23.7%)
    • Unchanged interest in AR: 80 of 135 (59.3%)
    • Less interest in AR: 23 of 135 (17.0%)
  • 45-59 (22%)
    • iPhone users: 40 of 110 (36.4%)
    • Purchasing the next iPhone: 12 of 110 (10.9%)
    • More interest in AR: 22 of 110 (20.0%)
    • Unchanged interest in AR: 78 of 110 (70.9%)
    • Less interest in AR: 10 of 110 (9.1%)
  • 60+ (31%)
    • iPhone users: 64 of 156 (41.0%)
    • Purchasing the next iPhone: 20 of 156 (12.8%)
    • More interest in AR: 19 of 156 (12.2%)
    • Unchanged interest in AR: 101 of 156 (64.7%)
    • Less interest in AR: 36 of 156 (23.1%)
  • Male (48%)
    • iPhone users: 99 of 240 males (41.2%)
    • Purchasing the next iPhone: 44 of 240 (18.3%)
    • More interest in AR: 54 of 240 (22.5%)
    • Unchanged interest in AR: 153 of 240 (63.7%)
    • Less interest in AR: 33 of 240 (13.7%)
  • Female (51%)
    • iPhone users: 119 of 257 (46.3%)
    • Purchasing the next iPhone: 26 of 257 (10.1%)
    • More interest in AR: 44 of 257 (17.1%)
    • Unchanged interest in AR: 165 of 257 (64.2%)
    • Less interest in AR: 48 of 257 (18.7%)
  • Plan to purchase next iPhone 71 of all 502 U.S. consumers (14%)
    • iPhone users: 54 of 71 (76.1%)
    • More interest in AR: 38 of 71 (53.5%)
    • Unchanged interest in AR: 31 of 71 (43.7%)
    • Less interest in AR: 2 0f 71 (2.8%)
  • Not planning to purchase next iPhone 430 of all 502 U.S. consumers (86%)
    • iPhone users: 166 0f 430 (38.6%)
    • More interest in AR: 62 0f 430 (14.4%)
    • Unchanged interest in AR: 289 0f 430 (67.2%)
    • Less interest in AR: 79 0f 430 (18.4%)