As a new fund, we think it is important to share how we view the world beyond our long-term purpose to pursue The Future Perfect. Our Philosophy Series details our most important learnings from our time covering the Internet space and how we plan to transfer that knowledge to venture investing.
The 5 Focuses
There’s a famous story about Warren Buffett helping his pilot set priorities in his life. Buffett advises the pilot to make a list of all the things that he wants to accomplish in life. Anything that comes to mind, even if the list is 100 items long. Then Buffett tells the pilot to take that list and narrow it down to the five most important things. You only have capacity to truly focus on five things in your life. Whether that’s family, work, hobbies, etc. They all require resource commitment. All the other things that didn’t make the top five are your ‘Stop Doing’ list. You should avoid these things at all cost because they will only serve to distract you from your more important goals. While this is great advice for individuals, we think it is equally important for companies, from small startups to Fortune 100s, to establish their five focus areas. And a company’s five focuses should be driven by their greater purpose — their mission statement. In this note, we go through Apple, Google, Facebook, and Amazon’s five focuses and how they will impact the VR, AR, AI, and robotics spaces on which we are focused.
Apple has taken some flak in the past regarding its mission statement. While the company does not seem to have as clear a statement as Google, Facebook, or Amazon, we believe it is to, “Make the best products on earth, and leave the world better than we found it.” This mission statement makes it a little more difficult to relate to Apple’s five focuses compared to the other three companies we analyze, but here’s what we think they are:
- iPhone/iOS. Apple has always been about integrated hardware and software, thus its hard to separate iPhone and iOS. They go hand-in-hand. iPhone is Apple’s most important product because it is the best smartphone on earth, following in their mission. iPhone and iOS are also a lead-in for Apple to participate in emerging technologies like VR and AR. The phone will be what ultimately powers a Daydream-like VR offering, which we expect in the next two years, and it already powers AR applications from third-party vendors. We continue to believe the next iPhone will have additional AR features including a chipset dedicated to providing AR functions. VR and AR are the next new categories where Apple can create the best products on earth.
- Services. We’ve already written a lot about Apple’s Services business. With the App Store, Apple proved that making great products doesn’t stop with just the hardware and software, but also requires great services. Additional offerings like Apple Music and Apple Pay lock iPhone users further into the platform by making their lives better. Like Amazon with Prime, Apple seems to realize that a truly compelling service experience can’t revolve around just one key offering. Prime was originally about fast shipping, which is still the cornerstone, but now also includes streaming video, music, book rentals, and more. Amazon stated in its 2015 10-K, “We want Prime to be such a good value, you’d be irresponsible not to be a member.” We believe Apple is embracing a similar philosophy with Apple Music by adding video content, including original programming. We expect Netflix to spend $7 billion in content in 2017 and, while we expect Apple to increase its content spend gradually over several years, the company has more than enough resources to participate in the same way.
- Machine Learning/AI. Apple has made no secret of its intentions in machine learning. Apple stated in a letter to the NHTSA (National Highway Traffic Safety Administration) that the company is “investing heavily in the study of machine learning and automation, and is excited about the potential of automated systems in many areas, including transportation.” Based on a leaked presentation about Apple’s efforts in machine learning, we broadly think of the company’s AI products in three buckets: digital assistant, image processing and prediction, and health. The first bucket touches us most today: Siri. While we believe Apple is investing in improving Siri’s capabilities via natural language processing, we think Apple’s digital assistant is really the iPhone. Siri is just a component of that. The iPhone via iOS already offers alerts for travel time with traffic, it finds meetings in your email, as well as app suggestions. Thus Apple’s investments in digital assistant technology will come across multiple products, not just Siri. Second, image processing and prediction ties directly to efforts in both AR and transportation, where Apple needs to understand the world around you and process those image-based inputs to perform actions, whether to overlay information or drive a car. These investments may come to light in the next iPhone with new AR features. Finally, the most unique of the three is health. We don’t believe any other major tech company is investing in machine learning in the health space to the same degree as Apple. This seems to speak directly to the idea of leaving the world “better than we found it.” Longer-term, health data can actually make the digital assistant side more effective because it gives it biological feedback, perhaps a proxy for body language, that the assistant misses today.
- Next-generation Products. We believe Apple is exploring three new product categories: a car, AR, and VR. Much has been written about Apple’s car efforts, Project Titan. There are two schools of thought related to Titan. The most obvious is that Apple plans on launching a car, although, as we’ve learned in the past, just because Apple experiments with a new product doesn’t mean they will launch it. Apple could decide to abandon the car project if it doesn’t seem feasible. Another possibility is that Apple just releases software that controls a car, leaving hardware up to a partner. This seems antithetical to Apple’s philosophy of integrated hardware and software. It’s hard to predict what way the car could go, but the market opportunity is undeniable. If Apple sold as many cars as BMW (1.9 million units in 2015), it would represent $130 billion in revenue (~$70k ASP). Aside from the car, we’ve already written about AR and VR above. It’s clear Tim Cook views AR as the bigger opportunity for Apple. We believe the company is experimenting with dedicated AR wearables, but still don’t expect one for the next few years.
- Mac. Mac is Apple’s second most important product after iPhone and is the best computer on earth. Mac is a legacy product, which we could see replaced by VR or AR in importance for Apple in the next decade or so.
Non-core priorities for Apple:
- Apple Watch. The Apple Watch is the best smartwatch on earth, but it’s still an accessory to the iPhone. Limitations on battery power prevent it from being something more and we see the watch being tethered to the phone until at least next year. These are the same limitations that prevent us from having compelling AR glasses, the early versions of which are likely to start as tethered devices themselves. Philosophically, a device that relies on another, more powerful device for its functionality can’t be revolutionary until it stands on its own.
- iPad. We view iPad as a byproduct of iPhone and iOS. The iPad is basically just a large iPhone. This isn’t to say the iPad doesn’t fall under the “best product” on earth mission because it is the best tablet on the market at its price point, but we don’t believe Apple views iPad as a core opportunity like the other five focuses. The company can continue to leverage advances in the iPhone and iOS to sustain iPad as a great product without spending additional resources. We note that iPad unit sales have declined for the past 11 quarters straight, the surest sign the product isn’t a core focus.
Google’s mission is to “Organize the world’s information and make it universally accessible and useful.” For this discussion, we are considering Google core, not Alphabet, it’s parent company. More on that later. We view Google’s five focus areas as:
- Search. The foundation of making information accessible is making it searchable so humans can find what they are looking for. This includes Maps as location data is fundamental to an end-to-end search experience. Search also includes the evolution beyond traditional web search — a combination of machine learning and AI elements that deliver information through other interfaces, like voice, as well as pre-cognitive delivery of information, i.e. providing information to people before they ask. An example is traffic affected time to the next appointment on your calendar.
- Android. A ubiquitous and affordable mobile computing platform is critical to making information accessible to all people and useful at any time. Android extends beyond the smartphone today to VR and AR through things like Daydream and Tango. Like Apple with the iPhone and iOS, we view Android as Google’s window into continued development in the VR and AR spaces to power platforms for future information consumption. Thematically, AR may be more important to Google than VR as it more directly enables the mission of making information universally accessible and useful.
- Machine Learning/AI. We view Google as the leading machine learning and artificial intelligence company in the world. Machine learning has evolved as the most recent five focus for Google. The company has numerous machine learning products including Google Cloud ML Platform, TensorFlow, and DeepMind. These are important to Google’s mission because they make information more accessible and more useful given better text processing, image enhancement, natural language recognition, etc.
- YouTube. Entertainment and information have always gone hand in hand, whether the platform is written word, newspapers, magazines, radio, television, or internet video. YouTube is not only the ultimate digital entertainment platform, but the ultimate how-to and video information platform. Video makes information more useful by combining it with visuals.
- Adtech. This one may seem strange, but Google’s ad products in many ways enable content partners to make their information free, thus more accessible. Those products then provide Google incremental revenue, which it can invest in improving other products that make information accessible and useful. We believe Google has the best end-to-end ad stack in the world from supply to exchange to demand.
Non-core priorities for Google:
- Social. Google+ famously flopped, despite significant investment and PR. They talked the talk, but didn’t walk the walk. In retrospect, that outcome should have been obvious. Social could never be a top five priority because it doesn’t improve the accessibility or usefulness of organized information. Adding a human sharing element to information distribution creates a bottleneck to accessibility and usefulness. In a social network, the information you have access to is only as good as the information known by your network, an inherent limitation. Perfectly accessible and organized information means that you don’t need to find the right person to ask for it. That is the old way of doing things that Google is trying to fix. Since social did not have the qualities to deliver on Google’s core mission, it could never replace one of the existing five core priorities that all do.
- Gmail. Email in a lot of ways is pre-social social. Better search is the key function today in Gmail that maintains it as the best email platform, but that’s really an extension of the Search priority. Gmail’s path to dominance had some luck in that it was launched in the mid-2000s where the last generation of heavy email users were able to get new user names that were crowded out of the legacy Hotmail and Yahoo! Mail platforms. “Unlimited” message storage was a cherry on top. The product execution was and still is great, but the superior search function only makes information you have in Gmail more accessible and useful to you, not the world. It’s not the world’s information. We don’t view Gmail as a top five priority at Google and we don’t think most people would argue that statement. Note that Gmail is an example of when a powerful company can leverage its capital and brand, with a little bit of innovation and luck, to find a way to dominate a stagnant market with relatively little startup competition.
- Chrome. Like Gmail, Chrome shook up a stagnant market with little startup competition. The browser has historically been the window through which you can access the worlds information, but that window has always been “free” as a part of a complete operating system. Microsoft antitrust issues aside and no Windows pun intended. Really, Chrome is becoming a feature of Android that just happens to be available on other platforms. Making the world’s information more accessible and useful needs to work for all of those windows on all of those platforms, not just one. So owning the browser market in and of itself doesn’t further the grander purpose. Google has never been afraid to show an industry how to do things better, even if the intention isn’t to build a new business. Nexus is a classic example — Google’s effort to show the industry that Android devices could compete with iPhone. Then we got the Galaxy from Samsung. Fiber is another example of a business that wasn’t a focus and was more to push existing competitors to deliver faster Internet speeds. And it seems to have worked. Whether Fiber survives or not is irrelevant. Chrome showed the industry and consumers how fast a browser could be. It showed us the power of extensions. Every once in a while, one of these how-to’s will stick and Chrome stuck.
A note on Alphabet:
We think Google recognizes the prioritization issue perhaps better than any other company in the world, given their long interest in moonshots beyond the core business. That is why they formed Alphabet — to separate their Other Bets, as they call them, from core Google, because Google’s priorities would never allow any of the moonshots to be top five. Other Bets includes: Fiber, Nest, Verily, and Waymo (self-driving cars). In theory, the Alphabet holding structure frees the Other Bets to set their own top five priorities and not need to compete for resources within the larger Google structure. In practice, it remains to be seen whether or not that actually takes place.
Facebook’s mission is to “give people the power to share and make the world more open and connected.” We view Facebook’s five focus areas as:
- Core Facebook. The company’s namesake product is closest to connecting the entire world with 1.8 billion monthly active users (MAUs) in Q3 2016. We expect over 2.2 billion MAUs by 2020.
- Instagram. Instagram enables evolved connectedness in developed markets with high-speed mobile data and high quality smartphone cameras. We believe that images are the future of communication, not text, and Instagram is a platform built specifically for images. Instagram has 600 million MAUs and we expect it could exceed 1 billion by 2020.
- Messaging. This includes both WhatsApp and Messenger. There are obviously separate teams running the two products, but from a priority standpoint, Facebook management can think of messaging as a single priority even with two products. Given the similarities between the two, logic would seem to suggest that if the world is completely connected on a single platform, one or the other must win out long term and Facebook shouldn’t care as long as it’s one of their two platforms. Both products currently have over 1 billion users.
- Oculus. VR represents the next computing paradigm and the evolution of human connectedness. VR is an evolution of the PC and mobile, so owning the platform gives Facebook incremental control over openness and development of services. This is important because there are no guarantees there will be an equivalent of the web browser in VR that offers open access to any web service. We believe Oculus is also a window into AR given CEO Mark Zuckerberg’s commentary about that segment.
- Internet.org. Internet.org may be the surprising one on this list, but we think it’s a bigger deal than most. Internet everywhere is critical to connecting the world, thus it makes logical sense that achieving that goal is paramount for Facebook to succeed its mission.
Non-core priorities for Facebook:
- Search. Search is not and has not been a priority for Facebook, even though there has been concern over the years that they would kill Google with some sort of social-powered search technology. It’s not a priority because it doesn’t make the world more connected. To make the world more connected, one need only to be able to search for friends and connections, not information. Facebook as a risk to Google’s search business seems just as unlikely as Google being a risk to Facebook’s core social business.
- Machine Learning/AI. Machine learning is, of course, something Facebook is working on, but we believe not to the same extent as Apple, Google, or Amazon. Facebook’s priorities dictate that their machine learning efforts focus on experience in their core Facebook, Instagram, and Messaging products (chatbots are an example). Companies like Google and Amazon are using machine learning and AI to deliver new, meaningful products related to their missions. Making the world more open and connected is by definition centered around humans, thus Facebook’s focuses are correct to address the needs and wants of humans rather than developing artificially intelligent products that don’t further that goal.
- Workplace. Facebook is experimenting with connecting workers through Workplace (f.k.a. Facebook At Work). Similar to Gmail and Adsense, Workplace seems to extend the key functionality developed for Facebook’s core product to a new market. The problem is that enterprise communication systems tend to be closed by nature, not open. As far as we can tell, Workplace is closed in that communications are only available to coworkers. The story has yet to be written for Workplace, but if we had to make a bet, we’d take the under for it becoming a top priority and significant business for Facebook (no offense to the team running it who we are sure are quite capable).
Amazon’s mission is, “To be Earth’s most customer centric company; to build a place where people can come to find and discover anything they might want to buy online.” We view Amazon’s five focus areas as:
- Fulfillment. Fulfillment is the unspoken part of Amazon’s mission. Consumers not only want to find and discover, but get what they buy fast. Fast shipping is customer centric because it makes them happy. Fulfillment takes multiple focuses. First, Amazon is committed to expanding same day delivery to defeat one of the final advantages of traditional retail — getting something “now.” This requires additional fulfillment centers to minimize delay due to distance. Second, speed of delivery is core to Prime, which we view as the company’s greatest weapon against other retailers. We estimate that Prime members spend more than 3x non-Prime members on Amazon per year because they search Amazon first vs Google or other retailers. Third, Amazon has slowly built out its own fleet of planes and trucks to supplement third-party carriers. We expect Amazon to ship over 8 billion units in 2017 and close to 13 billion by 2020, which may give them efficiencies of scale to do their own shipping.
- AWS. We think Amazon should spin out AWS. While AWS has been a massive hit for Amazon, it’s hard to see how it furthers Amazon’s mission of building a place for consumers to find and discover things to buy. Keeping AWS as part of Amazon is preventing a new focus from emerging that might better serve the company’s mission.
- Digital Media. Digital media is a rapidly emerging focus for Amazon and fits with its customer centric focus. Amazon uses content investments, primarily in Prime Video originals and other content, to drive Prime membership. Much like Apple moving into original content, having a great content offering creates a unique incentive to maintain Prime members. We estimate Amazon will spend over $6 billion on content in 2017 which compares to Netflix at $7 billion.
- Robotics. Amazon may be the most advanced robotics company in the world. The company acquired Kiva, which is now Amazon Robotics, in 2012. That acquisition is the basis for over 30,000 robots in Amazon fulfillment centers. We believe that only around 10% of Amazon fulfillment centers utilize robots. The robots pick 2-3x faster than humans, thus they more efficiently deliver goods to consumers, yielding faster shipping speeds. Amazon is also developing Prime Air, which is a drone delivery service. The combination of Amazon Robotics and Prime Air paints the picture of a future where robots handle substantially all of fulfillment, maximizing speed of delivery.
- Machine Learning/AI. Amazon approaches artificial intelligence as a way to enhance the customer experience. The company has done this through three efforts. First, product recommendations are highly machine learning driven and help consumers discover more things to buy. Second, Alexa offers a new voice-based interface for consumers to find and discover things to buy. Third, the company’s experiment with Amazon Go (cashier-less retail) is powered by sophisticated computer vision and artificial intelligence to determine what products a customer selects. Removing the friction of checkout is another example of customer centrism.
Non-core priorities for Amazon:
- Selection. Amazon sells over 350 million SKUs in the US. We believe that selection was a top five priority about five years ago. The company used to talk about the null search being their biggest enemy, but that talk has since quieted. Amazon has established a moat around selection and audience — sellers know that Amazon is the best place to get in front of interested buyers and buyers know they can get almost anything they want at Amazon.
- Brick-And-Mortar Retail. Despite opening brick-and-mortar bookstores in Seattle and San Diego, we do not view traditional retail as a core focus for Amazon. We see these stores as experiments for Amazon to learn about customer behavior and potentially test new services like Amazon Go. Additionally, brick-and-mortar retail does not fit with the company’s mission of helping customers buy “online.”
Why do the priorities of these tech giants matter to venture capitalists? There are two reasons: First, the five focus areas are about resource allocation. Whether a company is 10 people or 10,000, its focus areas determine where it chooses to allocate resources. The top priority gets the best talent and most resources and so on. It’s easy for giant companies to extend beyond their five focus areas and they’re going to keep doing it. When a company like Google or Facebook enters into a startup’s market, its natural for the world to jump to the conclusion that they might kill whatever small incumbents compete in that market; however, unless the market is somehow directly related to the large company’s purpose, the total destruction of small competitors happens less than you’d think. Consider it this way: if Google decides to enter market X, it might be priority number 179. Maybe the project gets a few million dollars thrown at it, but it won’t get the absolute best talent and won’t get the full weight of the Google machine. By contrast, market X is priority number one for a great startup, so it gets all the venture money the startup raises, the company’s best talent, and everyone’s full attention. As long as the startup has some modicum of defensibility, not just a bank full of venture money, they should survive the onslaught from the giant and probably come out stronger. On the other hand, if a startups focus is in direct opposition to one of the big four, it won’t stand much of a chance. In startup language, get ready to pivot.
The second reason why this matters is directly related to the first. Apple, Google, Facebook, and Amazon will spend over $40 billion on R&D in 2017 and have $265 billion in net cash on their balance sheets. When a startup becomes a great company with a leadership position in an area that ultimately becomes a top five priority for the big four, the giants have significant resources to potentially acquire them. Across the big four, there are overlapping priorities emerging in VR, AR, AI, and robotics. That’s why we’re so excited about those themes for the next 10 years, and we have good company.
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.