When we started Loup four years ago, AR was an enabling technology we believed would be transformational over the next decade. It’s made progress since then, with enterprise AR use cases beginning to materialize, along with continued commitment and investment from the world’s largest tech companies. We believe by 2025, multiple consumer AR glasses will be available from big tech, and the AR experience will shift from being powered by the phone to being powered by wearables.
Apple will be one of the biggest beneficiaries of this computing evolution over the next decade, along with Microsoft, Facebook, Google, and Samsung.
The altered-reality landscape
When talking about AR, it’s helpful to understand the product approaches that anchor and orbit the topic:
Step 1 – Virtual reality. VR is a fully-immersive simulation of a 3D environment inside an enclosed headset, mostly used for entertainment and gaming purposes today. Paired with a phone, VR experiences have been available for below $100 for the past five years. That said, the approach has fallen well-short of mainstream given phone-based applications are clumsy. The more robust approach is Facebook’s all-in-one Oculus Quest 2, a compelling value at $299, yet still above the mainstream buyer price point. Long term we believe in VR, and see it as a secondary application to augmented reality.
Step 2 – Mixed reality. MR blends elements of AR and VR into the form of goggles. External cameras on the goggles bring the view of the outside world into the inside of the goggles. This outside view is then augmented with overlays of digital images and information. From a technology development standpoint, MR goggles will come before AR glasses given MR’s closed viewing environment is easier to control. Apple is rumored to be developing a pair of MR goggles and will likely be the company’s first altered-reality product before AR glasses. Microsoft’s HoloLens is branded as MR, but we view it primarily as AR. Down the road, MR will likely be replaced by AR glasses.
Step 3 – Augmented reality. AR superimposes digital images onto the real world. Today, the phone is the AR window of choice, first powering applications such as Pokemon Go, and now advancing beyond gaming into retail, healthcare, and education. Transformative AR will involve a pair of consumer glasses that overlay information onto a user’s field of vision. Facebook has publicly commented they are building AR glasses, with the other major tech companies all rumored to be working on them as well. We expect the first version to be available around 2025. While there are blurred lines between AR and MR, what matters most is that there’s a computing paradigm shift on the horizon that mixes elements of the physical and digital worlds. Thus, for simplicity, we largely group these two categories together.
State of the union: enterprise applications beginning to emerge
Recent enterprise applications are encouraging for AR adoption. First, Microsoft recently won a contract with the US military to provide more than 120,000 HoloLens-based custom headsets over the next 10 years. The devices will help simulate training situations, give soldiers situational information in the field of combat, and capture data that can be used to evaluate how missions are executed. With an estimated $22B in total value spread out over a decade, the annual contribution will add just over 1% to Microsoft’s annual sales. This is small in one respect and material in another, given it’s the largest AR contract to date.
Second, AR is now being utilized by physicians to assist in spine and knee surgeries. John’s Hopkins recently announced that AR headsets made by Augmedics were used in the first set of spine surgeries on live patients last summer. A surgeon at the Hospital for Special Surgeries in New York performed two knee replacements in December using AR glasses developed by Medacta. HoloLens 2 is also being used in a variety of surgeries at the Cleveland Clinic.
Given their steep price tag (HoloLens 2 costs $3,500), these headsets are prohibitively expensive for individual consumers and most businesses. However, as more use cases are discovered and AR headsets become “must have” for certain industries such as medical surgeries, demand will increase, leading to an increase in supply and declining prices. In the end, enterprise AR devices will pave the way for consumer devices.
Apple has been steadfast on AR’s potential
In a recent interview with Kara Swisher from the New York Times, Apple CEO Tim Cook said AR is a critical part of the company’s future. Cook commented, “The promise of AR is that you and I can have a better conversation if we were able to augment our discussion with charts or other things to appear. When I think about that in different fields whether its healthcare, education, gaming, retail, I’m already seeing AR take off in some these areas with the use of the phone and I think the promise is even greater in the future.”
This is consistent with what Cook has said dating back to the summer of 2017, when he commented that AR “is one of those huge things that we’ll look back at and marvel.” We agree, and believe Apple will first come to market with high-end MR goggles in 2022, followed by more mainstream AR glasses in 2025. Even if we don’t see the first signs of MR from Apple at this year’s June WWDC event, we believe the product is currently on its intermediate-term roadmap.
Given Apple’s commitment to the AR opportunity and sufficient resources to see the development through, we believe it’s a question of “when” not “if” AR becomes transformational and mainstream.
The details of mainstream AR applications remain unknown
One of the challenges with building investor excitement around the AR theme is there are only a handful of compelling uses today. We have seen this investor skepticism before, like when the App Store was launched and most investors felt the platform would be relegated to applications that enhanced existing features on the phone, such as the alarm clock.
Another example is when Apple Watch was released, most viewed it as having limited functionality, and a convenient way to read text messages. The slow ramp in the App Store and Watch functionality taught us that increasing the utility of these devices is in the hands of developers. That’s good news for Apple, given their developer community is flourishing with some 2m apps in the App Store, and those professionals are looking for new ways to add products on future Apple devices.
Below are a few examples of AR applications driven by the phone today:
- Pokemon Go (gaming)
- IKEA Place (retail)
- Wayfair (retail)
- Warby Parker (retail)
- Lens Studio (Snap)
Unfortunately, given AR hardware remains limited to phones today, it’s impossible for us to outline the applications developers will build on what will eventually be AR wearables.
Gene and Andrew discuss why the term “ecommerce” fails to capture the paradigm shift occurring in commerce, along with the opportunity for experiential commerce at home.
This is the first in a multi-part series rethinking ecommerce. The series is based on the following three premises:
- Ecommerce is just commerce at home. Ecommerce is all grown up. It’s time to break away from the early-internet paradigm where online shopping was a new, “electronic” form of shopping. Today, almost all commerce involves varying degrees of digital elements (discovery, price comparison, personalization, selection, ordering, payment, delivery, etc.). The defining factor is not whether commerce is digital; rather, one defining factor is the optimal location for a retailer to meet a consumer’s needs. Shopping happens on a spectrum between home and the store. As such, ecommerce is better understood as commerce at home, and Amazon was the early winner.
- Great retailers focus on convenience or the experiential. In the new paradigm, certain retail truths persist. For example, all great retailers have focused primarily on either convenience retail or experiential retail. To be clear, any retail can be a great experience, but the priority matters. Amazon focuses ruthlessly on convenience. The outcome is a great customer experience. To drive growth, Amazon has prioritized speed and selection over consultation and curation. Amazon’s focus on convenience has yielded an (incredibly) high-volume, low-margin retail business. Apple, on the other hand, emphasizes the experiential. The Genius Bar stands out as one of the great retail innovations of all time, matching Apple’s premium brand with a premium customer support experience. Apple’s focus on the experiential has yielded a high-margin, lower-volume business that other device makers can’t match. Great retailers must deliver a great experience, but they do so by focusing either on convenience, eliminating human interaction, or the experiential, emphasizing human interaction.
These first two premises establish a four-box paradigm to consider:
- There is an open opportunity in experiential commerce at home. Apple has struggled to deliver the same great experience they offer in their stores to customers ordering online and shopping from home. Perhaps the closest they’ve come is a delightful unboxing experience or a well-timed email offering online setup and support just after your new Apple product is delivered. But these efforts fall short. Similarly, Amazon has struggled to execute its attempted experiential elements in the home, like installation and setup. These appear to be all but abandoned experiments. For Apple, commerce at home appears to be outside of its skillset as a retailer. And for Amazon, the experiential appears to be outside of its skillset as a retailer. This leaves open an untapped opportunity in experiential commerce at home.
We’re investors in Enjoy, a technology company that partners with premium brands, including Apple, to offer a high-touch retail experience in the comfort of home. Enjoy is directly addressing the open opportunity in experiential commerce at home.
Your home is now a place of business
Walmart was built on new technologies (cars, trucks, freeways) that unlocked new opportunities for store-based commerce. Similarly, Amazon was built on new technologies (internet, mobile devices, robotics) that unlocked the commerce at home opportunity. In addition to the retail sector, the internet has enabled many industries to leverage the home as a new place of business.
- Airbnb turned the home into a hotel.
- Peloton turned the home into a fitness studio.
- Tesla turned the home into a car dealership and a repair shop.
- Netflix turned the home into a movie theater.
Businesses can now presume that consumers have access to the internet with sufficient bandwidth and an existing payment infrastructure at home. Today, 77% of US adults say they have a broadband internet connection at home (source: Pew Research). More than 90% of US teens shop online (Source: Piper Sandler). Globally, 80% of adults have a smartphone (source: Benedict Evans). The internet is no longer the defining feature of a new product or service with some digital component. The internet is table stakes.
Businesses are leveraging the home as an advantage over and against competitors with a physical presence (stores, gyms, theaters, restaurants). Delivering your product or service directly into the home means no lease payment, no buildout costs, and no depreciation. Instead, businesses can leverage the customer’s physical assets (their home) to save the customer time and deliver a superior experience.
Alongside various enabling technologies and economic benefits on the supply side, consumer preferences and expectations have changed on the demand side. Consumers trust retailers enough to buy more of their essentials and even big ticket items without visiting a store or talking to a salesperson directly. Today’s shopper prioritizes the time savings of shopping at home, or working out at home, or watching a movie at home, especially when those products and services are better at home.
The internet and internet users had to mature for many of these at-home solutions to become mainstream, and that time has come.
Covid-19 accelerated commerce at home
Ecommerce sales in the US grew by 13% in 2018 and 17% in 2019 (source: US Census Bureau). In 2020, growth in US ecommerce sales accelerated to 31% as lockdown restrictions forced people to shop from home. Most industry watchers believe the pandemic pulled forward ecommerce adoption by 5 to 10 years.
The pandemic has affected consumer preferences. Crowded stores are even less appealing than they were pre-pandemic. Now, the hassle (and risk) of visiting a store is greater than the hassle of learning how to shop from home for a growing number of shoppers that are new to ecommerce. The incentives to try commerce at home have never been better.
The spectrum between store-based commerce and commerce at home
As retailers have adapted to the internet, a spectrum of retail solutions has emerged between store-based commerce and commerce at home. Here’s how we see it:
The store-based shopping experience has changed as retailers have added in-store and curbside pickup options. These store-based options offer shoppers some of the benefits of online shopping with an added level of immediacy and control.
The at-home shopping experience has also changed dramatically since its advent. Amazon has pushed delivery times down with free same-day delivery to your door. Other retailers, like Peloton and Enjoy, are going through the door, offering in-home setup, consultation, and personalization— a full store experience in the comfort of home.
Reinventing experiential retail
Commerce at home has become an obvious and established mode of retail. However, the opportunity in experiential commerce at home remains early and mostly untapped. New technologies, new supply-side capabilities, and new consumer expectations have unlocked a massive market within retail that Amazon seems unfit to address.
In part two of this series, we will explore the second axis of our retail paradigm: convenience driven vs. experiential retail.