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When Will Apple Win Its First Oscar?

When Will Apple Win Its First Oscar?

We think Apple will win an Oscar in the next five years. That’s how long it will take for Apple to scale its original content spend from less than $200m today to $5-7b. The reason why expect $5-7b in Apple original content spend in five years is because Apple must catch up to Netflix and Amazon, the former of which will likely be spending more than $10b per year at that point. Before diving more into the question, here are a few key data points that we think are relevant to the discussion:

  • Amazon recently beat rival Netflix to be the first streaming service to receive significant Academy Award acknowledgement for Manchester By The Sea, with 6 nominations including one for best picture.
  • Netflix has received a total of five Oscar nominations, all in the best documentary category, since it began purchasing the rights to original content.
  • Apple is serious about content. The company will debut two exclusive shows, “Planet of the Apps” and “Carpool Karaoke”, this spring on the Apple Music platform.
  • Revenue from Apple’s Services segment, including the iTunes Store and Apple Music, is a key growth driver for Apple over the next several years. See more on Apple’s Services business in our piece, The 5 Focuses, which outlines Apple’s top five priorities, including Services.
  • We expect 2017 original content spend of about $7b from Netflix, and $6b from Amazon. Amazon includes a la cart cost.  Excluding a la cart we estimate Amazon original content spend is $4b. 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.

As we’ve written before, we believe Apple innovates by taking small but deliberate steps forward (see our piece on Apple’s baby steps here). They did it with the iPod, they did it again with the iPhone and the iPad, and we see them doing the same in original content for their entertainment platforms. On their most recent earnings call, Tim Cook said, “In terms of original content, we’ve put our toe in the water doing some original content for Apple Music, and that will be rolling out throughout the year. We’re learning from that, and we’ll go from there.” His comments remind us of the way the company has talked about Apple TV for the last decade, often describing their work in the category as “pulling a string” to see where it leads.

Any vibrant entertainment ecosystem needs exclusive content. iTunes and Apple Music, for example, already leverage exclusive relationships with app developers, music labels, and artists, along with TV and film content providers in order to gain an edge over competing services. Owned content is the ultimate exclusivity. Apple’s new “Planet of the Apps” show, for example, will give the company the freedom to reach viewers in new ways. The show, which is a “Shark Tank”-like reality show for app developers to pitch their latest apps, creates obvious synergies for Apple. For example, we envision “Planet of the Apps” streaming on iPhones and Apple TVs, with a direct links to download the winning apps in the App Store.

But Apple’s new TV shows are just the beginning. We expect Netflix, Amazon, and Apple to continue to increase their spend on content over the next several years. And you pay for what you get. Eventually, Netflix and Apple will achieve the type of critical acclaim for their exclusive content that Amazon has already seen. We’re big believers in the benefits of disaggregated content delivery and disaggregated content owners. Apple is well positioned to invest significantly in original content, distribute it in new ways, and drive synergies across it’s massive device and user ecosystem. That virtuous cycle, we believe, will eventually result in a big winner for the company. Until then, enjoy the Oscars!

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, Apple, Netflix
3 min. read Show less
Is Snapchat the Real Augmented Reality Powerhouse?

Is Snapchat the Real Augmented Reality Powerhouse?

Written by guest author Lindsay Boyajian, CMO at Augment 

Snapchat has been acquiring companies and releasing augmented reality features, setting itself up to be an AR global leader.

When you think of augmented reality (AR), names like Microsoft Hololens, MagicLeap, Vuforia and Blippar come to mind. When you think of social media, you think of Instagram, Snap, Linkedin and Facebook. However, one of these social media players is an augmented reality company in disguise—Snap, Inc.

Snapchat, owned by Snap Inc., is one of the biggest AR companies today. Over the past few years, Snapchat has been rolling out more and more features to its ephemeral photo sharing app that are blurring the line between our physical and digital worlds.  These features plus a string of acquisitions point to Snap’s ambitions beyond photo sharing.

Snapchat’s evolution

In July 2014, we saw Snapchat’s first move towards AR with geofilters. AR overlays digital assets on the real environment. With geofilters, users could now place location-based image tags on their photos.

In June 2015, Snapchat introduced branded geofilters, allowing brands to pay for custom geofilters to reach Snapchat’s coveted millennial audience. In other words, Snapchat began monetizing augmented reality ads. McDonald’s was the first company to launch a geofilter campaign, and today nearly all the major brands have followed suit. AR has become Snapchat’s secret moneymaker.

Geofilters were just the start. Later in 2015, Snapchat came out with lenses or facial filters. Lenses are filter overlays that augment your face. Snapchat acquired Looksery, a facial recognition startup, to power this feature. This represents one of Snapchat’s first acquisitions in the AR space (Hint: more to come).

In June 2016, Snap made a quiet acquisition of Seene, a computer vision startup that allows users to make 3D selfies from their mobile devices.  Seene can scan and recreate 3D objects on-the-go, which has a number of different AR use cases.

In November 2016, Snapchat took lenses even further when it released a new feature called “world lenses.” World lenses allow users to apply an animation or effect to the environment. For instance, users can overlay falling hearts on the background of their photos.

Each iteration of lenses shifts Snapchat further into the realm of AR and hints at its larger ambition in AR.

Nothing points towards this more than Snapchat’s recent acquisition of AR startup Cimagine. Cimagine allows users to visualize products in the real world environment through their mobile devices.   Snap’s interest is Cimagine’s 3D visualization technology that allows models to be placed and anchored in space without trackers or markers.  With Cimagine’s technology, Snapchat will be able to further enhance the AR experience for users and brands by offering more life-like visualizations.

Is Snapchat becoming a hardware company?

This evolution was just the beginning. In November 2016, Snap Spectacles hit the market. Spectacles are a clear signal that Snap is thinking not only about AR content, but also hardware. Specs are Snapchat’s $130 sunglasses with a camera inside that take short videos for Snapchat. Specs use Bluetooth to seamlessly sync video content from the glasses to your Snapchat app.

This initial rollout of Specs is a market test for Snap: Will consumers adopt head-wearable tech? Consumers have been receptive to Snap’s brightly colored and quirky glasses. Thanks to a fun design and marketing, Specs have avoided the perception issue of Google Glass.

Snap glasses change how we interact with hardware. With Specs, you no longer have to take out a piece of hardware to capture a moment. I recently used Specs while hiking on vacation. I didn’t have to be bothered to pull out my iPhone to capture the scenery in cold weather. With a simple tap on my sunglasses, I could capture the moment through my eyes with ease. (See my video below.) The hardware became part of the experience. The product further blurs the line between technology and reality.

What’s next for Snapchat?

At the moment, Specs take only short videos, but in the future, lenses, filters and even more advanced AR capabilities can be incorporated. Specs can become an advanced AR headset by integrating the technology Snap has acquired over the last few years. Snap has proved it has the formula to spur customer adoption of head-mounted technology. Next up is integrating its content into the hardware.

With Snap’s IPO on the horizon, investors are already curious as to how Snap will continue its impressive rise.  The company earned $404.5 million in revenue in 2016, up from $58.7 million in 2015.  As we look at the history of the company, it is evident that Snap is betting on AR to drive future growth.

Snapchat may have started as an ephemeral photo sharing app popular among teens, but today the company is positioned to be a global leader in augmented reality.

A version of this article originally was published on Network World.

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.

Augmented Reality, Snapchat
4 min. read Show less
Tesla’s Bedrock In AI & Robotics Will Transform The Industry & Our Lives

Tesla’s Bedrock In AI & Robotics Will Transform The Industry & Our Lives

I always wanted to cover Tesla, but as an internet analyst, the stock fell outside of my coverage space. Despite this, I continued to study the company and ultimately invested because I believe that Tesla is not a car company, but a consumer electronics company that thinks like an internet company. With a bedrock in AI and robotics, Tesla is one of the best positioned companies to transform our lives over the next 20 years.  We think Tesla is on par with Amazon when it comes to a reckless pursuit to shape the future, which we believe will reward investors over the long run.

The Street Is Understandably Focused On The Wrong Metric

Tesla reports December quarter results on Wednesday (Feb. 22). Given the 48% rise in TSLA shares over the past 3 months, now trading near an all-time high, it’s understandable why investors are nervous going into the print. After all, good news is priced in as information of the earlier-than-expected Fremont production retooling has stoked Model 3 production expectations. As of our last check, buy side investors expect 17k to 25k Model 3 shipments in 2017.  That’s a big number when you consider that in 2016 Tesla delivered 76k vehicles (all models) to customers. Investors will be zeroed in on Elon Musk’s comments on the earnings call about production of the Model 3 in 2017.  His comments may cause volatility in the stock short term, but they are irrelevant in the long run.

It’s Not About How Many Model 3’s Tesla Sell In 2017

As venture capitalists, we have the luxury of thinking about themes over a very long horizon. With that perspective, Wednesday’s Tesla earnings report is a non-event.  What’s more important is that Tesla makes the best car in the world, amplified by AI and robotics. That focus will keep competitors in check, allowing the company to reach scale and ride the next tech mega wave as our lives are quickly transformed (over the next 20 years) into an electric, automated existence.

Artificial Intelligence

Tesla’s obvious AI play is autopilot for autonomous vehicles, with a less well known AI push in manufacturing. We know that the company is pushing boundaries to gain data to improve its driving AI with a goal of being first to market with an L4 compatible vehicle (the automated system can control the vehicle in all but a few environments).

The first to market will have a measurable advantage because road data equates to smarter AI and safer cars.  Google’s Waymo has driven over 2 million autonomous miles, but comparisons with other automotive companies are difficult given some companies include simulation miles.  Last October, Elon Musk reported Tesla had driven 222 million cumulative autopilot miles, but those miles are not comparable to the fully autonomous number that Waymo reports.  It’s unlikely that Waymo will have a commercially available vehicle in 2019, but likely that Tesla models solid in 2019 will be L4 compatible. Traditional automotive is even further behind, with BMW, Audi, Mercedes, Ford and GM likely shipping L3 autos in 2019. Note that L5 is the highest level of autonomy, for vehicles capable of all aspects of the dynamic driving under all roadway and environmental conditions that can be managed by a human driver, followed by L4, L3 and so on.  This begs the question, why would anyone interested in an autonomous car buy an L3 compatible vehicle if it was priced similar to an L4 vehicle? We don’t know how Tesla’s autopilot AI stacks up against the market, but based on comments from our industry contacts, Tesla sees AI as one of its two core competencies and is structuring its future around it.

Traditional Auto Is Behind; Needs To Get Right With Electric Before Tackling Autonomy

To underscore how far behind traditional auto makers are in building the future of transportation, keep in mind those companies are still bracing for a post ICE (internal combustion engine) world.  Spare parts and supply chain represent two profitable segments that traditional auto must give up. As for spare parts, an electric world lacks this gravy train. For example a Tesla Model S has 17 moving drivetrain parts, compared to a typical ICE vehicle with about 1,500 parts. Fewer moving parts means fewer repairs.  The automotive supply chain is similar to the military spending complex, littered with special interests that will resist change.  While big auto is easing into electric, Tesla was built for a post-ICE world and has already shifted its focus to AI (and as a result, autonomy) allowing the company to more aggressively pursue a self-driving world.

The core issue is innovation.  Automotive companies are not tech companies; with autonomy on the horizon, they face the wrath of the innovators dilemma. Ford acquiring Argo is a step in the right direction, but will only be successful if Argo triggers a wholesale change in the pace with which Ford embraces EV and autonomy. We believe that it’s unlikely children born in the US in 2020 will ever regularly drive a car. The race is on and the clock is ticking for these auto makers.

Robotics

Robotics plays into the Tesla story in two ways: First, an L4 compatible car is a robot. Second, robotics in manufacturing is a core competency for Tesla. Tesla’s expertise in robotic manufacturing is under-appreciated by investors for good reason; Tesla has long had a production problem – they can’t make cars fast enough.

As a result, profitability lags, cash burns, and we don’t know the true underlying demand. but we do know demand is greater than supply. And with the release of the Model 3, with an average sticker price of $45k compared to the Model S and Model X at about $90k, we believe demand will continue to outpace supply. We’re comforted knowing that Tesla sees smart robotics as the solution to increase output. Compare that to traditional automotive companies, which, even if they prioritized automated manufacturing, would lag behind Tesla due to the lag in transitioning their labor force. Politically, it will be difficult for traditional auto to retool fast enough to capture the wave. On top of that, President Trump’s focus on manufacturing jobs will likely put the industry in a catch-22 as tax credits will postpone the required retooling and give Tesla more time to reach scale. Once Tesla reaches scale, their advantage may be insurmountable; just ask those who have competed with Google in search, Amazon in retail, Apple in smartphones, and Facebook in social.

The Bear Case

The bear case on Tesla has three primary assumptions. We think the first two are off base, but the third poses a true risk.

  • Every car company fails; therefore, Tesla must fail. This begs the question, what are the essential elements of a car company? We define a car company as providing transportation in an industry overseen by EPA, DOT, and organized labor. Only one of these three (DOT) applies to Tesla. The company does not need to navigate the EPA or organized labor. Again, we see Tesla as a consumer electronics company.
  • Tesla will run out of cash. There’s concern that Tesla’s production problems persist over the next several years and competing manufacturers rush to market and gain share, resulting in the company running out of cash.  While there is risk that a tech company like Google, Baidu or Uber will compete more aggressively with Tesla (see below), we expect Tesla’s order book of $20B would help the company secure financing in a time of need. Investors will increasing appreciate the upcoming sea change in transportation and will be willing to see through the risk and underwrite the company’s future.
  • Competition is coming. This is the strongest bear case with Ford, BMW, Uber and Baidu (Yun Xiao, or “Cloud Ride”) each expecting to sell a fully autonomous car in 2021. With think Tesla should be most concerned with Google’s Waymo, Baidu and Uber, other tech companies pursuing self driving without the baggage that traditional automakers carry. Our belief is that Tesla will reach scale faster than these other players, making it difficult to compete on price.

Valuation

Tesla’s $43B market cap is over valued if you think of it as a car manufacturer. Ford’s market cap is $49B and GM’s is $56B.  In 2016 GM sold 10m vehicles, Ford 6.7m, and Tesla 0.076m. However, one way to get comfortable with valuation is to look at the long term potential.  Our best guess, and stress the word guess, is that in 2025 Tesla will sell somewhere between 1.5 and 2m vehicles which implies a 16-22% CAGR from 2019-2025. This valuation method is risky given the number of variables. What we can say is that Tesla today feels like Amazon in the spring of 2009. At that time, Amazon’s stock had doubled to $80 in six months. The story was thought to be fully valued as investors struggled to justify the surge in value.  After all, Amazon was unprofitable.  Today, Amazon still struggles to make money, but shares have risen 10x over the past 8 years and are near an all time high.  Amazon had the roadmap for the future of commerce and web services, similar to Tesla’s roadmap to pursue the future of auto and solar, based on their core competencies in AI and robotics. Tesla may not an internet company, but they think like one, which will continue to serve them well.

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, Artificial Intelligence, Google, Robotics, Tesla
6 min. read Show less