- Optionality around new product and service categories is the 4th and final pillar to our Apple as a Service thesis.
- We expect a stable iPhone business (part 1), a growing Services segment (part 2), and capital returns (part 3) to move shares higher.
- In part 4, we outline potential new product and service categories, including AR wearables, personal health, original video content, and autonomous vehicles, which represent additional growth drivers not yet reflected in investor thinking.
- New hardware products generate new Services opportunities and the company will continue to develop both in tandem as it looks to expand its ecosystem.
AR wearables a great fit for Apple. Futurist Charlie Fink sums up AR best: “The world is going to be painted with data.” Tim Cook agrees, and in 2017 said, “AR is one of those huge things that we’ll look back at and marvel at.” Cook is doing everything in his power to advance the theme, as evidenced by three developments in 2017 including; releasing an AR development platform (ARKit), shipping dedicated AR optics in the iPhone X, and purchasing SensoMotoric (a wearable computer vision technology).
While the tech community believes in the long-term potential of AR as the future of experiences, most investors are understandably mixed about its potential, given the two most popular AR use cases today are Snapchat and Pokemon. Adding to investor skepticism is the failed consumer launch of Google Glass, released in 2014 and discontinued in 2015. As a society, we were not ready for people to wear cameras.
That said, we believe AR is real and Apple will be a beneficiary. We expect Apple’s AR theme to play out in three phases. First, this fall we expect 2 to 3 new iPhones to join iPhone X with advanced optics for AR (VCSEL arrays). Second, AR apps built using ARKit will slowly become the next gold rush for developers, led by games, ecommerce, and education. Last, we expect Apple will release Apple Glasses late in 2021.
This begs the question: are we ready for AR glasses? Not now, but eventually we will be. AR is better hands-free. We’re not made to experience the world holding up a tiny window. Our arms and eyes get tired. Glasses solve that problem, but they also create a problem by breaking a social dynamic around privacy. We expect minuscule wearable adoption until the utility of an AR wearable offsets the negative social dynamic. Simultaneously, the technology must advance to a point where the design of the glasses is not a negative factor (as we’ve seen with smart watches). Once that happens, wearables will likely go mainstream. We see the early flip phone as a helpful analogy. Around 2000, flip phones added cameras, and the privacy threat of a camera in everyone’s pocket created a negative social dynamic. Eventually, consumers got over it because the utility of the camera offset the negative social dynamic. In the future, we won’t be able to live without an AR wearable, and Apple will be there to sell us one.
We are pushing back our expected release of Apple Glasses from September of 2020 to December of 2021 based on recent meetings with several AR industry experts. While these people do not have direct knowledge of Apple’s plans, it is becoming clear that, as a category, AR glasses are a few years away. We’re looking for 10 million units in the first year, similar to Apple Watch’s first year. We’re using a $1,300 ASP, which yields a $13B business and should account for 3% of Apple’s revenue in CY22. See our updated model here.
Personal health and fitness Apple’s new hobby. Steve Jobs routinely referred to Apple TV as a “hobby” for the company. In 2018, the Apple TV business will generate an estimated $3-$4B in revenue. Apple Watch has well surpassed Apple TV; we estimate it will generate nearly $11B in revenue in 2018. Apple Watch is now the most popular watch in the world. And fitness is literally a hobby of Tim Cook’s. Lastly, we view Cook’s personal motivation to improve global health and wellbeing as an important factor here. The rubber meets the road with products like Apple Watch and AirPods along with software development tools including HealthKit and ResearchKit, but new wearables (and “hearables”) and new capabilities for existing products represent a significant potential growth driver for Apple in the personal health space. We estimate that Apple Watch, AirPods, and a new AR wearable (“Apple Glasses”) will generate over $71B in FY23, up from an estimated $12B in FY18.
The opportunity in original content. We continue to expect Apple to launch a rebranded, all-in-one Apple video and music offering in 2-3 years. As the company ramps its spending on original content at a clip of about 50% per year to more than $4b in 2022, it will need a new home for its video content (currently available through Apple Music and iTunes). While Apple’s original content spend of about $500M in 2017 is just a fraction of the $8B Netflix plans to spend on original content this year, we think they are committed to competing in the content space. That said, they already take a cut of subscriptions generated for HBO, Hulu, Netflix and others via Apple devices. This one-two punch in content will continue to drive consumers away from cable and satellite TV providers to a combination of over-the-top service providers, and Apple is well positioned to benefit both directly and indirectly from this shift. See more here for our thoughts on Apple’s original content strategy.
Apple’s plans in autonomy. Tim Cook has said, “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.” While he notes that transportation is just one segment of autonomy, it is clear that Apple is working on autonomous vehicles, as they have recently expanded their fleet of test vehicles registered with the California DMV to 55, up from 27 earlier this year, and just 3 last year. While the company’s ultimate ambitions in autonomy are unknown, their public confirmation is noteworthy, and it is clear they are taking the opportunity seriously.
There are two ways we see Apple potentially bringing its autonomous systems to market. The first option would be to partner with a manufacturer to build an Apple-branded car, 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. The second option would be to focus on developing software and 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 as it plays to a number of Apple’s strengths including voice, navigation, entertainment, security, and a developer ecosystem.
At the moment, Apple is likely pursuing both options under the R&D umbrella of Project Titan. The most near-term application of their efforts is an autonomous shuttle called PAIL (Palo Alto to Infinite Loop) that will transport employees around campus, likely to collect data in a semi-controlled environment. 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: 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.