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.