Taking a step back, Vision Pro is a spatial computing headset. Spatial computing is the next logical computing interface, allowing users to interact with digital objects in the real world. Essentially the goal is for the lines between the current phone and computer interface to merge with the real world.

The concept of spatial computing is not new. In 2017, Apple began talking about the potential of augmented reality, and in 2019, Meta launched the Oculus Quest headset, dubbed as computing for the metaverse.

Call it AR, spatial computing, or the metaverse, each is centered on the basic principle of bringing digital objects into the real world. While the concept sounds promising, the substance of the uptake has been disappointing.  Meta’s Quest headset has been out for about four years, and I estimate they have sold about 25M units to date.  That comes out to about 6M per year, a fraction of what I estimate to be 230M in annual iPhone unit sales. On top of that, its Reality Labs unit will lose just around $15B next year, compared to $13B last year.

While the Quest case study is concerning, it’s a different product than Vision Pro. Yes, both are headsets, but Vision Pro is a breakthrough. The limited 30-minute demo I had with the product back in June made me see, for the first time, that the concept of bringing the digital and real worlds together is here.

As for timing, no need to buckle up for the next paradigm shift, because it will take five years to take off.

I believe Vision Pro will be the first spatial computing device that consumers will want to use. Others have tried over the past eight years, including Microsoft with HoloLens and Meta with Quest, and have yet to capture a groundbreaking product. Vision Pro, at its core, is the first product to have spatial computing at breakthrough quality.

The most common question about Vision Pro is: What will people use it for? For what it’s worth, I believe the first blockbuster app will be spatial video. That said, most people don’t have a good answer.

When the iPhone came out, the use case was clear, bringing desktop quality of web browsing and maps to mobile (and, by the way, it’s an iPod too). For Vision Pro, the initial use case is more vague. The concept of interacting with digital objects in the real world doesn’t have analog consumers like the iPhone did back in 2007 around bringing the web and apps to your phone.

But the web, maps, and iPod didn’t make the iPhone what it is today. The developers did. Tim Cook knows that, and when he talks about the utility of Vision Pro he suggests it’s in the hands of developers. The reason why he believes that is because he’s seen it work for Apple in the past.

Taking a step back, think about the apps on your iPhone today that your daily life depends on. When the iPhone came out in 2007 there was no App Store, just the basics (Safari, Maps, Messages, Photos). When the App Store was released in 2008, the top apps for that year were Pandora Radio, Facebook, AIM, iBeer, and Lightsaber Unleashed. With the exception of Facebook all of these apps are obsolete.

I was surprised to go back and see how long it look for game-changing apps to be launched. The chart below details when today’s most popular apps became available in the App Store.

The takeaway is that it took five years for developers to build about 10 blockbuster apps. That means that only about two apps that matter come out ever year. Five years into the iPhone’s life, those 10 apps played an important role in driving iPhone sales to an inflection point. Back in those days Apple reported iPhone unit sales, and we can see it was in year five that sales accelerated from 90% growth to 93%, a remarkable step up in growth rate given the law of large numbers. We see the 193% unit growth in year two as less relevant given it was off the launch year base with easy comps.

While there were other factors driving demand in 2012, including the launch of the first large form factor phone, iPhone 5, and increased global carrier availability, I believe the apps that turned your phone into a computer in your pocket was the central driver of demand.

For that step up in growth, Apple can thank developers, and thats why the company is smartly counting on the developers to do it again with Vision Pro.

Similar to the iPhone, it took three years for consumers to begin adopting the Watch and appreciate its functionality. I remember in the fall of 2016, a year after its launch, most investors believed the Watch would never account for measurable revenue. Some believed the product was on the verge of being killed. Today, I estimate Watch accounts for about 5% of sales, less than the Mac and iPad at 10%, and still in the category of measurable revenue.

For the Watch, it was Apple as the app developer that drove utility. Looking back over the first five years, there were 20 blockbuster features and apps on the Watch, of which 19 were developed by Apple.

While Apple does not report Watch unit sales, Deepwater estimates that unit growth stepped up to 49% in the third year compared to being flattish in the second year.

I attribute the growth rate increase to a combination of more apps, many related to wellness along with the availability of cellular in year three.  While I estimate only 1 in 4 Watch users purchase cellular, the added feature triggered a step up in demand that got the installed base to a critical mass for the flywheel of word of mouth marketing to gain momentum.

Like the iPhone and Watch, I believe Vision Pro will take about five years to go mainstream. Once on the market early next year, I expect the iPhone developers to take notice and start the long road of building applications that drive functionality. Disney is already on board and has committed to releasing content optimized for the device next year. Also, this summer Apple has opened developer labs in Cupertino, London, Munich, Shanghai, Singapore, and Tokyo to provide developers with hands-on experience to test their apps on Vision Pro hardware and get support from Apple engineers. 

Additionally, like the Watch, I expect Apple to release its own spatial apps for the device.

This growth inflection point will take time based on the history of developer momentum and the added headwind of the $3,500 starting price point. In the first year, I expect they will sell a few million units (too few to report to investors).

By the end of 2028, I expect a version of the device will be priced at $2,000, reaching a $1,000 consumer-friendly price point by 2030. While those may seem like high price points for wider adoption, the iPhone’s average selling price is around $850, and they have more than 50% share in the US and around 20% globally. Importantly, even with the higher price point of iPhone, the product has been gaining global share over the past three years. The reason: Consumers pay up for great products, and I believe Vision Pro will prove to be one of those must-have products.

As for unit growth expectations, I expect modest growth of 20% a year through 2026, accelerating to 60% in 2028 once the price declines. By 2031 (its eighth year), I believe Apple could sell 75M Vision units,  which compares to the Apple Watch reaching just around 45M units in its eighth year in the market. Seventy-five million units at $1,000 would generate around $75B in revenue. Assuming Apple grows its top line by an average of 5% per year through the end of the decade (which yields total revenue in 2030 of about $550B), the Vision segment would account for about 14% of total Apple sales in 2030.

If I am wrong and it’s a bust, it would add fractional revenue in 2027 and account for about $5B in annual expenses related to development and marketing and have a modest 3-4% negative impact on earnings when factoring in both revenue and expenses.

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