Loup Ventures and Tim Cook share at least one thing in common. We both agree that AR will transform how humans interact with each other, removing the clumsy touchscreen, replacing the smartphone, and most importantly, expanding the utility of computing. An AR wearable from Apple is a long ways off.  Over the next five years, we see the iPhone as Apple’s play in AR, which will be a driver for their all-important Services business.

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We’re closely watching Apple’s moves in AR and Tim Cook’s recent interview with The Independent caught our attention.  Not because Cook said something new about AR, but because the frequency with which he’s talking about a future product category is unprecedented in the 14 years we have been covering Apple. If you’re interested, Cook told The Independent: “The smartphone is for everyone… I think AR is that big. It’s huge. I get excited because of the things that could be done that could improve a lot of lives. And be entertaining.”

“The smartphone is for everyone… I think AR is that big. It’s huge. I get excited because of the things that could be done that could improve a lot of lives. And be entertaining.” – Tim Cook

Cook’s talking about AR because innovation is the persistent question at Apple, and his comments support our belief that the next five years of Apple’s innovation will focus primarily on augmented reality. The smartphone is the world’s window into augmented reality today. While this will change driven by augmented reality hardware in the future, we would expect the next five years of AR innovation will happen mainly through the device in our pockets.

It’s A Big Deal When Apple Talks About Future Products, Because It’s Rare.  Apple doesn’t talk much about future products. The best example is going back to July 19th, 2006, six months before the iPhone was announced.  During the earnings call, a question was asked regarding music-enabled phones putting increased pressure on MP3 players and the iPod in particular. Apple’s then CFO Peter Oppenheimer responded, “As regards to cell phones, we don’t think that the phones that are available today make the best music players. We think the iPod is. But over time, that is likely to change. And we’re not sitting around doing nothing.”  Oppenheimer’s comments were significant because it was a rare tip of Apple’s hand about a future product. Under Cook Apple has strived to remain secretive around future products, but that’s more difficult given Apple’s revenue has grown to $218B in 2016, 10x larger than the $21B the company generated in 2006.

So, What Has Cook Said About AR So Far?  On July 26th, 2016, Cook made his first comments on AR during an earnings call in response to a question about Pokémon Go, commenting, “We are high on AR for the long run. We think there are great things for customers and a great commercial opportunity. And so we’re investing, and the number one thing is to make sure our products work well with other developers’ products, like Pokémon.” Below is a list of what we could find related to Cook’s public AR comments.  Notably, on the last two Apple earnings calls analysts have not asked about AR, most likely because everyone knows it coming.

• “AR can be really great. And we have been and continue to invest a lot in this.” Apple earnings call, July 2016
• “I think AR is extremely interesting and sort of a core technology. So, yes, it’s something we’re doing a lot of things on behind that curtain that we talked about.” Washington Post, August 2016
• “[AR] gives the capability for both of us to sit and be very present talking to each other, but also have other things visually for both of us to see.” ABC News, September 2016
• “I do think that a significant portion of the population of developed countries, and eventually all countries, will have AR experiences every day, almost like eating three meals a day, it will become that much a part of you.” Utah Tech Tour, October 2016
• “Augmented reality will take some time to get right, but I do think that it’s profound.” BuzzFeed, October 2016
• No mention of AR on the Apple earnings call, October 2016
• No mention of AR on the Apple earnings call, January 2017
• “I get excited [about AR] because of the things that could be done that could improve a lot of lives and be entertaining.” The Independent, February 2017

Three big questions remain: How quickly will Apple jump into AR? What form(s) will it take? And what does it mean for their business?

Moving Forward With Baby Steps. Apple takes baby steps towards new products (we wrote about these baby steps here). We don’t expect Apple to release an AR wearable anytime soon.  Our guess is 2020 at the earliest.  That said, we expect Apple to continue moving slowly but powerfully into AR this fall with the launch of iPhone X (more on this here).  Our industry contacts have told us that Apple will add improved 3D imaging technology that will position the next iPhone as an AR device. Apple will ease us into AR by building phones with powerful computer vision and mapping, which will enable developers to create a new category of AR apps. While the baby steps approach with the iPhone might not seem as exciting as launching iGlasses, we believe it will lay the groundwork for the next dominant computing platform.

What Does AR Mean For Apple Over The Next 2-5 Years? Protecting Market Share and Services Revenue.  We believe Apple’s tight integration of hardware and software will enable iPhones to be viewed as the best implementation of AR over the next 2-5 years. iPhone AR won’t be the first to market, given Google’s Tango platform, which launched in 2014 to third parties. However, Tango has not driven meaningful sales or adoption. Apple has many opportunities in AR including additional sensors to incorporate depth, cameras and software to enable computer vision, and even external peripherals connected to the phone, possibly some sort of wearable. While these features might not accelerate hardware sales in the near-term, they will protect Apple’s ~17% global smartphone market share as iPhone users will be able to do more with their phones.  More importantly, we think Apple will accelerate Services revenue by enabling new experiences previously unavailable through a smartphone.  This is an important driver of Apple’s growth over the next few years. We expect Services will increase revenue from about $30B in 2017 to $50B in 2020, which we expect to account for 50-60% of Apple’s revenue growth and 60-70% of earnings growth during that period.