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Apple Working With Tesla Is A Fairy Tale

Apple Working With Tesla Is A Fairy Tale

There’s been a lot of talk about Apple buying Tesla, but what if Apple simply made a $10 billion equity investment in the company instead? It sounds so good — Apple working with Tesla. In theory, it would make our lives so much better. Imagine all of the things you love about your iPhone, perfectly integrated with all the things Tesla owners rave about. The two tech giants could take over the auto industry over the next 20 years as consumers embrace electric vehicles and automation. Unfortunately, an investment from Apple, nonetheless an acquisition, would be hard to pull off. At the end of the day, that might be better for consumers if not investors.

Before we discuss why it won’t happen, let’s go over why it sounds so good.

For Tesla. A $10 billion cash infusion would all but eliminate any current or future cash problems for the company. While $10 billion equity investment would cause about 20% dilution today, it’s likely it would have a long-term benefit on Tesla stock given the removal of the cash question. Aside from the cash, we believe Apple could and would want to provide resources from their world class hardware, software, and AI teams to make Tesla’s the entertainment system and autopilot better. The investment would likely remove Apple as a potential direct or indirect competitor. Additionally, Tesla’s Model 3 could be showcased in Apple’s 490 retail stores in 20 countries.

For Apple. Investors would feel like they are actually doing something with their cash, which should be a positive for AAPL’s multiple. Apple would be investing in a company that has the potential to be multiple times bigger over the next decade. They would not be spending on the impossible, which would be building its own car to try to catch Tesla, but rather investing in making the leader even better. The impact of AI and robotics on the automotive sector is one of the next mega tech trends, and Apple would have a pole position within that theme.

Now, why the pairing won’t work.

  • Single product visionaries. It’s hard to imagine Apple doing a deal without some deeper operational partnership or influence on the product given their work in the auto sector. An investment in Tesla, an American automaker, has very different strategic implications than the investment in Didi Chuxing, a ride-sharing platform in China. Apple has a board seat at Didi. Similarly, it’s hard to imagine Tesla management welcoming outside influence on their products when they already make the best car in the world. Musk won’t let it happen, and more importantly shouldn’t let it happen. Single product visionaries create world class consumer products. Steve Jobs with the iPhone and Mac and Musk with Tesla. These visionaries are able to construct their own unique cultures to build great products, but if you try to merge two great cultures, we believe you end up with mediocrity. If we as consumers want the best products, we should want Apple and Tesla to keep their cultures separate and do it their way, even if it means competing with each other in auto.
    The deal Tesla might accept, Apple likely wouldn’t. Tesla might agree to a $10 billion cash investment from Apple if Apple were to accept non-voting shares and have no operational influence. Basically be a silent equity investor. The issue with operational influence relates to the last paragraph, but regarding voting rights, if Apple were to invest $10B and get voting shares, they would actually be the largest voting shareholder in the company, making Elon Musk second. As has been popular with large Internet companies, Tesla could create a non-voting share class that would enable Musk to retain his position as the largest voting shareholder in the event of an Apple investment; however, we don’t see Apple agreeing to non-voting shares because their philosophy on use of cash outside of repatriation has been to generate operational benefits. We believe would want some influence on Tesla.
  • Why an outright sale won’t happen: Tesla doesn’t want it. So a $10 billion investment could make some sense, but the deal Tesla would accept, Apple wouldn’t and the deal Apple would accept, Tesla wouldn’t. Then why doesn’t Apple just try to buy Tesla outright? It’s important to understand how much Musk loves Tesla. On this week’s earnings call he said “I expect to remain with Tesla essentially forever.” We believe Musk as a very long-term vision for Tesla and money doesn’t motivate him. To that end, while Tesla doesn’t have dual class stock arrangements like some other companies, it does have supermajority voting provisions that protect the company from “unsolicited acquisition attempts and hostile takeover initiatives.” The supermajority provision means an acquirer would need two thirds of shareholders to vote for change of control. Since Musk owns 21% of the company, it would require 83% of the non-Musk shares to vote for the sale, which would be unlikely given shareholder support for Musk and other insiders loyal to Musk. It’s fun to talk about Apple buying Tesla, but we don’t think Tesla is for sale.

Apple has a long road ahead in auto.
One of the appealing parts of Apple investing in Tesla would be Apple getting to partner with a world class auto manufacturer. As Musk said on this week’s earnings call, the “factory will be a more important product than the car itself” and the “goal is to be the best manufacturer on earth”. Tesla has a giant lead in terms of manufacturing on the entire automotive industry. The company is investing in robotics and AI to increase their speed of production. Musk added on the call, “I refocused most of Tesla engineering, including design engineering into designing the factory.” The auto industry and auto hopefuls (WayMo, Apple, Baidu, Uber) will have a hard time catching up. So where does that leave Apple? Likely looking for a different auto partner or scrapping the program altogether.

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.

Apple, Artificial Intelligence, Google, Robotics, Tesla
4 min. read Show less
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.

https://www.youtube.com/watch?v=QLabXnEPpHY

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