Latest Research
Jump Ball for the OS of the Future

Jump Ball for the OS of the Future

As we watched the run up in SNAP shares since its IPO last week, we wondered how much of the move was based on potential revenue growth of more than 2x in 2017 or investors buying in to Snap’s long term vision as a camera company. Their vision suggests Snap wants to expand its position as an AR platform and compete for the jump ball of the next computing paradigm. That led to a bigger question: who is best positioned to win in AR and own the OS of the future? Here we weigh in on who’s most likely to grab that jump ball.

Counting Down to Tip Off

One of our core beliefs is that every 10-15 years a new computing paradigm emerges that changes the way humans interface with technology. Each paradigm shift creates an opportunity to own a new OS layer. In the late 80s it was the PC, ultimately powered by Windows, Mac and Linux. In the late 90s it was the Internet. We would argue that Google and Amazon provided the closest thing to an OS for the web. In the mid 2000s it was mobile, which is owned by iOS and Android. It’s obvious that the biggest value lies in owning that OS layer as evidence by the market caps of Apple ($730b), Google ($575b), and Microsoft ($490b).

What We Know About The AR OS Layer

We know that over the next few years, most AR functionality will happen through existing mobile OSes (iOS and Android); however, we also know that AR wearables – in order to drive a true paradigm shift – will need their own OS. It seems likely that there are 2-3 winners as the AR OS given what we saw in PC, Internet and mobile.

This is necessary because developers and hardware manufacturers need reach and scale to maximize profits, so they will only build for the biggest audiences. If there are more than 3 OSes, reach and scale will be difficult to achieve.

We also know that there will likely be at least one OS solution that is closed and one that is open. This is another commonality across the PC, Internet, and, mobile. Mac, Amazon, and iOS represent closed or integrated systems. The end-to-end experience is largely controlled by one player that allows some restricted development on the platform. Windows, Google, and Android represent open systems that allow broader utilization by third parties. Closed systems tend to be first to market, and the tight integration of software and hardware offer a user friendly experience that promotes early adoption. Open systems tend to follow, enabling third-party developers to innovate on hardware or software features while utilizing a standard, consumer-adopted OS. This means that hardware tends to become a commodity and, while there are definite challenges around miniaturization and battery today, we expect AR wearables to go the same way.

AR Is A Culmination Of Several Core Disciplines

Another core belief we hold is that the future of computing must build on prior technologies while introducing revolutionary changes; the AR OS will be no different. The winners of the AR OS layer will combine camera hardware with an OS that uses computer vision to map the real world and augment it with a layer of information and present it in a user-friendly interface. The OS will also need to incorporate artificial intelligence including the ability to interpret and interact with user speech as well as environmental sounds. But camera and UX design are just two of the more visible pieces of the AR stack. Supporting those elements are maps with points of interest, organized informational data, social data, a developer community, content, and payments. Unsurprisingly, that definition of the AR tech stack puts established companies like Google, Apple, Microsoft, Facebook, and Amazon in the best position to be AR platform winners because they already have many of the big pieces in place.

Below is a scorecard that ranks many of the major players in AR in each of these core disciplines. We note that low scores in the table represent categories of potential M&A for the corresponding company.

A few quick notes to explain the rankings. First, we didn’t rank camera even though that is a key factor, because we believe camera hardware is already commoditized. Every one of these players will have access to a relatively high quality camera in their OS efforts. By category:

  • UX design: We ranked the companies by their current capacity for UX design. On this basis, Apple ranks first given their ability to make simple, user friendly software products.
  • Maps: Having a core competency in Maps means owning proprietary map data. Google is far and away the leader; Apple and Microsoft are the only other players providing mapping services. Facebook leverages Here for maps.
  • Informational data: This category intends to rank how much purely informational or knowledge data the companies have access to. Again, Google is the obvious leader given its indexing of the web. Microsoft is second with Bing. We give Apple, Amazon, and Facebook lower data scores given that they do not focus on broad information collection like a search engine, but do have to domain specific data. Amazon, for example, likely has the best collection of commerce related information data of any of these players.
  • Social: Unsurprisingly, Facebook has access to the best social layer for an AR OS, followed by Snap. We gave points to Google for Gmail/Hangouts, Apple for iMessage/FaceTime, Microsoft for Outlook/Xbox, and Amazon for Twitch.
  • Developers: Given the rapid growth of mobile payouts, we ranked Apple and Google highest for developers. We believe they also benefit from a “cool” factor that Microsoft lacks, likely because Microsoft isn’t meaningful in mobile. We ranked Facebook slightly behind given that many web developers integrate Facebook into their services. We ranked Amazon 5 for its developer relations through AWS, although those developers aren’t specifically for an Amazon platform in the same way as the other players.
  • Content: We believe that YouTube, with over one billion hours of video viewed a day, makes Google the top content platform, followed by Amazon. We rank Facebook third given the rapid growth of video on their platform. Snap holds its own again the giants through its broad partnerships with media groups to create content for Snapchat.
  • Payments: We ranked payments based on technology, not adoption. While adoption is important, we believe having underlying payments tech is more important than adoption in building a new OS. We ranked Apple highest with Apple Pay and its hardware based security solution, which we view as slightly more secure than Google’s Android Pay or Microsoft Wallet, as they are cloud-based solutions. Facebook and Snap do not currently have mobile payments solutions that extend beyond their platforms.

R&D Spend

We realize that spending doesn’t equate to success, but we view spending as a proxy for how determined these companies are to win the jump ball. The five biggest players in the space will collectively spend $51b on R&D in 2017.

A Closer Look At The What The Key Players Are Doing Now:

  • Google: Google was an early experimenter with Glass (2013) and Tango (2014), though neither of those efforts have established an AR OS. While it’s easy to criticize the discontinuation of Google Glass, it simply turned out to be a before-its-time experiment. Tango, on the other hand, looks like a for-its-time experiment. There is already one Tango-enhanced device: Lenovo’s Phab 2 Pro and Acer has also developed a Tango-ready phone. Both devices utilize three rear-facing cameras to enable Tango’s AR experience. We see Google as the most likely winner for the open AR OS, which could evolve from a combination of Android and Tango, augmented by its machine learning efforts. Google will likely also make its own hardware in a limited fashion like it does with “hero phones” today (e.g., Pixel).
  • Apple: Apple has aggressively let the market know that it intends to be a player in AR. Tim Cook has made public comments about the company’s interest in AR six times in the last seven months. The next iPhone, if it integrates a dedicated 3D mapping chip as expected, could be the first AR hardware to gain mass adoption (more than 100m units a year). The iPhone’s new chip will not only enable developers to create unique AR experiences on the iPhone, but Apple may also show off the capabilities of the chip with help from Prime Sense and Metaio, two of the company’s more recent AR software acquisitions.
  • Microsoft: Microsoft may be the furthest along in AR today with the Hololens and its Windows Holographic OS. Philosophically, we believe that Microsoft knows it missed mobile despite being one of the early players in the space with Windows Mobile. Thus, we think the company is determined not to miss AR. The biggest challenge for Microsoft will be that its doesn’t quite match up to Google in most of the core competencies to win in AR. Microsoft’s best competency lies in productivity, which we don’t view as a necessity to win the AR OS battle.
  • Facebook: Facebook was early to recognize the opportunity to own an OS with Oculus. In 2014 at the time of the Oculus acquisition, Zuckerberg commented, “We’re making a long term bet that immersive virtual and augmented reality will become a part of people’s daily lives.” Over the past three years Zuckerberg has been Oculus’s headline product evangelist, which emphasizes his determination to be a force in VR & AR for the long term. Zuckerberg has also characterized VR as 5-10 years ahead of AR. While there is definite overlap between VR and AR – and we believe Facebook is experimenting on both – it seems the company is more focused on VR at this point. We think this makes sense given the company’s relative weaknesses in the AR stack (maps and informational data), which are less relevant in VR. Social is their core competency, which, alongside content, are the two most important elements to winning the VR OS layer.
  • Amazon: We don’t expect Amazon to make a play on AR wearables, although we do think they are a player in AR through Alexa, an open OS. Alexa-powered devices will eventually include cameras that will enable computer vision, giving Amazon the ability to interact with both speech and sight. Bigger picture, we believe Amazon wants to maintain its authority as the OS layer for commerce. They will insert themselves into both open and closed AR platforms in the future and they don’t consider owning the platform as an imperative.
  • Snap: Communication is a key use case for AR, which represents Snap’s biggest advantage. The camera is already the basis for communication today, not text. That trend will be even more pronounced in the future. Snap’s focus on the camera as a communication tool gives it a singular focus around which to develop great experiences. Spectacles are an early example. However, it’s hard to envision Snap winning the AR OS battle given that they can’t offer incremental features beyond social to developers. For this reason, we think it is Snap’s goal to do one thing extremely well: communication in AR. In this sense, they could be an intermediary between developers and the larger OSes that enables unique AR functionality beyond the tools created by the OS owner. We still view this role as highly valuable, but not in the same league as owning the OS itself.

Putting It All Together

Maybe our conclusion is disheartening: in the foreseeable future, some combination of Google, Apple, and Microsoft is likely to win the AR OS race. While not exciting, it’s logical. Apple and Google, prior OS winners, won the mobile layer. Part of the reason is that these shifts are well defined and the existing players are carefully positioning themselves to be sure that they have a seat at the table. The good news is that the future won’t always be owned by the incumbents. As we move away from purely digital technologies into ones that combine the sciences — biology, chemistry, psychology – the opportunities for new major players will emerge.

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, Augmented Reality, Facebook, Google, Snapchat
8 min. read Show less
Feedback Loup: Snapchat

Feedback Loup: Snapchat

We think customer feedback is a critical (but too often overlooked) component of understanding where technology stands today and where it’s headed in the future. Our Feedback Loup series provides real customer feedback on the technologies shaping our future. Snap’s IPO is a perfect opportunity to step back and gather comments from Snapchat users on their habits and practices from frequency to filters.

Snap’s public offering is great for the tech industry and is a huge accomplishment for the company. We summarized our thoughts in an open letter to the company, touching on managing expectations while chasing a bold long-term vision. We’re big fans of the direction they are heading with their core AR capabilities and budding hardware lineup. We recently argued that Snap is an augmented reality powerhouse because Snap combines market-leading AR technology with dedicated cameras, like Spectacles, to deliver an unmatched user experience.

But we wanted to bring the Snap story to life, gather some real user feedback and, for novices, show you why people love using Snapchat. So we asked 32 college students – a small “buzz” survey within a core demographic – about how they use Snapchat. Here’s some of what we heard:

Key Data Points from our Buzz Survey of College Students:

  • 66% snap more today than they did 6 months ago
  • The average user snaps 37.8 times per day
  • 69% send more than 5 snaps per day
  • 41% could recall a specific ad they saw on Snapchat

We know Snapchat’s global user base is growing rapidly. Our data suggests that college Snapchat users are also using the service more often. 66% of the students we spoke with said they snap more now than they did 6 months ago, 28% snap less frequently today, and 6% snap roughly the same amount.

Among the 32 students in our sample, the average user snaps 37.8 per day. 69% send more than 5 snaps per day and 19% send more than 75 snaps per day. One user told us that she sends about 200 snaps per day. Interestingly, the median number of snaps per day was 17.5, so it’s easy to see the 80/20 rule in effect.  Based on our results, 80% of the snaps in our buzz survey were sent by 30% of the users we surveyed.

We also asked each user to pick a favorite Snapchat filter. The most popular option is to send a snap without a filter; 25% of users prefer no filter. The most popular filter is the dog filter (13%) followed by the face swap filter (9%).

Snap weaves sponsored content, filters, and ads into the Snapchat experience in an engaging way that sometimes goes unnoticed by users. It’s hard to use Snapchat without exposure to content that generates revenue for the company. While the seamless integration of sponsored content is clearly an objective for Snap, ad recall rates are also important for brands. Our survey found that 41% of users could recall a specific ad they say on Snapchat.

Notably, about two-thirds of those who could not recall a specific ad remember seeing ads more generally. But that implies that about 20% of all users in our sample do not even realize that Snapchat serves ads to its users.

Snapchat has the ability to generate advertising revenue by charging brands to post stories to its “Discover” page, and also by selling advertisements in three forms: Sponsored Ads, Geofilters, and Lenses.

  1. Sponsored Ads are full screen advertisements that users see in Snapchat. These ads can be seen in two places. First, the “Discover” stories that companies manage. On “Discover” stories, brands such as CNN, WSJ, Comedy Central, ESPN, National Geographic, or iHeartRadio can post pictures about their articles. Users can then swipe up to be directed to the article on the sponsor’s website. Companies on the “Discover” page can sell advertisements to other brands or allow Snapchat to sell advertisements to brands on their behalf. In both instances, Snapchat and the “Discover” brand will share the revenue. Second, sponsored ads can also be seen by a user in between their friends’ stories.
  2. Sponsored Geofilters are overlays that place an outline over a picture or video. These overlays allow brands to create a filter that users can add to the photos they share with their friends. Among our respondents that could recall a specific advertisement, 40% recalled a “Sponsored Geofilter” of an upcoming movie.
  3. Sponsored Lenses are similar to filters, but allow the manipulation of a photo or video before it is taken. Brands are able to create their own lenses that include their logo, with the intention that users will select their lens and send it out to their friends.

Now that Snap is publicly traded, there will be even more scrutiny on how its users are engaging with the platform, including user growth, time spent, and ad revenue.  Snapchat has established a unique ad experience within its platform as demonstrated by the 5x y/y growth rate in revenue in Q4 2016.  The company has established a deeply engaged user base generating a solid foundation in ad revenue with interesting optionality in camera hardware.  It will be fun to see how these assets converge even more in the future.

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, Feedback Loup, Snapchat
4 min. read Show less
Snap’s IPO And The Road Ahead

Snap’s IPO And The Road Ahead

Snap priced its IPO at $17 per share, implying a $23.6 billion market cap.  To put the valuation in perspective, we think Snap could grow revenues by 100% to ~$800 million in 2017 and believe some buy side investors think the number will be closer to $1 billion.  Therefore, Snap is trading at about 29.5x our CY17 revenue expectation and 23.6x the early bullish whisper.  For comparison, Facebook trades at about 10x the Street’s CY17 revenue estimate of $37.8 billion.  There is a vast difference in forward growth that helps justify the difference in multiples: 100%+ y/y growth for Snap this year vs 36% for Facebook.  Snap is obviously at a much different stage in its lifecycle as a company vs Facebook and is actually attacking social networking from a different angle – the camera.

We believe investors will have questions over the next year as to what being a “camera company” means.  Philosophically, we think of it as Snap trying to own the tech stack one step above social.  The camera has already established itself as the future of communication.  Snapchat, Snap’s flagship product, relies on smartphone cameras to enable its service.  Without connected cameras, Snapchat doesn’t exist.  By trying to own, or at least influence, the camera layer itself, Snap evolves beyond a social media app into an enabler of communications.  In that sense, Snap’s focus on the camera is not all that dissimilar from Facebook with its experiments with VR and AR.  The difference is Snap appears to be all in.

Trying to own the camera layer may come through multiple products.  Most obvious is software that uses and enhances current cameras.  Snap already does this with products like Lenses.  We expect the company to continue to develop software that utilizes the camera both in core Snapchat and perhaps outside of it as well.  The second camera product is Spectacles, which we view as the most useable AR glasses on the market today.  There is next to no learning curve because the glasses focus on one simple task: recording video through a camera.  Spectacles aren’t the future of AR, but they are a baby step toward the next phase that will add a little more functionality.   Beyond Spectacles, we believe the company is experimenting with other hardware, which may be other consumer wearables or may be products they look to partner with existing hardware manufacturers.

We don’t know how the stock will react tomorrow or over the next year.  What we do know is that the camera is at the centerpiece of communication already, and if Snap can find a way to own the camera they will be rewarded handsomely.

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, Facebook, Snapchat, Virtual Reality
2 min. read Show less