Reinventing Oneself: Apple and Loup Ventures
We are believers that every 10-15 years people need to reinvent themselves. It’s a natural progression. As the world changes, we need to change with it. We believe the world is about to undergo a major change in how we interact and interface with machines. Because of this coming change, after many years as sell-side stock analysts, we are reinventing ourselves as venture capitalists.
The 10-15 year reinvention plan applies to companies too. During our time on the sell-side, we were most well known for our coverage of Apple. We started covering Apple in the early 2000s as it began its first reinvention from a computer company to a portable electronics and digital media company with the iPod. We are getting close to the 15 year mark of that reinvention, which suggests it may be time to think about the next reinvention. In the past we’ve written about Apple’s focus on its Services segment (App Store, iTunes, Apple Music, etc.), and that’s where it makes the most sense for the company to reinvent itself — as a world class digital services company.
Reinventing yourself is a careful balance. We think the best way to do it is to keep some of the best qualities you developed previously and use them to vault yourself into being best in breed at something completely new. Hardware is what Apple does best. We know that they have always viewed hardware and software as a cohesive unit. They combine to deliver a special experience that can’t be matched by only doing one or the other. Historically, the company’s services helped it sell hardware to new users and, probably more importantly, retain current hardware users. iTunes and the App Store are examples. But the company’s newer efforts in services, including Apple Music and an eventual TV streaming service, seem to be more about monetizing their large hardware user base. We expect Apple to eventually lower the price of the iPhone and reduce its gross margins in the next 3-5 years, which are about 40% today. This will trigger an expansion in the Apple hardware user base from 1 billion people today to what could be 1.5 billion in 5 years. This larger user base will build a more profitable, predictable services business, with about 60% gross margins. Apple may be under pressure in the near term as this transition starts, but the company will be rewarded long term.
There are many music streaming and TV streaming services, so Apple has to do them better by leveraging their platform ownership advantage. The careful balance here is making sure that they continue to innovate on the hardware side while becoming a great services company, and that is where the reinvention story gets truly interesting.
The iPhone is going to go away. Not next year and maybe not five years from now, but it’s unlikely we see an iPhone 20. At least it won’t be a thin sheet of aluminum and glass that you keep in your pocket. We think VR and AR will combine to replace all of the computer interfaces we use today, so its critical for Apple to innovate in those areas with hardware; however, more than any other digital media device in the past, services and content will sell VR and AR devices because they are all about the experiences they deliver. So the future for Apple will mean leading with great services supported by hardware instead of the other way around.
So, as venture capitalists, why do we care about Apple’s efforts to transition to a services company? Because we believe it means they will be investing heavily in improving its services offering. What we don’t expect them to do is buy a bunch of content businesses. Observers like to debate what major companies Apple should buy given their balance sheet. We’ve heard everything over the years. Netflix. Twitter. Time Warner. Snapchat. We don’t think any of those happen.
More likely? Apple buys a handful of emerging companies trying to build unique platforms. Companies that have a kernel of something special that Apple can put its significant resources behind to build into something even more amazing. That is Apple’s acquisition playbook. They did it with P.A. Semi to build better processors for the iPhone. They did it with Siri to build Siri. They did it with Authentec to build Touch ID. They used Beats, both the executive team and the technology, to build Apple Music. Aside from Beats, none of these deals exceeded $1 billion in value. We don’t think Apple is afraid to make a large acquisition, but we do think they are well aware that it will be harder to utilize and integrate a large acquisition as well as they do smaller ones.
In our reinvention, we will maintain the thing that we do best: research. As venture capitalists, we will keep sharing our tech industry thoughts with the world. We will keep talking about the companies we know best, including Apple, who also happen to be major players in our four investment themes: VR, AR, AI, and robotics. We will keep conducting surveys to figure out what average consumers think of our emerging themes and where hidden opportunities lie. Reinvention is scary, but it’s also exciting. It’s easy to stay in a place where you are comfortable, but being uncomfortable is how you reach new heights. We’re hungry and foolish.
Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. 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.