Quick Thoughts: AAPL renews its vows to the device

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  • AAPL’s WWDC 2017 keynote reaffirms its commitment to being a device-first player with its usual OS updates and incremental updates to the Mac and iPad product lines
  • The premium priced HomePod is more premium home speaker system than virtual assistant; GOOGL and AMZN continue to have superior AI capabilities
  • AR Kit stands out as the most intriguing announcement of the day as it will allow third parties to build AR apps, but longer term the best apps will need the cloud and 5G
  • APPL’s device-first focus calls into question the long-term strength of AAPL’s positioning versus the other platforms
  • Paul appeared on CNBC earlier today to talk AAPL

Apple doubled down on its device focused strategy with its WWDC 2017 key note presentation. The day kicked off with a comedic video teasing an App apocalypse after a datacenter goes down, an obvious jibe at its cloud savvy competition. Moving on through new iterations of its OS software platforms for Apple TV, Apple Watch, Macs, and finally iPhones and iPads, the primacy of each device was made clear. The cloud is supplementary resource not the main platform.

Most of the announcements filled holes. The AppleTV got Amazon Prime Video access, ending a standoff between the two companies and bringing Apple to parity with the many other TV devices that already had the Amazon service. Apple Watch got Siri support, cool new watch faces, and the ability to sync with a variety of gym equipment from leading vendors – looks like more pressure on FitBit. Safari got ad tracker and auto-roll video blockers sure to annoy Facebook, but unlikely to drive new Mac converts. Improvements to the MacOS High Sierra version came with new iMacs and MacBooks, the first update on the iMac for more than two years. Bragging about Apple Music reaching 27 million paid users rings a bit hollow considering that Spotify went from 20 million to 30 million users in 9 months without the benefit of an installed base of nearly a billion iOS devices, and now has more than double Apple Music’s subscriber base. With more than 500M Apple users visiting the App Store daily, we think it a bit of an indictment that nearly 2 years into the service, just 6% of those daily visitors have signed on.

The most interesting announcements were ARKit, which provides developers with clear APIs to build augmented reality apps for both iOS and MacOS, and the HomePod, which implements the Siri virtual assistant in a high quality wireless speaker. Both are glaring examples of Apple’s commitment to device primacy. Surely, ARKit will draw 3rd parties to build simple AR apps to run on iPhones – think better filters on Snapchat and a more compelling Pokemon hunting experience for Pokemon Go. However, we see powerful AR experiences running on the cloud with practically infinite computing power, gargantuan datasets, and fast, reliable and low lag 5G access just a few years away. We wrote about this recently (http://www.ssrllc.com/publication/a-5g-wireless-primer-the-final-ingredient-for-the-next-era-of-tmt/) and hosted a conference call to discuss it.

HomePod is a $349 home speaker with the Siri virtual assistant as the primary user interface. Unlike Amazon and Google, which have priced their products to move at $129, and view them as a distribution vehicle to drive engagement for their cloud-based core franchises, Apple apparently sees the home speaker as a standalone product. In this, it is really competing with Sonos, whose wireless speakers run for $200 to $700 and sell on convenience and sound quality. In this context, HomePod is a cool product for audiophiles, but Apple hopes that it inspires many more music lovers than Sonos, which has annual revenues of just $1.5B.

None of these products is likely to really move the needle for a company with $220B in annual revenues, two-thirds of which come from the iPhone. Investors have been breathless in anticipation for the iPhone 8 – or the iPhone X, or the Tenth Anniversary iPhone, or whatever they call it – but that won’t be announced until September. In the meantime, these incremental advancements will probably suffice to keep interest sufficiently piqued.

Sill, in the long run, we believe the device-first approach is wrong footed and poorly positions Apple while its rivals assemble the core ingredients for a cloud and AI driven future. GOOGL, AMZN, MSFT, and FB have all heavily invested in assembling the 3 key ingredients of AI – hyperscale infrastructure, top AI talent, and vast troves of data – using them to build powerful application platforms that play across devices and venues. Running AI on a smartphone today reduces latency and protects against those times when a high speed connection isn’t available or costs too much, but that won’t always be true.

We’ve recently written about 5G improving connection speeds, latency, availability, network flexibility and costs by a magnitude or more when it deploys about three years from now in 2020. (http://www.ssrllc.com/publication/5g-hyperscale-ai-5g-sea-change/) With 5G in place, the practical advantages of device based AI will evaporate, positioning cloud-based AI platforms to flourish, spurring adoption and engagement in use cases like virtual assistants, autonomous vehicles, augmented reality and predictive analytics.

AAPL is clearly chasing two of these use cases: virtual assistants and augmented reality. Siri was a pioneer when it was introduced in 2011, but the times haven’t been kind to it. 3rd party evaluations now consistently rate Google’s Assistant, Microsoft’s Cortana and Amazon’s Alexa ahead of it in terms of its ability to recognize requests and to fulfill them. Apple wisely realized that its HomePod might not sell on the basis of Siri alone and has focused on audio quality as the primary differentiator for the premium product. Apple’s crowing about transmitting data back to the cloud ONLY when the “Hey Siri” command is uttered is pretty empty – the same is true for “OK Google”, “Alexa” and “Cortana” as well. As a pure AI assistant platform, HomePod is extremely pricey – a 150% premium over either Amazon Echo or Google Home – so it better sound crazy good. Meanwhile Amazon and Google are working to undermine the App model with every home speaker they sell.

ARKit looks to promote iOS as a major platform for augmented reality, and it will certainly attract a swarm of developers offering simple AR inflected apps a la Snapchat or a more sophisticated Pokemon Go. However, the game changing AR apps, like those demoed with Microsoft’s HoloLens or the secretive Google-funded startup Magic Leap, are not possible to build on a smartphone. We expect 5G to catalyze a flowering of cloud-based AR that will quickly surpass even the most sophisticated local device implementations.

Apple’s device centered religion delivered unto it the iPhone, and absent Steve Jobs, it seems no one there recognizes a coming sea change that will dramatically favor its cloud-focused rivals. This WWDC is just more evidence of that.


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