Apple reported its first annual decline in sales in 15 years earlier this week, which is focusing investors’ minds, as well as those of the management. You wouldn’t expect the world’s most successful company not to be thinking seriously about what it should do next. So it is worth looking more closely at a couple of strategic pivots the company has made in the past few months. Combined these changes would amount to more than a couple of billion dollars in reallocated research and development spend, which was the question that the Morgan Stanley analyst asked rather pointedly.
There are multiple well-sourced reports that Apple has all but abandoned the self-driving electric project as a stand-alone piece of Apple hardware, slashing up to half the workforce, replacing the division head and cutting the budget significantly. There will also be a strategic review at the end of 2017, at which time a decision on Project Titan, as it is called, will be made.
CEO Tim Cook dodged the question on this during the conference call, saying he would not comment on rumours. But an analysis of the self-driving car plan raises a long list of questions. Principal among them is this one: who pays for the car? Remember, under the taxi/uber/hire car model, the car in which you ride is brought to you by the driver that pays for it. Take out the driver, and the car goes too, as we noted here.
And since the driver is the most expensive part of the trip (at around $50k a year, give or take, compared with the depreciation at say $15k) riding around in self-driving cars becomes massively cheaper than taxis or Uber cars – which further reduces private car ownership. Pushed to its logical conclusion, it is possible that “private” transport will be via competitive fleets of self-driving cars tiered to serve different parts of the market. So Apple as a car fleet owner? Hardly a model to which it would be attracted.
But a well-designed purely electric car with some (limited) driver assistance could still present an attractive niche business for Apple – say 1m units a year at $50k, for a $50b revenue impact. This seems to be what Tesla is about, and as an interim business is something that could be of interest. And if the electric car ultimately morphs into something different (as the iPod did with phone) then the company is right there with a product.
Of no less importance are the moves Apple is making in augmented reality. A (very) few well connected commentators have noted that the new iPhone 7 camera has two lenses. This allows additional photographic techniques such as better portraiture, but the real point to note is that it also makes the camera virtual reality ready – today. True, Apple doesn’t have any devices yet (like Facebook with Occulus, or Sony with PlayStation) but the feature could be useful in FaceTime, which with a VR option could enliven the conversations with emojis, animations etc.
Cook’s vision for VR can be thought of as a Pokemon Go experience, in which the real world is seen through a screen, with something unreal introduced into that screen. Microsoft is onto this, as is the largest start-up ever, Magic leap (which has raised over $1.3b and is not really all that close to having a product).
To get a feel for this, have a look at the video from a company called Metaio, which Apple bought last year. The application allows users to overlay historical (augmented) reality over the real scene which the device camera is picking up – so the Berlin Wall as it was in today’s reality, which is a kind of time travel app.
Apple also bought a company called Primesense, which provided the smarts to the X-Box Kinetic, enabling users to be tracked as they moved around a room. This could be important in a world where reality is provided not by walls but by the one you slip over your face when you put on the headset.
Even more radical, but not to be discounted, is the suggestion from Robert Scoble, a respected VR commentator, who says Apple is quite far down the path of providing a phone which is a clear piece of glass with the compute strip (battery, electronics) along the bottom. If that piece of glass were glasses (as in spectacles)… well, you get the idea.
Like Apple’s plans in voice search, outlined here a few days ago, these developments should not be seen just as quirky bits of technology. They will change business models altogether, in ways no less profound than the shift to the internet itself, or the roll-out of electric power a century ago. Taken all together, the pace of change for business is quickening, with very significant developments just over the horizon to keep investors focused on the main game.
Alex Pollak is chief investment officer of Loftus Peak, a fund manager that specialises in building listed global portfolios for self-managed super funds.