For Apple (NASDAQ:AAPL), the enormous success of products like the iPhone and iPad is a tough act to follow. Given that fact, what next technology is Apple CEO Tim Cook the most excited about? The answer is augmented reality, or AR, which overlays images, video, and games over real world experiences.
Cook has likened AR's potential to that of the smartphone. He predicts that in the future, we will all have "AR experiences every day, almost like eating three meals a day. It will become that much a part of you."
That's a pretty bold prediction, but Apple's track record as an innovator in technology is unmatched. And it has supporting data to back it up. Research firm Global Market Insights anticipates that the global market for AR products will grow at 81% CAGR to $165 billion by 2024.
Augmented Vs. Virtual Reality
Augmented reality is the lesser known relative of virtual reality. Virtual reality completely immerses a user in an artificial world which holds obvious attraction for gamers. While VR headsets like Facebook's (NASDAQ:FB) Oculus and Samsung's (OTC:SSNLF) Gear are very cool, niche products, they are hardly "transformational." On the other hand, wearable AR devices actually have the potential to be mainstream products that could even ultimately replace the smartphone.
One of the key differentiators between VR and AR is that augmented reality, as its name suggests, is not totally immersive. It does not replace or interrupt reality, it improves or "augments" it. Apple initially intends to add AR features and functionality to the next generation of iPhones. But ultimately it plans to come out with wearable AR glasses.
Current implementations of AR glasses are underpowered, lack functionality, and are just plain "clunky," but Apple is known for its innovation in slim, seamless, and sturdy design. If Apple can find the balance of functionality and fashion, it will succeed where others like Google (NASDAQ:GOOG) (NASDAQ:GOOGL) glass have faltered.
Like the Apple Watch, these products will likely be initially tethered to the iPhone. Even though the smartphone will do much of the heavy lifting, streaming 3D content to the glasses will require a lot of power. So prolonged battery life will be a critical aspect for AR devices.
But ultimately it will be all about the content. To quote VC firm Loup Ventures Managing Partner Gene Munster (a former analyst with Piper Jaffray), "to be successful in AR, there is the hardware piece, but you have to do other stuff too: from maps to social to payments." Munster believes Apple is one of the few companies that can pull it off. Indeed, Apple is dedicating a huge amount of resources to AR technology and putting some of its best engineers on the project and hiring talent from Facebook's Oculus and Microsoft's (NASDAQ:MSFT) HoloLens.
The potential use cases for augmented reality in the area of health and fitness are particularly promising. Fitness wearables expert Ted Vickey, a member of the EQM Wearables Index Committee, cites the recent fitness craze of Pokemon as an example of what the future could hold for augmented reality within fitness. Another recent example is Zumba's new VR class experience which offers a 360-degree Zumba group class from the comfort of your own home. "We are just at the tip of the iceberg when it comes to using this type of technology in the health and fitness space," says Vickey.
AR a Demand Driver
According to IDC, although AR still lags its cousin VR in terms of current shipments, AR headsets are expected to bring in significantly more revenue over time as the projected value of AR grows from $209 million in 2016 to $48.7 billion in 2021. This far exceeds IDC's VR headset forecasts of $2.1 billion in 2016 to $18.6 billion in 2021.
Gene Munster is particularly bullish about a potential Apple push into AR based on his company's survey of 502 likely iPhone X purchasers rumored to be available this fall. When considering consumers likely to buy the phone, 26% cited an interest in the AR features. Not surprisingly, this interest was highest among the 18-29 year old millennial demographic and male consumers. Based on the survey data, he predicts the AR-related features on the new iPhone will be a significant demand driver, quite possibly impacting AR "in a very big way." Indeed, he views the new upgrade cycle and the tech giant's foray into AR as a reason to own shares.
Opportunity Set in Wearables
When most consumers think of wearables, they think of activity trackers and smartwatches. But the opportunity set is far broader. Wearable devices seamlessly integrate computer and monitoring functionality, providing easy and reliable access to immediate information, acting as an "untethered" gateway to the Internet of Things. Smart wearable devices are providing innovative solutions for medical technology, industrial and military purposes, in addition to consumer applications in infotainment, lifestyle, and sports and fitness.
Wearables are any electronic device that can be worn on the body either as an accessory or as part of your clothing. In fact, Levi's and Google are about to launch a new smart commuter jacket aimed at those that bike to work. It allows riders to take phone calls, get directions, and check the time with a swipe of their sleeves. This example of smart clothing offers a preview into some of the wearable innovation in the pipeline besides AR and VR.
Here is a table summarizing some of the many applications for wearable technology:
Sports and Fitness
Lifestyle and Infotainment
Healthcare and Medical
Source: EQM Indexes, Investment Case for Wearables White Paper
It is no wonder that according to Juniper Research, wearables are on track to become a $19 billion industry by 2018.
The Apple Watch was Apple's first foray into wearable technology. While it has not had the same magnitude of success as the iPhone or the iPad, the Apple Watch still leads in the smartwatch category with 152 million units sold.
And don't count out the smartwatch just yet either. Research firm IDC just doubled its estimates for the segment as it expects it to "hyper-segment" into niche categories such as connected kids' watches, athletic watches, luxury and fashion watches, and lifestyle watches that better address different segment needs, whether they be communication, health and fitness, or as smart luxury and fashion timepieces.
A great example of IDC's hyper-segmentation thesis is the popularity of the kids' watch segment in China, which sold 16 million units in 2016. These watches are primarily designed to help concerned parents track their young, pre-smartphone carrying children.
After a brief slowdown in 2016 due to delayed launches of major platforms and vendors struggling to maintain pace, IDC expects new vendors, emerging form factors, and expanded retail distribution to drive worldwide shipments in the coming year.
AR's Genre-Defining Moment
While it is good to see growth in the smartwatch category, it now appears the next big bet on wearable technology will be with augmented reality. If companies like Apple have success with AR, it will be a transformational moment for the wearables industry as a whole. And tech behemoths such as Facebook, Google, and Microsoft are also heading down the AR path hoping to create a genre-defining product that permanently augments wearable reality.
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Disclosure: I am/we are long WEAR.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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