Apple Strategy

Teardown
The maverick of personal computing is
looking for its next big thing in spaces like
healthcare, AR, and autonomous cars, all
while keeping its lead in consumer hardware.
With an uphill battle in AI, slowing growth in
smartphones, and its fingers in so many pies,
can Apple reinvent itself for a third time?
In many ways, Apple remains a company made in the image of
Steve Jobs: iconoclastic and fiercely product focused.

But today, Apple is at a crossroads. Under CEO Tim Cook,

Apple’s ability to seize on emerging technology raises many new
questions.

Primarily, what’s next for Apple?

Looking for the next wave, Apple is clearly expanding into

augmented reality and wearables with the Apple Watch AirPods
wireless headphones. Though delayed, Apple’s HomePod speaker
system is poised to expand Siri’s footprint into the home and
serve as a competitor to Amazon’s blockbuster Echo device and
accompanying virtual assistant Alexa.

But the next “big one” — a success and growth driver on the scale
of the iPhone — has not yet been determined. Will it be augmented
reality, healthcare, wearables? Or something else entirely?

Apple is famously secretive, and a cloud of hearsay and gossip

surrounds the company’s every move.

Apple is believed to be working on augmented reality headsets,

connected car software, transformative healthcare devices and
apps, as well as smart home tech, and new machine learning
applications.

We dug through Apple’s trove of patents, acquisitions, earnings

calls, recent product releases, and organizational structure
for concrete hints at how the company will approach its next
self-reinvention.

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Given Apple’s size and prominence, we won’t be covering every
aspect of its business or rehashing old news. But some of our
main areas of focus include:

Apple’s bold bet on a post-smartphone world through augmented

reality and battery-efficient wearables, including AR glasses.

There’s strong evidence Apple is once again actively “cannibalizing

itself,” putting massive resources behind consumer tech that
will render its own iPhone obsolete. Augmented reality is the
company’s biggest bet. New AR apps are on the way, and there is
new evidence AR glasses are also in the works. Wearables such
as the Apple Watch and in-ear computers like the AirPods already
allow Apple’s customers to make and receive calls without an
iPhone.

In the last earnings call, Cook said Apple’s wearables business was
large enough to rank as a Fortune 400 corporation. That means
Apple Watch and AirPods are generating ~$27B or more in annual
revenue.

Meanwhile the infrared camera tech behind the iPhone X can also
underpin Apple’s future moves into augmented reality and more.
Apple is even looking at holograms as a possible UI.

AI is an Achilles’ heel for Apple.

Despite some sizable recent acquisitions of AI companies at a

valuation of $200M or more and an initial lead with Apple’s 2011
launch of its virtual assistant Siri, Apple has ceded ground in the
fields of machine learning, natural language processing, and more
to Google, Amazon, and others. Apple also has a relatively weak
patent portfolio in this area.

That said, Apple has made 11 AI-related acquisitions in the last 5

years, and has the capacity to design its own AI-optimized GPU
chips — something competitors like Google and Amazon do not
have. More could be in the works.

Autonomous vehicle efforts seem to have pivoted away from a

car, and toward autonomous driving software and technologies
like a light and ranging detection sensor (LiDAR).

We dig into what information is available on Apple’s auto project to

hazard a guess on what Apple’s looking to salvage from a project
that once reportedly employed several hundred people.

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Apple faces another uphill battle in media and entertainment.

Even as services and media (including the app store, iCloud, and
Apple Music) become the company’s fastest-growing business
segment, Apple faces competition in one priority area: original
content. Apple is late to the original content game in comparison
to Netflix, Amazon, and even Hulu. And given Apple’s $1B content
budge, barring a mega-acquisition, key hires may not be enough to
catch up.

Perhaps surprisingly, Apple’s jobs focus still leans toward

hardware engineering.

This throws a wrench into the theory that Apple is increasingly

focused on services over hardware.

Even at 80,000 strong, Apple is continuing to shore up its hardware

and software engineering. Despite the company’s increasing
emphasis on AI, services, and software, it’s still hiring for more
open jobs in hardware than software divisions

We also look at Apple’s strength in frequently overlooked areas

like cybersecurity, battery tech, and healthcare

Apple is clearly aiming to be at the center of consumer wellness

and preventive health with its Watch product.

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 Table of Organization & Priorities
»» Org chart
Contents »» Analysis of open jobs listings
»» Earnings calls trends
Future-defining Initiatives
»» Artificial intelligence
··AI M&A trends
··AI patent trends
»» Augmented reality
··AR M&A trends
··AR patent trends
··AR earnings calls trends & future offerings
»» Autonomous Vehicles
··Battery technology
··Auto M&A activity
»» Wearables
··Apple Watch
··AirPods
»» Smart home
»» Healthcare
»» Media & services
»» Cybersecurity & biometrics
»» Core business in multi-touch computing
Final Words

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Organization Apple remains a top-down organization
with a great deal of CEO control
& priorities Apple used to be infamous for its top-down approach. A longtime
trusted member of Steve Jobs’ team, now-CEO Tim Cook was
originally hired out of Compaq to revamp Apple’s broken supply
chain.

In contrast to Jobs’ showmanship, Tim Cook is “a ruthless systems

guy” who rose to Jobs’ inner circle by managing the unglamorous
parts of the business.

Today, it seems that Jonathan Ive has assumed control as Apple’s

design lead, the role once held by Jobs, while Cook manages just
about everything else.

According to Apple’s own key people page on its website, Tim Cook
has 17 direct reports, including Ive, CFO Luca Maestri, COO Jeff
Williams, and various SVPs and VPs.

Who’s running the show: Apple’s leadership

As of 11/16/17

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Apple’s secrecy extends inside the organization, with every project
on a need-to-know basis. Teams often don’t know what other
teams are working on, and are purposely kept apart. Former
hardware executive Jon Rubinstein once told Businessweek,
“We have cells, like a terrorist organization… Everything is on a
need‑to‑know basis.”

Notably, Apple is a “functional organization,” meaning it doesn’t

divide itself up by product line, with teams specialized according
to iPhone or Mac, for example. Instead, Apple is organized by
functions, so that Phil Schiller’s marketing organization handles the
marketing for all products and geographies.

This is no doubt an unwieldy structure at times, given the

company’s diverse business lines in software and services, phones,
and computer hardware.

But at the same time, this structure allows Apple to retain what
might be called a startup mentality. (In contrast, at a company with
a more traditional organizational chart branching off into product
divisions, product VPs might campaign to keep obsolete products
on the shelf for the sake of their jobs.)

When it comes to M&A activity, Apple’s acquisition focus has

centered on bolstering the dominant products of the day. For the
last decade, that’s been iPhone and its iOS, and as analyst Neil
Cybart of Above Avalon notes, it was once the same way for the
Mac:

“For 10 years starting with the NeXT acquisition in 1997, all but
one Apple acquisition were related to strengthening the Mac
platform. While this may not come as a complete shock given
Apple’s product line at the time, it is noteworthy that M&A was
not used for the iPod or to expand into other product categories
or industries. Apple then experienced five years of limited to
no M&A activity from 2003 to 2007. While the outside world
did not know it at the time, this ‘buffer’ zone ended up being
pivotal years for iPhone development. Since acquiring P.A.
Semi in 2008, every acquisition but one has been focused on
strengthening the iPhone and broader iOS platform. This new
iOS focus ushered in a significant increase in both the pace of
M&A and the amount of cash spent buying companies.”

According to Inside Apple, a 2012 book by Dan Lashinsky, internally

the industrial designers have always been “untouchable,” but as
iPhone and iPad grew into the company’s premier product, “the
coolest faction of the company [became] the software engineers
working on Apple’s mobile operating system.” That said, 5 years

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later, hardware engineers are still more sought after by Apple than
their software-focused counterparts.

Apple is still hiring more in hardware

than in software
As of December 31, 2016, there were approximately 80,000 direct
Apple employees.. To see where it’s looking to add more human
capital, we recently collected data from its site and broke down the
company’s 7,000+ open job listings.

Hardware Engineering leads by a significant margin, accounting for

34% of the open jobs.

The next largest slice was Software Engineering at 28%, followed

by Sales (9%) and Operations (8%).

For a company that’s trumpeting its growing Services business

and racing to beat others in fields like AI and AR, it’s somewhat
surprising that Apple is focused on hiring for jobs in hardware.

Apple’s open job listings

As of 11/1/2017

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Apple has recently made a few key hires. The company convinced
former Burberry CEO Angela Ahrendts to head its retail stores
(which it now has rebranded as “town halls,” in a bid to open the
company up to more current and prospective). In June, the com-
pany poached two Hollywood veterans from Sony to spearhead its
$1B push into original content, under Eddy Cue.

Additionally, Apple reportedly has 1,000 engineers in Israel working

solely on ARKit.

Earnings calls reveal a focus on

expansion markets like India and new
products like Apple Watch and AirPods
Looking beyond job listings, we also mined Apple’s annual earnings
calls to highlight recurring keywords from the transcripts, using a
significance-weighting scheme to surface words and phrases. For
the last 5 years, iPhone has dominated the conversation, as have
other main products like iPad and Mac.

Over the years, geographies like China, Brazil, Russia, and the
United States are frequently mentioned, but in 2017 India seemed
to be a new focus. Apple is increasingly looking to new markets like
India for growth, seeing slowing growth in more mature markets
like China and the US.

Earnings calls reveal Apple’s latest focus on

new markets and products
Most significant keywords in earnings call transcripts
2009–2017 YTD (11/17/17)

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 AirPods, Apple Watch, and augmented reality have also seen
increasing mentions.

Increasingly, Apple has been underscoring its strong performance

in “Services” (i.e. software-enabled digital purchases and cloud
services), including Apple Music. However, as we’ve seen in hiring
and other areas, hardware is still a focus.

As mobile penetration becomes higher, explaining Apple’s strategy

for dealing with the “upgrade rate,” which is slowing, and its play
for the high-margin “high end” market has become another theme.
Here, Apple is explaining slowing iPhone sales and its effort to
wrest more lifetime revenue from its customers.

In contrast to Google, which has called itself an AI-first company

and mentions AI frequently in earnings calls, Apple execs are not
emphasizing artificial intelligence in earnings calls.

Future-defining Artificial intelligence is Apple’s Achilles

heel — and the company is turning to
initiatives M&A to shore up its AI efforts
Pulling back the curtain on its AI effort, Apple appears to be behind.

Usage of Apple’s voice assistant Siri dropped last year, according

to third-party data source Verto Analytics, whereas usage of
Amazon’s Alexa grew.

Expanding Siri’s footprint with HomePod — Apple’s premium audio

take on Amazon’s Echo product and Google Home — was meant
to be a start to the fight against the Echo. But earlier this month,
Apple announced a delay to the HomePod, and it won’t release until
early 2018 (as opposed to late 2017 as intended).

More broadly, Apple seems to be consciously skirting the

conventional wisdom on data and AI. For many companies
today, every user interaction is thrown into cloud-based machine
learning models to help tune products, such as for tagging photos
in a photo app. Google Photos is considered to be a prime consum-
er-facing example of this.

But Apple has taken what might be called a “cloud-wary” approach,

favoring a model where computation is largely done locally on its

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devices, without user data leaving the device.

This has worked in part because Apple is primarily in the business

of selling devices, as opposed to selling advertising space like
its rivals Facebook and Google, which seek to harness user data
in the cloud whenever possible in order to increase consumer
engagement on its platforms.

In 2015, Tim Cook acknowledged Apple’s unique stance on

aggregating user data over privacy, stating:

“Some of the most prominent and successful companies

have built their businesses by lulling their customers into
complacency about their personal information. They’re gobbling
up everything they can learn about you and trying to monetize
it. We think that’s wrong. And it’s not the kind of company that
Apple wants to be.”

Inevitably, strengthening Apple’s offerings has meant a shift toward

AI. This year, Apple unveiled a new machine learning framework
called Core ML, which will give its iOS developer community the
ability to create apps that leverage more on-device computation
using machine learning. Core ML also has computer vision and
natural language processing frameworks that enable apps to label
photos and objects and identify languages.

AI M&A TRENDS
The new AI focus has been echoed in its M&A moves, and Apple
has ranked as the second most active corporate acquirer of AI
startups, with a total of 11 AI-related acquisitions over the past 5
years. Recent deals include Apple’s acquisition of image platform
REGAIND in September, as well as its acquisition of Lattice Data at
a $200M valuation in May.

Even looking only at its largest acquisitions, there’s a recent trend

of Apple spending big on startups employing machine learning.

Large acquisitions of $200M or more have gone to hardware

companies like Beats and Anobit, but in the last two years Turi and
Lattice, both of which developed horizontal AI, topped the list.

Many of Apple’s other largest acquisitions have been of semicon-

ductor companies, including Anobit Technologies, PrimeSense, and
AuthenTec.

With the company now designing its own machine learning GPU-
based hardware for the iPhone, we could see more acquisitions in
this area.

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Apple’s strength in designing purpose-built chips will come in
handy as corporates like Intel, Qualcomm, and Google put billions
behind machine learning-specific chips for data centers and
devices.

Presently, the chip world is white hot, with incumbents and ven-
ture-backed startups looking to take on the preeminent GPU maker
Nvidia. By adding an Apple-designed GPU to its latest iPhone, the
company is clearly taking the hardware front of AI seriously.

But for Apple to mount a meaningful offense here, it needs success

on the software and data fronts.

AI PATENT TRENDS
Apple is fairly active in seeking patent protection on its intellectual
property. Most famously it has patented relatively mundane things
like the iPhone’s packaging and Apple Store shopping bags.

Of course, an individual patent might only be an early sketch of a

potential product. And many patents do not amount to products.
But taken together, activity across hundreds of patents can reveal
strategic direction and priorities.

Apple’s patent application activity by category

2009 – 2017 YTD

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Interestingly, Apple’s top patent segment is cybersecurity, which
has seen 533 patents since 2009. The next most common parent
focus was AR/VR (253 patents), followed by autonomous vehicles
(72).

In comparison, only a small share of patents (22) have focused on

artificial intelligence.

The fact that Apple has fallen behind on its AI patent portfolio is
highlighted by a comparison of AI-related patents among the Big 5
global tech companies (those with the largest market caps).

AI patent application activity, Apple vs.

Microsoft, Amazon, Facebook, Google
2009 – 2017 YTD (11/10/17)

Apple’s big bet on augmented reality

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Today, FaceID, which unlocks the iPhone X by spraying thousands
of infrared light rays to recognize a user’s face, is the iPhone X’s
hottest new feature.

But this direction was clear in retrospect when looking at patents.

Apple has 5 patent grants and 2 outstanding applications for
patents in facial recognition dating back to 2015. In addition, it
acquired facial-tracking software maker Faceshift back in 2015.

Likewise, Apple obtained at least two patents this year that in retro-
spect seem key for iPhone X screen innovations: one for reducing
the border area of the device, and another one for embedding a
fingerprint sensor in the display.

Below is a drawing from Apple’s patent for “Locking and unlocking

a mobile device using facial recognition” (granted in October 2016)
side-by-side with the final product at launch:

Clearly, Apple’s future direction is not divorced from patent and

M&A bets. AR looks to be squarely in Apple’s cross-hairs given the

data we looked at.

AR M&A TRENDS
AR has been a serious M&A target in recent years: Arguably, Apple’s
most important recent acquisition was PrimeSense, whose infrared
(IR) technology first made waves inside the Kinect, a body-sensing
add-on for Microsoft’s Xbox. As tech outlets have pointed out, the
“notch” in the latest iPhone is basically a shrunk-down Kinect to
enable FaceID.

While it’s primarily used for mapping faces now, the infrared
camera in the iPhone X could be used by future augmented reality
apps to enable front-facing AR applications. For example, you

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could point your phone at a vacant lot, and the phone would spray
thousands of infrared dots into the area’s contours to render an
image of how a custom home would look in that area.

Other AR/VR acquisitions, like the recent Sensomotoric

Instruments deal, a computer vision company for AR headsets,
indicate a serious hunger to expand here. Earlier AR acquisitions
include Apple’s purchases of FlyBy Media and metaio. Meanwhile
facial recognition acquisitions (Emotient, RealFace, and Faceshift)
could certainly have applicable technology too.

Notably, the recent $30M acquisition of Vrvana indicates that Apple

is pursuing AR headsets/glasses.

Vrvana’s headset technology, pictured below, offers both AR and

VR capabilities. So far, it appears to be Apple’s first AR hardware
(as opposed to AR software) acquisition, and its positional tracking
could more immediately strengthen ARKit.

AR PATENT TRENDS
Apple is also looking beyond the physical iPhone screen for AR,
and holograms are apparently on the table.

The below patent application, called “Interactive three-dimensional

display system,” details a system that projects hologram-type
images that can be manipulated by users in mid-air, without the
need for special glasses to see them.

The application, which was filed in October 2012 and could be part
of the larger AR initiative, and mentions the fields of education,
medical diagnostics, and biomedical engineering as possible
application areas.

AR in the form of holograms is definitely a possible future direction

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that augmented reality could take. AR via hologram would mean
that projectors could beam images into physical environments
(much as robots do in movies like Star Wars).

In doing so, holograms could remove the need for clunky headsets
which have been a barrier to consumer adoption of AR. Lightform,
a San Francisco-based startup, has raised nearly $8M to pursue
this vision.

AR EARNINGS CALLS TRENDS & THE

FUTURE OFFERINGS
While often tight-lipped about its future products, Tim Cook has
a tendency to foreshadow Apple initiatives in interviews and in
quarterly earnings calls.

To get an idea of what’s to come, we looked at technologies and

geographies mentioned during the company’s earnings calls and
graphed them over time, using CB Insights’ earnings transcripts
search engine. We found:

»» Mentions of AI are a recent phenomenon, beginning only in

Q3’16.
»» Autonomous vehicles (AVs) were first mentioned in late 2017.
»» By far, AR/VR is the most-mentioned sector we examined, tally-
ing 33 mentions since first being mentioned in Q1’16.
»» In the latest Q4’17 call, AR/VR keywords were mentioned 15
times, lending credibility to it being a big bet.

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Apple earnings calls analysis
AI / ML, AR / AV, wearables, health and cybersecurity mentions

Notably, Apple’s AR headset may be coming soon. Different

pieces of evidence suggest Apple has been investigating virtual
and augmented reality applications for more than a decade. And
new revelations suggest Apple is going to have a standalone AR
headset by 2020. The AR project, dubbed “T288,” is reportedly
led by Mike Rockwell, a key hire taken from Dolby Labs who is
overseeing a team of several hundred.

The product will have its own rOS, or Reality Operating System,
which will be the spiritual successor to Apple’s mobile platform.

At WWDC in June 2017, Apple went public with its first major
effort and unveiled ARKit, which are tools for iPhone and iPad app
developers, as well as opening up a machine learning library called
CoreML.

In just a few short months, ARKit developers have released hit

augmented reality apps that will reach any Apple customer with an
iPhone 6S or above. Today, that figure amounts to 381M iPhones
and devices, but ARKit’s footprint is projected to boom up to 850M
units by 2020.

The smash hit AR mobile app Pokemon Go was reported to be the

most downloaded app in its first week in App Store history. Apple is

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also said to have 1,000 engineers working on ARKit in Israel.

And there’s already a growing ecosystem of AR apps, which are

turning the iPhone into what is arguably the most-used device for
experiencing augmented reality. Apps range from furniture retailers
like Ikea allowing users to visualize furniture in their homes to
educational games for kids that project puzzles onto their bedroom
walls, and many more.

In an early 2017 interview, Cook said he sees AR as Apple’s next big

thing:

“I regard it as a big idea like the smartphone …. I think AR is that

big, it’s huge. I get excited because of the things that could be
done that could improve a lot of lives. And be entertaining. I view
AR like I view the silicon here in my iPhone, it’s not a product per
se, it’s a core technology. But there are things to discover before
that technology is good enough for the mainstream.”

Cook has also reiterated that “AR is going to change everything.”

According to Apple’s Q4’17 earnings call, the App Store boasts over
1,000 apps that use ARKit.

But Apple faces some headwinds here as well. Serious gamers

and visual developers overwhelmingly use non-Apple PCs for their
graphics and VR experiences.

When released, Apple’s headset will surely compete with the

Google and Hollywood studio-backed startup Magic Leap, which
has been focused on pursuing an AR headset since 2011. (Neither
Magic Leap or Apple have products to show yet.)

Additionally, Apple’s patent portfolio in AR/VR, while sizable, is

modest compared to its competitors. Microsoft, Google, and
Facebook have been aggressive in this space, and have outpaced
Apple in pursuing patents.

Finally, while Tim Cook has spoken frequently about augmented

reality, but VR has mostly been neglected. Facebook’s Oculus,
Google Daydream, and Microsoft, among many others, have
kickstarted developer communities and built headsets and phones
for the burgeoning VR space, while Apple has seemingly placed all
its chips on AR.

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 AR/VR patent application activity, Apple vs.
Microsoft, Amazon, Google, Facebook
2009 – 2017 YTD (11/11/17)

Apple’s automotive project pivoting to

software and batteries
Autonomy, electric vehicles (and batteries for cars), and car sharing
are the pillars on which the future of cars is being built. Apple has
dabbled in all three areas, but sputtered when it comes to actually
building a car.

It’s a fairly open secret that Apple was working on an autonomous

vehicle (AV), and Apple researchers recently published a paper
about 3D detection of pedestrians and
cyclists, based on only LiDAR.

But overall, details on the project,

internally dubbed “Titan,” are scant.

CEO Tim Cook has said cryptically,

“We are very focused on autonomous
systems. We do have a large project
going, and are making a big investment
in this. From our point of view, autonomy
is sort of the mother of all AI projects.”

Apple’s reported LiDAR unit, image via Macallister Higgins.

Apple brought on new employees for a

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self-driving car years ago. But today, ambitions have been scaled
back to just developing software for self-driving cars. According to
the New York Times, internal disagreements and a lack of unifying
vision derailed the project:

“The team also worked on a new light and ranging detection

sensor, also known as LiDAR. LiDAR sensors normally protrude
from the top of a car like a spinning cone and are essential in
driverless cars. Apple, as always focused on clean designs, wanted
to do away with the awkward cone.

“Apple even looked into reinventing the wheel. A team within Titan
investigated the possibility of using spherical wheels … instead of
the traditional, round ones, because spherical wheels could allow
the car better lateral movement.

“But the car project ran into trouble, said the five people familiar
with it, dogged by its size and by the lack of a clearly defined vision
of what Apple wanted in a vehicle. Team members complained of
shifting priorities and arbitrary or unrealistic deadlines.”

While it’s noteworthy that Apple would approach the car with zero
assumptions, all the way down the to the wheel, the company may
have been biting off more than it could chew.

Auto is a crowded space (we’ve identified at least 44 companies

working in AV), and Apple’s chief competitors like Google have had
autonomous prototypes since 2009, putting them miles ahead in
both real-world training data and even the software that operates
the cars and hardware. OEMs have also seen opportunities in the
space, as GM’s $1B acquisition of Cruise Automation showed.

To head the car effort going forward, Apple tapped the former SVP
of Hardware Bob Mansfield as its new leader.

The refocused effort has scrapped the idea of a ground-up built

car, instead focusing on a CarOS software and building autono-
mous systems for driving, but that’s a challenge in and of itself

BATTERY TECHNOLOGY
One area where Apple is seeing more success in the auto space
is in its focus on battery technology. As new-age cars increasingly
resemble iPhones on wheels, Apple’s investment in battery
technology and a lithium supply chain may give it an advantage in
the electric car market.

Already, the company has been reported to have partnered with

CATL, China’s largest automotive battery maker, which could make

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a large-scale lithium-ion unit for Project Titan. In addition, Apple’s
investment into Chinese ride-hailing unicorn Didi Chuxing could
give the company a partnership that could potentially yield valuable
driver data as it mounts its autonomous car project.

As of this year, the company is also applying for patents related to

battery technology. In fact, of the 20 most significant phrases in
Apple’s 2017 patent applications, 6 are directly related to improving
battery technology.

The second most significant phrase for 2017 is “active material”,

which relates to the chemical compounds involved in the creation
of compact energy-dense batteries.

While battery tech could be related to the holy grail of smartphones

— a device that will last for days on a single charge — battery tech
translates well from smaller devices to larger applications like
homes and cars

Note: The patent filing process involves a significant time-lag before

the publishing of patent applications. This delay can range from
several months to over two years, meaning that records prior to
2013 are likely complete at the time of analysis, but there may be
applications from 2014 on that have yet to be published.

Apple patents by keyword significance

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AUTO M&A TRENDS
Unlike its peers, Apple doesn’t have a corporate venture arm, and
instead buys companies outright. The recent $1B investment into
Didi Chuxing was the first of its kind in decades.

In 2017, Apple announced a $1B fund set aside for Advanced

Manufacturing. The fund’s first investment was a $200M
investment into the publicly-traded Corning, which makes Gorilla
Glass on iPhones.

Where other OEMs like BMW have active venture arms, Apple
has none. Relying on in-house efforts and M&A (with no known
AV deals yet) is an undiversified approach, and Apple will need to
divert vast resources if it plans to make a mark in auto.

Wearables for the post-iPhone world

APPLE WATCH
Apple is building for a phoneless future, beginning with the Apple
Watch.

Above all, the company is leveraging its sterling consumer brand

and engineering chops to bring personal computing to smaller,
more convenient, and effortless user experiences.

Moving into wearables also gives Apple new insights into

biometrics data, and conceptually enables “continuous computing”
when it’s worn 24/7.

At Apple’s latest earning call, Tim Cook said the entire wearables
business was up 75% year over year in the fourth quarter and in
fiscal 2017 and has “already generated the annual revenue of a
Fortune 400 company,” which as mentioned above puts it in the
range of a $6.7B+ revenue company.

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Announced in September, the latest Apple Watch 3 feature cellular
reception, giving it the ability to make calls without an iPhone
nearby.

In other words, the Watch already allows Apple users to leave the
house with just a watch and perhaps in-ear AirPods to listen to
music and take calls and not feel they need a smartphone to get
through their day.

Meanwhile, the data derived from Watch is also enabling large-

scale research with Stanford to aggregate users’ heart rates and
identify anomalies. The fact that the Watch is worn continuously
will provide new insights into health and wellness efforts.

Analyst Ben Thompson of Stratechery wrote that design,

interaction/UX, and environmental awareness will be key for the
Watch going forward:

“Apple and its competitors’ ability to deliver on each of these

factors will determine whether the category ends up being a nice
side business to phones, or the next step in the trend towards
ever smaller and more convenient personal computers.”

AIRPODS

Introduced in late 2016, the AirPods wireless headphones are the

next obvious touchpoint for the human-computer interface.

Part of AirPods’ early success comes from Apple’s custom-built

W1 chip for headphones, giving it a competitive edge in range and
battery life.

And in a virtuous cycle, success in headphone hardware only feeds

into the Apple Music brand, which has acquired users at a rapid
clip.

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AirPods underscores Apple’s ambition to design products for
constant, ambient, passive use in the post-smartphone era.

Historically, it’s evident how Apple phases out obsolete technology

like the iPod in favor of its next big thing. AirPods and Apple Watch,
which represent only 6M and 13M units sold this year, are set to
grow into a greater proportion of the iPhone’s units sold. In 2017,
Watch and AirPods combined sold as many units as the Mac line.

Apple device unit sales

2007 – 2017 fiscal years, in millions shipped

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HomePod and Apple’s foray into smart
building design

Set to begin sales in early 2018 due to delays, Apple’s answer to the
Alexa-style vocal computer will be a proving ground for Siri and its
smart home efforts.

Among its peers, Apple is last to market for a home voice

computer, with Amazon’s Echo device and Google’s Home device
as prominent competitors.

To differentiate itself, Apple stresses HomePod’s premium, quality

audio as a music playback device. Notably, Apple also offers
HomeKit, a software platform for smart home devices.

Apple’s HomePod could be the first signal of a wider move into

the smart home market. Apple has a history of being a late but
transformative entrant, as it was with the smart watch and the
mobile phone. So success with HomePod and potential ancillary
devices, should not be ruled out.

More broadly, Apple analysts have theorized that the recent-

ly-completed Steve Jobs Theater and Apple’s new $5B Cupertino
Headquarters were the company’s first steps into building
and home design. Some even argue that Apple’s theater, new
headquarters, and retail stores are themselves Apple products.

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Apple is a design company, after all, and it’s not unfathomable that
it could get into selling smart homes, designed from the ground
up. Smart Apple devices could be part of these homes’ tech core,
engineered to be operated with Apple products like the Watch.

While the idea is just speculative for now, in the future Apple
could quickly enter into modular home construction by buying a
company like Kasita, offering rooms tailor-built in harmony with its
tech ecosystem.

Healthcare could be the next big vertical

The late Steve Jobs’ daughter revealed that, in his final days, Jobs
sketched out plans for an iPad-enabled hospital unit from his
hospital bed, with ideas for fluid monitors, X-ray equipment, and a
blueprint for a better room design.

Today, Apple has been edging into healthcare. With an iPhone

footprint that’s approaching 1 billion users, it’s well-positioned to
make a dent in research data and even caregiving.

Apple began its foray into health with its Health app and fitness
tracking via the Apple Watch. However, with its acquisition of
Gliimpse and partnership with Health Gorilla, the company is
slowly shifting to offer a full personal health record.

Apple is also increasing its attention on clinical-grade data capture,

as indicated by its partnership with the FDA to detect cardiac
anomalies, its foray into creating non-invasive glucose monitoring,
and its patent to turn the iPhone into a diagnostic tool.

Moreover, Apple’s ResearchKit app allows researchers to use

iPhones to conduct large-scale research studies.

Apple leaders have been explicit in talking about the company’s

involvement in diabetes and heart disease-management, two of
the largest cost drivers in healthcare in the US.

To improve outcomes, Apple is leveraging CareKit and its part-

nership with Health Gorilla, a platform for clinicians to coordinate
patient care, to get all stakeholders in a patient’s medical care on
the same page.

The company’s rumored partnership with American Well and

existing telemedicine patents suggest that Apple is also looking to
be involved in connecting patients to care.

Apple also reportedly considered buying corporate clinic startup

Crossover Health, which would have given it credibility for a push
into physical health care delivery.

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Relative to other tech giants, Apple has a sizable health-related
patents portfolio, which could give it an edge.

Healthcare patent application activity, Apple

vs. Microsoft, Amazon, Facebook, Google
2009 – 2017 YTD (11/10/17)

Apple also has a strong consumer-focused brand: notably, iPhone

has Net Promoter Score of 60, compared to an average score of 12
for the health insurance industry as a whole. Healthcare may be a
huge opportunity for the company to leverage its massive platform
to scale in a market where other tech giants have been shy.

Apple may be investing too little, too late

into content
The “Services” arm has become a growing profit engine inside
Apple. Centered on digital commerce platforms like iTunes, Apple
Music, the App Store, iCloud, and Apple Pay, the business arm
represented 13% of Apple’s revenue this year and saw 23% growth
year-over-year.

It’s an impressively sized business in its own right: Q1’17 services

revenue was nearly 2X that of Amazon’s hyped AWS unit and 3X
that of Netflix.

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Similar to Amazon, Apple is looking to create scalable services that
have low marginal costs, and seeking to use Apple Music, video,
and other media to lock in people to its platform and devices and
make them more valuable.

Apple Music has made streaming its new aim, and is already
competitive with similar services despite launching years later.
That said, Spotify still dominates the scene with over 65M users.

Apple recently announced it will spend $1B in 2018 to develop

original content and acquire rights for existing content. Meanwhile
competitors like Netflix and Amazon will spend at least $6B and
$4.5B this year, respectively, on original content alone.

Content budget of streaming services

2017 estimated figures vs. Apple’s forecasted 2018

Under SVP Eddy Cue, Apple’s content arm will need to develop
content to rival shows like Game of Thrones, Stranger Things, or
Amazon’s upcoming Lord of The Rings television series. Already,
Apple has announced a show featuring Jennifer Aniston and Reese
Witherspoon is being developed, based on Spielberg’s Amazing
Stories sci-fi series from the 80s.

As mentioned above, Apple has made moves to get the right

executives for this very personality-driven business.

First, it brought in Sony TV presidents Jamie Erlicht and Zack Van

Amburg (the two oversaw Breaking Bad, among other shows) to
head the entire effort. Apple has also poached Amazon Studios
executive Morgan Wandell to oversee its international division
and hired ex-BBC and Channel 4 executive Jay Hunt to oversee
development in Europe.

Apple has experience in the media arena from licensing deals for

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Apple Music, iTunes, and more, but its relatively weak investment in
original content does not position it well to catch up with dominant
players.

Cybersecurity and biometrics may be

overlooked strengths

Apple has quietly made great efforts in securing its platforms. As

company after company gets battered by high-profile cybersecurity
breaches, Apple has maintained an enviable track record.

In part, this may be because Apple’s OS and iOS represents

less than 13% of devices worldwide, but Apple has also taken
cybersecurity of its “closed system” very seriously, and its end-to-
end control of hardware and software helps. The company’s user
base updates software at a fast rate, increasing its cyber hygiene,
while Apple’s tightly-controlled App Store makes every application
go through malware vetting.

On other systems, the non-standard hardware components can

have varying levels of security, creating more security holes.

Moreover, all of Apple’s devices have come standard with strong

encryption since 2016. (This has made for an awkward relationship
with law enforcement, when Apple said it wasn’t possible to help
the FBI decrypt a shooter’s iCloud data).

In terms of patents, cybersecurity was the largest segment of

Apple’s IP portfolio, and is sizable relative to Google’s activity.

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Cybersecurity patent application activity, Apple
vs. Microsoft, Amazon, Google, Facebook
2009 – 2017 YTD (11/10/17)

With the next wave of smartphones incorporating facial

recognition, Apple appears to have other biometric logins in the works.
Its patent for “Using biometric verification to grant access to redacted
content” was granted in July 2017, and mentions iris-reading as a
potential unique identifier:

“The biometric reader reads a person’s uniquely identifying biometric

data (e.g., thumbprint/fingerprint, iris scan, voice, etc. … When the
biometric data matches the stored data, the person is verified.”

The patent’s images show how personal information in a text message

could be blurred out until the user is verified by the eye reader.

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Potentially, a seamless and totally passive means for identifying
users with the Apple Watch could revolutionize services like
payments with Apple Pay.

Finally, physical on-premise security could harness Apple devices

as a kind of wristband-enabled ID. Biometrics are taking hold in
industrial cybersecurity, with companies like Nymi using unique
cardiac signals to ensure the right person has physical access to
critical infrastructure.

Core business in multi-touch devices and

computers

Apple’s core business remains the iPhone, which accounted for

62% of the company’s net sales this year.

With the latest iPhone, the iPhone X (pronounced “ten,” not “ex,”

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according to the company), Apple seems to be moving toward
more ambient computing, where the physicality of the phone is
less of a focus.

Eventually, perhaps the screen itself will become obsolete. As we

see in existing patents, Apple is researching holograms, or a “digital
scroll” — perhaps beamed from an Apple Watch, glasses, or other
wearable — as alternatives to the OLED screen of today.

The primary change on the latest iPhone X is the phone’s new

“notch,” which houses a bar of sensors (including the infrared
camera but with many other sensors as well).

Today, these sensors help with the new FaceID unlock feature. In
the future, however, these sensors may enable SLAM (simultane-
ous location and mapping) for augmented reality, both on future
iPhones or as part of a next-gen headset.

There could also be unknowable ripple effects at the application

layer. Already, FaceID mapping is enabling vendors like Warby
Parker to suggest pairs of glasses that fit certain head shapes, and
we’ll likely see more applications built atop the technology.

Processing the 30,000 light dots on a human face takes a powerful

processor, and Apple introduced house-designed GPUs for
handling machine learning locally on the phone.

Apple’s history of building purpose-built chips, such as the “A” line

for iPhone and the W1 chip for headphones, has paid dividends for
bolstering devices’ onboard capacity.

Even with such leaps forward, the question remains: can Apple
develop the future of personal computing while so deeply
entrenched in supplying the dominant device of the day? Not to

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 mention maintain and improve product lines like the iPad and
Macs, which hundreds of millions of Apple users also depend on.

Apple’s push into wearables, watches, and more ambient

computing shows how it’s trying to break the mold. But in both its
existing business and on new frontiers it faces stiff competition:
Facebook, Google, Amazon, and other giants are also pushing the
limits of new AI- and voice-focused computing platforms.

Final thoughts Nearing $900B market capitalization, Apple

is on track to be the world’s first trillion-dollar
company. In financial terms, it’s never looked
better.
Yet technology success is ephemeral. The future of Apple hinges
on nailing yet another platform. The trouble is, nobody knows for
certain what’s next.

Apple has allowed its lead to slip in hyped areas like AI and
voice-led computing, and bided its time when it comes to spaces
like smart home and cloud services. Meanwhile the company has
doubled down on AR and wearables over VR and home devices (to
date, at least, with HomePod still a question mark and Apple TV
failing to buck its reputation as Apple’s “hobby”).

But Apple is a company that’s rejected conventional wisdom,

critics, and naysayers again and again to great success, by betting
on large macro trends and getting it right.

Apple bet on the smartphone market when many said it couldn’t be

done by the “iPod company,” and it proved everyone wrong.

It bet late on smartwatches and wearables when many analysts

were convinced these were DOA categories, and has now claimed
an early dominance.

Currently, AR is the far-flung counterpart to the immersive VR

championed by Facebook and Mark Zuckerberg, but Apple has
nonetheless pushed forward in that arena over many others. It
ditched and reorganized its car effort despite being publicly chided
by Tesla CEO Elon Musk.

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Apple is comfortable with product risk, but what about its
organizational risk?

Another self-reinvention may require a new design philosophy

that embraces failure. It may require a deeper appeal to fostering
a developer community, and could even require a re-organization
to better organize Apple’s sprawling (and sometimes converging)
product lines.

Above all else, Apple must retain its revolutionary spirit while
shedding its past. It’s a tall order for any company, let alone the
world’s most valuable one.

But as Apple searches for its next platform technology, it should

recall the words of its late founder: “If you haven’t found it yet, keep
looking. Don’t settle.”

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