Apple is probably smarter than I gave them credit for initially, with this Headset Business

Commentary on Apple’s Headset release – What is Apple (ticker: AAPL) doing right now? How could they play this out?

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This Commentary is for entertainment purposes only – the author holds an indirect long position in the stock at the time of this commentary. This is not investment advice.

The below text is a transcript (may not be word for word in all places) of this video.

Apple’s headset could be Their avenue into new-ish markets – but not for the same reasons you’re thinking

Apple’s announcement of the AR/VR headset was initially met by this author with a feeling that it was going to be a giant dud. And it’s fair to state up front, I am absolutely not an apple fanboy. That said, I’m an investor in the company because they seem to have the Midas touch, forget about the free cash flow, the market cap, the loyal fans, etc., etc., etc. but I think Apple may have a transformational play on their hands – maybe not for the reasons most consumer tech lovers are thinking. (In the spirit of full transparency, The author has an indirect investment in Apple from a concentrated mega cap/tech adjacent ETF, as well as index fund ownership – but recently sold a very small direct position in Apple)

I would posit the following thesis as a potential reason that Apple is building an AR/VR platform now, and how it relates to Apple’s future:

I believe that Tim Cook and crew may be smarter than we think, and paired with running out of ways to spend money, and a market size that is beginning to be capped on growth rates on their historical product mix, they are looking to move into other ancillary markets in a bigger way. I believe that they are strategically trying to enter the content market more heavily, while also moving into the increasingly valuable business training market, and have the infrastructure in place to do just that, with app store/digital assets, developer ties, and brand recognition. 

In an era where the biggest companies are going to get even bigger, and have increasingly larger percentages of free cash flow and are pressed to be embracing AI and other innovative technologies – Apple is well poised to be selling $3-5k headsets to businesses looking to better train employees. 

I could see Accenture – a 700k employee company already poised above the signing line for an early adoption contract of thousands of headsets to train high value employees on their increasingly important internal training programs. I could see companies like Wal-Mart using these types of headsets to train store managers and assistant managers on loss prevention tooling (and making a 50k+ per store purchase to do the same for normal employees). I can see VR/AR being adopted by top medical schools to help train doctors and surgeons on integration of robotic tooling and procedures. (As I edit this, Apple and Disney have already announced a partnership on content delivery from the Disney+ brand) I could see Disney offering an AR/VR enhanced journey through their physical spaces, or offering one-off journeys through their brand assets and worlds for families and hardcore Disney fanatics to experience their brand in different, novel ways. That’s a 50k+ unit order for Apple; and revenue enhancement for Disney in their physical parks, and on the couches of many living rooms. 

I can see people gaming on them, sure, but gamers have a price pain threshold that doesn’t quite square with the 3-5k all-in price of the new apple headset. 

The meta realm is all about business – until the price to develop and maintain comes down from current lofty cost structures. Sure, Sony and Meta are going to develop games in AR/VR but the killer app for Apple might be catering to a business market that they tried, in a somewhat lackadaisical way, to enter in the 1990’s. Personal and business computing was dominated by other players at the time, and with the M2 chips and strategic agreements with semiconductor machinery makers (e.g. ASML – the Dutch heavyweight) means that Apple silicon is going to play a big part in their future. The improvements in computing capabilities from Apple in their roadmap to the M1 and M1 (and beyond) isn’t to challenge Intel, or save a few bucks – it’s to be in business categories more competitively, at the top level of compute. 

Here’s where it gets a bit weird for some readers/listeners:

I can see companies looking to Apple to spread advertising in the real world where meta playgrounds could cater, almost subliminally to actual decision makers. A combination of developers, their digital app store and their major agreements for distribution with pop culture and high-tech firms means that Apple may be even better positioned to take advantage of passive advertising in spaces where real market leaders and business people will be training, playing, developing and doing a larger and larger percentage of their workflow in the next 5-15 years. 

While that is the least interesting play from a revenue perspective, it’s likely to be the next frontier for interactive and programmatic advertising. Marketers are going to lose a lot of ground with the changes in AI fundamentally altering how people get and spread information. I’m more bearish about the future of Google ads and SEO, than I am about the future of Apple as a leader in delivering strategic advertising to real decision makers that are dabbling in new innovative workspaces in the meta universe. Which if you had asked me 5 months ago, would have been a laughable concept in my mind.

Don’t get me wrong: Google’s not going to suddenly be rendered into a state of poverty because Meta builds a game world, or ChatGPT has taken a bit of the informational content search market. But, traditional advertising is forgettable and easy to ignore in its current iteration, and we want to target the highest level (lowest level of the sales funnel) decision maker as we possibly can with the right, passive brand building advertisement. We want them to recognize our brands by name, and subliminally build credibility and sell themselves on the transaction in their own minds. 

What does this new avenue for growth through the Apple AR/VR headset look like? 

Probably something like this:

A doctor in school; 1 year away from graduation, is doing surgery practice on a $3k headset using innovative software on a student license – at a reduced cost (school is expensive!), and in turn, the company that provides the discount and the software gets to partner with advertisers from companies that are looking to sell to doctors that open new practices or land high paying, highly important places in big medical institutions and hospitals. Viagra, Lipitor (it’s likely to be far more strategic than that – think: Dupixent on dermatologists’ AR/VR space; and Boston Scientific Catheters For Training A Charge Nurse); and others are billboards on the side of the operating room. For the next year, a passive acknowledgement of those brands are in the periphery of that doctor. It’s a long-term game, but the data collected puts sales people directly in connection with these doctors about to land positions at hospitals, or the nursing staff, or even the office controller, to help them make setting presentation meetings easier. Some of these doctors are going into private practice, and some of them are some of the most talented, brightest stars in a ridiculously lucrative field. That’s an interesting set of eyes to an advertiser. 

Medical staff turnover, and will bring their historical workflows with them to different offices or hospitals. This spreads the adoption.

How else can I imagine this?

How about a consultant – paying a larger consultancy to get access to their data, say from an Accenture. Accenture offers a 200 million dollar program built to train its own people on high tech adoption, or digital literacy, or PR in the age of difficult marketing. They recoup their development money by selling public facing programs in an immersive environment, to high level consultants who may not have the ability to service bigger clients. They may be able to partner to take some of that business, but being a solutions provider to those independent, unrelated consultants at the same time. Both parties benefit. The bigger beneficiary? A company like Accenture – and they control how much of their proprietary data gets moved out to the public marketplace – it’s a win win for them. It’s a catalyst to produce content – a new growth area for a larger consultancy that has a small cost to develop and offers a big profit margin at maturity. It’s an avenue into more of the SMB consulting space that they never before had because of their initial price points.

It’s a very symbiotic relationship that helps all variables interact in a way that improves total profit percentages from all participants’ perspectives. 

So here we are back to the initial point of this commentary: Apple is likely to be pushing more aggressively into the content arena, the business markets, and positioned to be one of the biggest advertising platforms in the future, leap-frogging the mega companies already in the space. Such a combination of the infrastructure they already have, the control levels they already employ, and the potential to sell through at a much more capital insensitive market than Meta is currently marketing to, means Apple is likely to be a strong contender for market share ownership in multiple growth areas that it has only dabbled in, up to this point in time.

How does this AR/VR Headset plan play out?

Get as many developer units into the market as possible; offset costs for now, while you get the cost of production down, and gauge interest in broader markets. Send your salespeople into the biggest employers by employee population and into the biggest research institutions and brain-trusts in the world, including important NGO’s and tech and medical training, and educational institutions. That’s the long-play. 

The intermediate play is developing an advertising platform that intuitively sends people through a  funnel of reinforcement for premium payer brands, so they are front of mind in the periphery of decision makers, who will naturally gravitate to the innovation of an Apple branded, Apple built headset. The advertising and content play here is massive. It will translate across business platforms into the consumer market – in some form or fashion. 

The short term play is to sign exclusive agreements to develop premium programs for big companies in targeted training to sell headsets and recoup the initial costs of the development by Apple. This will allow a lot of viral content to be leveraged to sell more to middle market and large companies as a training tool. A well placed consultant as a partner (again, the obvious types of players are the Accentures of the world), and a tech partner that can help provide the coding and content aspects (Apple has a whole stable for these companies in their ecosystem already), means that Apple sells a lot of these units to a lot of different companies. Companies can absorb the total costs of using this technology – whereas Meta has struggled to make this go mainstream because it has pushed the DTC (direct to consumer) market, and is trying to own the entire delivery system. Apple doesn’t need to own the spaces, they need to deliver the content, from content producers on a platform where the content producer can thrive, a la, their current app store. They can own the hardware market after the developers build the killer apps.

It’s ridiculous to think Apple is simply throwing away money here, without having a better masterplan, but If I’m wrong, what else do you do when you have so much cash laying around? Let’s see how it plays out. And if I’m right – Apple – call me, I’m available as a consultant if you want to know how to make this work.