• Google has finally launched its play for The Metaverse with the launch of Android XR where it has sensibly decided to leave the hardware to Samsung and Qualcomm in what may be the beginning of the end of Google making consumer devices.
• Google has launched Android XR which is a version of Android that has been optimised for head-mounted displays.
• This means that it will share a basic level of compatibility with Android used in smartphones but extra systems such as real-world perception and 3D environments have been added so that both virtual and augmented reality can be added.
• Confusingly, at the same time, Google launched Project Astra powered by Gemini 2.0 (see here) with videos demonstrating its use on a pair of glasses not unlike those shown recently by Meta (Orion).
• I am pretty certain that whatever this product is, it is not running Android XR which brings us to the first limitation of Android XR.
• The capability of a platform needed to run something like the Apple Vision Pro and something like Meta’s Orion are very different and so how a single platform such as Android XR can cover all of these use cases is unclear.
• One possibility would be to use a microkernel OS (like Huawei does with Harmony OS) which gives much greater flexibility in terms of form factors and use cases, but I do not think that this is what Android XR is.
• Instead, it seems to be a compatible version of Android in that apps and services from smartphones will run on it but with the extra components to ensure that it offers a good Metaverse experience.
• This means that it will be next to impossible to have this Android XR running on a pair of glasses because the platform will be too large and too power-hungry to make this a practical reality.
• Consequently, how a single unified XR ecosystem is going to be built without fragmenting the Android XR platform remains a mystery.
• The only product running Android XR that has been announced is Project Moohan which is made by Samsung using Qualcomm’s XR chipset.
• This device looks very similar to the Apple Vision Pro and shares the same approach in terms of implementing The Metaverse backwards.
• Everyone seems to agree that the main use case for The Metaverse is a mixture of the real world and the virtual world but the right way to do it is to overlay the virtual world onto the real.
• The problem with that is that this is very technically demanding so as an interim step, Apple (and now Samsung) are doing it the other way around.
• There is nothing wrong with this intrinsically, but I continue to think that The Metaverse will not take off until the technical problems are solved such that it can be implemented in the right way.
• These announcements are significant because they demonstrate an ever closer collaboration between Samsung and Google where Google does the software and Samsung does the hardware.
• I have long thought that this is what needs to happen for the Android Ecosystem to really compete with the Apple Ecosystem (see here).
• The Metaverse is a great place to test this new form of cooperation as there is very little risk to revenues if it fails.
• If it works, it could completely change the way the relationship works and herald the end of Google making its own hardware products.
• This is something of which Ms Porat is almost certain to approve of.

• While the commentariat is impressed with Meta Platform’s new Orion AR device, it is also unusually critical of Apple which it thinks has made the wrong technical choice, but I suspect that Apple has got much more up its sleeve than everyone thinks.
• Although there appears to be a lot of debate surrounding how to implement The Metaverse, there is no disagreement that it needs to be made up of the real world and the virtual world blended together.
• This can be achieved by either overlaying the virtual world on top of the real world or the other way around.
• Meta has chosen the former which is technically very demanding while Apple has chosen the latter and Meta’s demonstration of Orion has reignited the debate about whether Apple has made the wrong choice.
• This is where I think the commentariat is not looking far enough ahead.
• When it comes to the mass market takeoff of The Metaverse, there is no doubt in my mind that overlaying the virtual world on top of the real world is the only way to do it.
• If users are going to live their digital lives in The Metaverse rather than on smartphones, they will need to stay in touch with reality rather than a representation of it.
• Overlaying the virtual world on top of the real will ensure that the resolution of reality will remain infinite with world-beating latency of 0ms.
• Hence, there is no doubt in my mind while Apple talks about AR being the only way to do The Metaverse, it has implemented it backwards which is a dead end.
• The commentariat agrees but where we differ is that I think that in a few generations from now, Apple will be in a position to flip its implementation on its ahead and move to implementing the virtual world on top of the real world.
• It will be able to do this reasonably easily as Apple has built two completely different systems that run independently of one another where one captures and interprets reality and the other creates the virtual world.
• Meta’s Orion has taken a similar approach, and the device uses a puck roughly the size of a smartphone to achieve its 100g weight.
• The system that interprets reality and the battery is in the glasses while the virtual world is processed and rendered on the puck and then wirelessly streamed to the glasses.
• Hence, it is very clear that the two worlds need to be created or detected separately and then interlaced together with the virtual world being overlayed via transparent lenses.
• The assumption is that the future roadmap for the Vision Pro is to remain a VR-based device, but I think that this is not the intent.
• Apple has a reputation for user experience and even now with Meta’s new product, the only way to deliver this today is to do it the way that Apple has.
• Once the technology is ready to deliver this quality of user experience with the virtual world being implemented on top of the real world, then I think Apple will be able to quickly flip its offering around.
• The fact that these are two independent systems will make it much easier to do this.
• I have long viewed the Vision Pro as an insurance policy against the demise of the smartphone rather than a statement of where Apple thinks the market is going and so I think Apple will change the Vision Pro to match what the market is demanding.
• Consequently, I don’t think that Apple has gone down a blind alley or taken or wrong turn but has merely produced a device with the best user experience using technology that is available today.
• It is also important to remember that the Meta Orion produces an inferior user experience and costs around $10,000 to make meaning that it is very far from being a commercially viable device.
• What Meta is looking for is something that offers at least as good or better in terms of user experience, weighs less and that it can sell for something closer to $1,000.
• Taken in this context, it is clear that Meta has very far to travel and so I see no need to change RFM’s current forecast of a viable Metaverse device much before 2026 or even later.
• Even from that point, and in an optimistic scenario, The Metaverse will take years to seize the digital life crown from the smartphone and so the iPhone business looks pretty safe for the foreseeable future and certainly for the usual investment horizon.
• That does not mean that I want to hold Apple shares as it remains expensive for a company struggling to show growth and so I would continue to look elsewhere.

• Meta showcased the results of billions of dollars of investment and at the same time was not shy of taking shots at its competitors as it staked its claim to the next generation of the digital ecosystem.
• Connect is Meta’s showcase for developers where the focus this year was all about AI and The Metaverse (something most people have completely forgotten about).
• In my opinion, ignoring The Metaverse is not a smart move as one day, the technology is going to be ready by which time those who have chucked it on the scrap heap will be too late.
• This is why Apple has the best VR device with the best reality detection system that hardly anyone has purchased because if Meta stumbles upon the formula that popularises The Metaverse, it will be ready to compete.
• There were three main announcements:
  • First, Orion: which is a pair of augmented reality spectacles that are far from ready for the market, but make a number of key advances.
  • Orion has a 70-degree field of view which is pretty good as well as a bright display and all of the compute onboard the device.
  • The demonstration of the device is pretty good but most of the functionality makes use of AI to identify objects and situations in the real world and make suggestions based on that.
  • How much of that was happening on the glasses themselves, remains to be seen.
  • It will also prioritise voice, but gestures and neural impulses are also being worked on.
  • The demonstrations were slightly glitchy but by and large, Orion is a good step forward but remains far from anything that a consumer is going to use on a daily basis.
  • Meta has shown its progress, and the results show that if The Metaverse takes off, it will be in pole position to be a major player and not have to remain dependent on Apple or Google.
  • This has been one of Mr Zuckerberg’s gripes for many years and ever since Apple messed around with his business model, he has been adamant that this will not be repeated.
  • Orion is a step along that journey but the road yet to be travelled remains long.
  • Second, AI: where Llama 3.2 was released in its 11bn and 90bn parameter sizes but not the really big 405bn variant.
  • Llama 3.2 is multimodal for the first time and catches up with the latest versions of Gemini and OpenAI in terms of capabilities.
  • Here, Mr Zuckerberg could not resist taking a swipe at his competitors stating that Open Source is the way to go and that his competitors are already slashing prices to stay competitive with Llama.
  • I have seen no hard evidence of this but if it is true, it is a sign that the bubble is beginning to burst.
  • Llama 3.2 11bn and 90bn will not be available in EU and Mr Zuckerberg once again could not resist taking a shot at the EU for its excessive regulation.
  • I continue to think that with its flagship 405bn Llama 3.1 model available for free to anyone that wants it, Meta is rapidly commoditising generative AI and its foundation models meaning that differentiation will increasingly be in the services that are built on top (see here).
  • Third, VR: which is where the volume of The Metaverse exists today.
  • A new, cheaper device Quest 3S was launched which starts at $299 which is clearly a subsidised price.
  • This device is all about a land grab and ensuring that all early moves in The Metaverse are made using Meta’s platform and with its independent competitors having largely given up, the road ahead is clear.
  • This will light no fires under Metaverse adoption but crucially it will ensure that Meta dominates the fledgling market positioning it well for a take-off if it comes.
• These launches are all about positioning Meta well in the growing market for AI services and The Metaverse when / if it takes off.
• Meta was not shy in calling out the shortcomings of its competitors and regulators and, to be fair to Mr Zuckerberg, he is putting his money where his mouth is and delivering progress.
• Llama is already a thorn in the side of Google, OpenAI, Microsoft and Amazon and is building a barrier to entry for Apple in both AI and The Metaverse.
• 5 years ago, Meta Platforms was a laggard in AI and while it has spent a fortune, it has gone up significantly in my rankings and is now challenging the leaders.
• However, it may also be the cause of the bubble bursting and so while there is AI upside priced into Meta’s shares, I would be wary of investing.
• The cheapest AI investment available remains Baidu which along with its peers is having a bounce as China has finally decided that it needs to do something about its moribund economy.
• It is still risky, but this could be the beginning of the long-awaited rerating of Chinese technology.

• While Apple Intelligence got all of the attention at WWDC, an extraordinary amount of content was provided to developers on how to develop apps for VisionOS for a product that has almost no users.
• This would appear to be counterintuitive until one considers that in the very long-term some form of augmented reality (AR) may end up replacing the smartphone meaning that Apple needs something ready to go or face going the way of Nokia, Ericsson, Blackberry and many others.
• The Apple Vision Pro is Apple’s first foray into the Metaverse and although it is without doubt the best experience available by far, sales have been disappointing.
• I don’t think that this is necessarily due to the price tag but more to do with the horrible compromises that Apple was forced to make to get the experience where it wanted.
• These include a large device that is front-heavy, 2 hour battery life meaning that it needs to be plugged in most of the time and the fact that Apple was forced to implement its experience back to front.
• Apple thinks of this device as AR but the reality is that the Vision Pro is a VR device in that reality is superimposed on the virtual world rather than the other way around.
• True AR is where the virtual world is superimposed on the real world, but this is so technically difficult to do right now, that Apple had to do it the other way around which is what I mean by back to front.
• Despite all of these problems and weak sales, Apple dedicated many of its WWDC sessions to teaching developers how to write apps for Vision OS as well as upgrading its tools and capabilities which appears strange for a device that has very few users.
• I think that Apple’s strategy is to prime its ecosystem to be ready to switch to AR should The Metaverse start to take off to ensure that whatever it loses in smartphone sales is made up by Metaverse devices.
• Furthermore, I think that Apple is also leading the way in terms of how AR should be implemented by splitting the processing of the virtual and real world into two completely different systems.
• This is because interpreting reality is very latency intolerant and hence requires a real-time system whereas the virtual world is much more forgiving.
• Hence, the optimal solution is two systems which create the two worlds separately and then overlay one over the other.
• This will also make it much easier for Apple to switch from VR to AR when the technology is ready for it to do so which I think will be around the 2026-to-2028 time frame.
• I think that the Apple Vision Pro is successful because it is fulfilling its function which is to be an insurance policy to prevent the kind of implosion that Nokia suffered between 2007 and 2012.
• If developers are familiar with how the system works and how to program for it, then Apple will be one step ahead of the competition for AR.
• The current leader is Meta which makes devices that are far cheaper which means that it has sold far more devices and has a much larger installed base but its system is not that well suited to be migrated to AR.
• Consequently, I expect that Apple is not about to ditch the Vision Pro system but will continue developing it just in case it is needed.
• Given the gargantuan size of the iPhone business and the peripheral businesses that it enables, spending a few billion a year on developing a Metaverse offering just in case it is needed is a worthy and successful investment in my opinion.
• Furthermore, it is a rounding error in the accounts and investors will barely notice its impact.
• That being said, Apple is not suddenly an AI company and the recent rally only serves to reinforce my view that the valuation of the company is too high and that there are much better bargains to be had elsewhere.

• Meta reported reasonable results but Meta’s habitual tendency to spend resurfaced spooking the market which sent the shares down 15% which I can understand as, based on what it launched last week, Meta should be less capital intensive than its peers.
• Q1 24 revenues / EPS were $36.5bn / $4.71 slightly ahead of estimates of $36.1bn / $4.32 but when it came to expense guidance there was bad news.
• Here capex will be $35bn – $40bn compared to its previous estimate of $30bn – $37bn to support its AI ambitions while losses at Reality Labs will increase materially to new all-time highs.
• Reality Labs is Meta’s department that is tasked with creating its version of The Metaverse, but Meta is claiming that Reality Labs is increasingly overlapping with its AI activities which doesn’t quite make sense to me.
• Mr Zuckerberg explained this stating: “so it is true that more of the Reality Labs work, like I said, is sort of focused on the AI goals as well”, which is as about as woolly and vague as it gets.
• Consequently, it is impossible to tell what is really going on here as if resources from Reality Labs were being focused on AI for the company, then the expenses for those resources should have been moved out of Reality Labs.
• Hence, on the face of it, it looks like a badly disguised return to the old bad habit of profligate spending under the guise of AI in the hope that the market will not care because it is for AI.
• The market wasn’t fooled and sent the shares down 15% anyway.
• On the AI front, Meta’s 12% increase in capex also makes no sense when one looks at the direction its AI efforts are taking.
• What is remarkable about Llama 3 is its size which at 70bn is the same size as Llama 2.
• This is a complete contrast to everyone else whose models seem to get bigger and bigger with every generation.
• This is why Meta’s competitors need to keep spending on cloud computing so aggressively but with smaller models, Meta should be much more efficient.
• To be completely fair, Llama 3 is trained with much more data than before so the amount of compute required for training will be much greater but as the focus moves to inference, its greater efficiencies should bear fruit.
• Its peers are 10x the size or larger, and so when it comes to storage and running inference compute, Llama 3 should be far more efficient.
• Hence, why Meta needs to increase capex by 15% is a bit of a mystery.
• Instead, Meta should be focusing on using its smaller model to run at a far lower cost than its rivals and encouraging developers to use its model as their services will be much cheaper to run.
• This is why I am somewhat non-plussed by these increases as they do not make sense and given Meta’s habit of over-spending, need a much better explanation.
• As a result, the 2024 consensus EPS estimate for Meta of $20.15 may now be too high and I would not be surprised to see a round of downgrades.
• Assuming a 10% cut and including the 15% fall in the share price, the shares are trading on 23x 2024 PER which is at the bottom end of the developed market peer group which I think means that this is not the beginning of another rout in the share price.
• However, there are cheaper options out there in the market meaning that I do not see this correction as an opportunity.

• Some users are starting to return the Apple Vision Pro in a sign that while Apple has clearly demonstrated how The Metaverse should be implemented, it has failed to solve the basic VR problems that everyone else continues to labour with.
• A small, but not insignificant proportion of Apple Vision Pro users are choosing to return their Apple Vision Pro within the 14-day window that Apple is offering for returns.
• I suspect that the main reason for this is that $3,500 is a high price to spend on a device that once tried, will only be used occasionally and so some users appear to be choosing to get their money back.
• Crucially, the main complaints being cited are headaches, discomfort (especially as the weight is front-loaded), eye strain and motion sickness all of which we have heard many times with other devices.
• Furthermore, the productivity function does not appear to work as well as many users hoped and so the device does not have this use case to help sell it and drive usage.
• Furthermore, many of the major entertainment platforms like YouTube, Netflix and Spotify have decided not to support this version meaning that content consumption in the device is more limited than elsewhere in the iOS ecosystem.
• Crucially many of those returning the device remain keen to try the next version implying that the problems being faced are not being blamed on a poor implementation by Apple but on the fact that the technology is still not ready.
• This reinforces my long-held view that Apple has gone too early with its offering for the Metaverse but importantly, it does not look like the returns will do its brand much harm.
• What Apple got right:
  • First, Augmented Reality (AR): which RFM has long concluded is where the vast majority of digital life in the Metaverse will eventually be spent.
  • The problem is that the technology to do AR properly is even more limited than virtual reality which is why Apple decided to simulate AR with what is actually a VR device.
  • It is the fact that this is a VR device that is responsible for the problems that are causing users to return the device.
  • Second, Reality perception: where Apple has implemented a completely separate and real-time system to perceive and interpret the real world so it can be superimposed on the virtual.
  • For me, this is the biggest breakthrough of this product and I expect that in time, the industry will follow Apple down this road.
  • This system will put Apple in a good position to create a proper AR device when the technology can support that use case.
  • This will be doubly the case if Apple has patented the system which will make life much harder for anyone trying to follow.
  • Third, user interface: The device ships with no controllers but instead relies solely on hand gestures.
  • Apple has put a lot of effort into getting this to work properly and the general consensus is that it does again, I suspect that many others may follow Apple down this path.
• What Apple got wrong:
  • First timing: this device makes hideous compromises in terms of field of view, off-device battery, weight balance and the fact that it is a VR device.
  • This is why I think that Apple is a couple of years early with this device and it could have easily waited another year or two before launching it.
  • However, putting a stake in the ground now announces Apple’s intention to address this segment and will keep developer minds open preventing them from only concentrating on the Quest platform.
  • Second productivity: The ability to have a large floating screen projected from a map alongside other screens from the Vision Pro itself sounds good but it hasn’t panned out very well in practice.
  • This is probably the area that reviewers have expressed the most disappointment as it doesn’t work well enough to compel users to don the device as opposed to spending the money on a large external monitor.
• The net result is that even though Apple is not taking the right long-term path with the Vision Pro, it provides a placeholder for The Metaverse and an insurance policy just in case The Metaverse is the next big computing platform.
• With reality perception being a single and unique system, Apple will be able to reuse this in a real AR device where the perception of the real world and the man-machine interface will be just as important.
• Its device is extremely expensive, but it does everything so much better than anything else that has gone before that it will give developers the confidence that this is a platform worth paying attention to over the next 10 years.
• This will have no financial impact on Apple for many years as both its revenues and its costs will be a rounding error in the accounts, but it provides the security of a position just in case.
• Hence, holding Apple shares remains about iPhone which continues to fare very well in difficult circumstances but not well enough to make me want to own the stock.
• Hence, I continue to look elsewhere.

The Metaverse – Augmented story.

• In 2022, The Metaverse was all everyone wanted to talk about but a price hike from Meta and increasing interest rates caused both device shipments and excitement to evaporate in 2023.
• Despite this, plenty is still going on in The Metaverse but hardly anyone seems to care.
• 2023 saw a number of Chinese companies pretending to be USA companies demonstrating the latest and greatest in augmented reality lenses.
• In my opinion, poor quality image quality in transparent lenses is the single biggest problem holding up augmented reality (but there are plenty of others).
• This year saw the entire field of Chinese AR lens companies disappear to be replaced with a similar number of Korean companies offering pretty much the same thing.
• Although the lenses are getting better, progress has definitely slowed down in the last 12 months and I see no reason to think that this technology will be anything like ready before 2028 or 2029 to sell in volumes.
• Until then, I expect that augmented reality will remain an enterprise play as in this segment, productivity is more important than size, battery life, weight and user experience.

Automotive – Displays and software.

• The sector that has seen the most progress in the last 12 months is undoubtedly, automotive.
• CES 2024 saw meaningful improvements in both the software architecture and heads-up displays, which are important when considering the quality of the digital experience in the vehicle.
• Here, Valeo proved to be one of the more innovative companies showing flexibility in software that makes it easy to use the same code in all trim levels but could also be used to upgrade hardware in the middle of the vehicle’s life cycle.
• I have long thought that upgradeable hardware is an important component in enabling OEMs to compete with the smartphone in the vehicle and I view steadily growing adoption in the industry as good news.
• Valeo has also come up with a superior alternative to the projection on the bottom of the windscreen that BMW showed in its concept car last year.
• This solution involves specialised TFT LCDs and a reflective surface at the bottom of the windscreen.
• This works surprisingly well and looks to me to be a superior system to using projectors.
• Whether this can be adapted and used as a HUD remains to be seen but Valeo generated a lot of interest, and its stand was always busy.

Transparent displays – Not as you saw it.

• Headlining in the press were a series of transparent displays all of which make compromises in visual quality which in my opinion kills their use case.
• One use case is to use them as windows in a stadium box and then overlay event data on top of what the spectators can already see.
• However, much more interesting things were to be found buried deep in Eureka Park, a place which many CES goers never visit.
• Here, there were a few solutions (some much better than others) using reflective film which is stuck to the glass to reflect light from a projector as well as allowing ambient light to pass through.
• The key to this is the brightness of reflection as well as how much the film impedes light travelling through it and this is where one sees the divergence in quality from one offering to another.
• This looks to have potential for offering navigation in augmented reality for drivers as well as other services although the issues with focal planes and distraction will need to be addressed.
• Extending digital services across other surfaces in the vehicle is one way for OEMs to push back against the digital ecosystems that are still, by and large, limited to the infotainment screen.
• OEMs need to move fast as this is not somewhere where they intend to be caged for long.

• Life is not great in The Metaverse at the moment as shipments are expected to almost halve in 2024 but in the grand scheme of things, this is irrelevant as RFM Research does not expect any real traction in this market much before 2028 or 2029.
• According to Counterpoint Research (see here), shipments declined by 33% YoY in Q1 2023 and RFM Research thinks that this has deepened in Q2 2023 to more than 40% YoY.
• Meta has also given up a lot of market share as the new Oculus Quest 3 came too late allowing new products from others to get a foothold in the market.
• The real problem is both the economy and the inflation that was triggered by money printing during the pandemic.
• When the money supply increases faster than the economy, inflation results as there is too much money chasing too few goods.
• The pandemic saw the money supply in the USA (and elsewhere) increase by 40% while economies contracted heavily explaining why inflation started to be a problem in 2021.
• The problem now is that the pandemic is being paid for by reducing the purchasing power of fiat currency which in turn has triggered the “cost of living crisis” that is hitting many countries across the world.
• This has meant that while consumers are paying the bill for the pandemic, they don’t have much purchasing power left over to buy a new smartphone let alone a new VR/AR device.
• A smartphone is a must-have for many people while a Metaverse stage is a nice to-have for some people while the vast majority don’t care one way or the other.
• This is why the nascent market for Metaverse devices has been hammered especially hard and the outlook remains very weak until at least the middle of next year.
• At this point, I expect that the money supply and GDP will return to a state of balance and inflation can come down of its own accord.
• Interest rates can then begin to come down which in turn should allow the economy to see better growth.
• Usage of Metaverse devices globally is around 0.01% of smartphones and market volumes would have to double for the next 8 years to reach volumes equivalent to 20% of the smartphone market underlining just how small this market is.
• This sounds pretty bad, but the reality is that it doesn’t really matter one way or the other because the technology that has the potential to drive the Metaverse is a good 3 or 4 years away from being available.
• This is why Apple has been forced to implement its Vision Pro device backwards as well as make horrible compromises (see here) as the technology to make it correctly (in my opinion) is currently not available.
• Furthermore, this device is so expensive that almost nobody will buy it, not even the hardcore Apple fans that I speak to.
• However, none of this means that the Metaverse won’t take off as the market is so tiny, that this kind of volatility and bumpiness is well within the realm of expectations.
• Hence, I continue to think that 2025 / 2026 is the time when Metaverse devices that users actually want to spend time with will emerge which in turn could lead to mass market take-off in 2028 or 2029.
• This will require devices to interoperate fully with one another which in this climate is a big ask and I see very little evidence that anyone is opening up their platforms to allow others to come in with devices from other manufacturers or platform providers.
• This remains by far the biggest risk to the take-off of The Metaverse but fortunately, these players have plenty of time to sort it out.
• The Metaverse remains uninvestable at the moment as all of the cited players currently earn most of their revenues doing something else which is unlikely to change any time soon.
• I am keeping an eye on Roblox and Unity as potential plays for the Metaverse, but both of them remain too expensive and their shares look set to stagnate or decline for a while yet.

• The master of marketing will be at work drumming up excitement via increased scarcity for a product that has no long-term future in this iteration even if the Metaverse does take over and replaces the smartphone.
• The FT is reporting (see here) that Apple has been forced to make substantial cuts to its production numbers for the Apple Vision Pro VR headset due to production issues as opposed to any weakness in expected demand.
• The problem is relatively simple in that this device is an entirely new take on the Metaverse and with Apple’s demands for the user experience, it has to use cutting-edge components.
• This is something that Apple does not typically do but given that Apple is moving early on this device category, and it needs a good user experience, it has no real choice in the matter.
• In order to recreate reality as accurately as possible, the device uses 2 micro-OLED screens and there have been real problems in achieving decent yields given how novel the manufacturing process is.
• This is one of the reasons why the device is so expensive as the cost to manufacture screens that are defective and have to be discarded has to be paid for somewhere.
• Forecasts started at around 1m units in 2024 which were then cut to 400,000 and now stand at something closer to 150,000 or so.
• This is the first sign of trouble with this device, and I suspect it will not be the last.
• This is just one reason why I think that Apple has gone too early with its product as I see no reason why Apple has to launch this product now.
• I have long been of the opinion that Apple has to address the Metaverse at some point because it needs to be present just in case the Metaverse really takes off.
• That way it has a good chance of transitioning its iPhone revenues into the Metaverse thereby avoiding Nokia’s fate between 2007 and 2015.
• This is what I refer to as Apple’s insurance policy (see here) and I think it is money well spent even if the Metaverse is a total failure.
• However, given that it is likely to be another 5 years at least before the Metaverse takes off in any meaningful way, there is no reason why Apple needed to launch now.
• It already has the strongest digital ecosystem by far which has been shown to be willing to embrace new device categories although none as far-reaching as this one.
• Hence, I think that a launch in 2025 or 2026 would have been perfectly fine and because the technology will be more advanced by then, these sorts of problems will be much less likely to occur.
• Despite these issues, I think Apple will be able to turn this to its advantage by utilising the scarcity of the product to generate marketing buzz and hype.
• By all reports, those that have tried it, say that it is far better than anything else that they have seen to date but no matter how good it is, this category has no long-term future.
• This is because although Apple says that it believes that augmented reality (AR) is the right path, the Apple Vision Pro is a VR device that digitally recreates reality to allow it to interact with the virtual world.
• Hence, at some point, Apple is going to have to flip its offering into a product that superimposes the virtual world viewed through a transparent lens (i.e. glasses) as everyone else does.
• Currently, this is impossible to do with anything like the quality of user experience that Apple requires which is why it has taken this route.
• The net result is that this production cut is not really a big deal, and I am pretty sure that Apple will use the increased scarcity to whip up excitement for its new venture.
• However, this will have no bearing on the valuation of the shares as The Metaverse remains many years away (if at all) and so Apple remains a story about iPhones and to a lesser degree the other devices that exist in orbit around it.
• Apple has surpassed a valuation of $3tn but that is no reason to own the shares in my opinion which continue to look expensive compared to many other options out there.

• Apple has announced its play for The Metaverse but by going at least 3 years early, it has been forced to make some hideous compromises in order to deliver the kind of experience that everyone has come to expect.
• The Apple Vision Pro is being touted as an augmented reality (AR) device, but the reality is that it is a VR unit where a huge amount of effort has gone into replicating the real world and, to be fair to Apple, it has done an excellent job given what it has today.
• Those who have tried it support Apple’s claim that it is like looking through the device when you put it on and with 12 cameras, 5 sensors and 6 microphones the recreation of reality is pretty convincing.
• Strangest of all is the eyesight feature which displays the user’s eyes on an external screen which allows interaction with other people not in The Metaverse while using the device.
• The recreation of the real world is the default position with virtual elements being layered on top which creates a pretty good illusion of reality, but this illusion falls apart when one thinks for 5 minutes about some of the use cases Apple has in its advertisement.
• For example, a lady is packing her suitcase and answers an incoming Facetime call, and we are expected to believe that anyone in their right mind would be packing a suitcase with a VR unit plastered onto their face.
• The use case here is that she would not be wearing the device while packing her suitcase and would either have to put it on or just take the call on her iPhone.
• Another example is where parents interact with their children on special occasions and during everyday life while wearing the unit.
• Facial interactions are extremely important for the development of children, and I can see the psychiatrists shivering at the prospect of what this could mean for the development of children.
• This brings us to hideous compromise number one which is the layering of the real world on top of the virtual instead of the other way around.
• True AR is where the world is viewed through a regular pair of glasses but then the virtual world is superimposed on top through the transparent lens.
• This is a far better method of delivering AR but it is so technically challenging that no one has yet been able to get to grips with it.
• Doing this way around makes it possible for all-day use as well as negating some of the weird and creepy use cases that Apple has gone with in its marketing material.
• In order to deliver the kind of user experience worthy of its brand, Apple has been forced to take this route even if it has no long-term future.
• I have long believed that if The Metaverse is going to take off in volume, it will predominantly be in AR meaning that Apple is going down a dead end with this device.
• However, I suspect that the long-term roadmap will be able to re-use all of the sensors and the software that Apple has developed to virtualise the real world when it comes time to flip the script and do AR properly.
• The device is powered with an M2 chip as well as a specialised R1 chip which handles all of the input from the sensors, leaving the M2 free to do everything else.
• Apple has put so much effort into the user experience that a lot of compute horsepower is needed which brings us to hideous compromise number 2: the device is tethered to a power supply.
• This takes the form of mains power or an external battery pack just small enough to fit into a back pocket that supplies 2 hours of usage.
• Apple has made this compromise so that the device will not be heavy and bulky and still have a great user experience but it is much better than full tethering where the compute runs on an external computer.
• I think that Apple gets 2 things out of this launch namely an insurance policy and a load of IP that it can use in the future.
  • First, Insurance: At $3,500 per device, volumes are going to be very low but crucially, Apple has staked out a position in The Metaverse from which it can build over time.
  • This means that it can bring the price down as the technology improves as well as introduce new form factors from this base position when or if the market emerges.
  • The Metaverse is something that Apple has to address because if it replaces the smartphone over the next 20 years and Apple has no position, then it will suffer the same fate as many smartphone makers before it.
  • Even if it is a total failure and billions of dollars go down the drain it is a worthwhile insurance policy to ensure the longevity of the iOS ecosystem.
  • Apple Vision Pro is the first iteration of that insurance policy.
  • Second, IP: Apple has filed over 5,000 patents during the development of this device which probably translates into around 1,500 patent families or separate innovations.
  • If Apple has been merely tinkering with no intention to release a commercial device, it would not have been forced into making the design and technology choices that have resulted in the filing of so many patents.
  • Furthermore, its unique take on how to deliver The Metaverse has taken development in directions where no one has gone before.
  • This means that a lot of this IP could be quite novel, meaning that if everyone follows, they will have difficulty getting over the IP wall that Apple has constructed.
  • This puts Apple in a good position as I suspect much of this IP will be re-usable when the time comes to flip the script and do AR properly and make life hard for competitors and imitators.
• The net result is that even though Apple is not taking the right long-term path with the Vision Pro, it provides a placeholder for The Metaverse and an insurance policy just in case The Metaverse is the next big computing platform.
• Its device is extremely expensive, but it does everything so much better than anything else that has gone before that it will give developers the confidence that this is a platform worth paying attention to over the next 10 years.
• This will have no financial impact on Apple for many years as both its revenues and its costs will be a rounding error in the accounts, but it provides the security of a position just in case.
• Hence, holding Apple shares remains about iPhone which continues to fare very well in difficult circumstances but not well enough to make me want to own the stock.
• Hence, I continue to look elsewhere.