The Importance of Patience for Apple's Augmented Reality Development

Apple Inc. (AAPL) is up 0.45% in trading today. The tech giant has been on a roll lately, with strong earnings reports and positive news about its new products. Analysts are bullish on Apple, and the stock is up nearly 30% so far this year.

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This year's real world is likely to be a harsh one for the company. This doesn't mean that the company should rush into a virtual one.
Apple is rumored to be working on an augmented reality headset, and according to analyst Ming-Chi Kuo, it could be announced as soon as this spring. Kuo, who is well-connected to Apple's supply chain, says the device is likely to be unveiled at the company's developer conference in June, with a launch sometime in the second half of the year. This lines up with a recent report from Bloomberg News, which said that Apple is planning to unveil the product this spring.

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Apple's augmented reality headset faces a tough road ahead. Augmented reality technology has continued to bedevil both richly funded tech startups as well as the biggest names in the industry. Microsoft, Facebook and Google have all taken serious cracks at the technology and have so far come up short. Facebook has even renamed itself as Meta Platforms in its pursuit of building a so-called metaverse, for which augmented reality and virtual reality would be key conduits. But the company reportedly canceled a project for commercial AR glasses last year, while its efforts in VR are burning a hole in its sizable wallet. Meta's Reality Labs segment that includes VR generated $9.4 billion in operating losses in the first three quarters of 2022.

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Apple has a history of designing products that are both intuitive and attractive, which gives them an advantage in creating a face-mounted computer that people would actually want to wear. However, it is still a difficult task even for a company like Apple. They have been working with the technology since at least 2016, when Chief Executive Tim Cook said that they were very interested in AR for the future.

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Although it has been in development for some time, Apple's AR headset may still have limited appeal. According to The Information, the version currently in production resembles a pair of ski goggles, requiring a cable to an external battery pack. Key elements of the headset are still a work in progress, and Mr. Kuo has predicted that the product will be unveiled this month.

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Apple has a history of taking its time to perfect new products and features. However, the company may feel pressure to release something new this year, due to weak showings in other areas of its business. According to Wall Street projections, iPhone revenue for the fiscal year ending in September will be flat in comparison to last year. This is partially because of Covid lockdowns and social unrest in China, which disrupted Apple's manufacturing facilities located there. Service revenue is expected to grow by a single digit for the first time ever, while Mac revenue is projected to drop 5% following three years of pandemic-boosted, double-digit growth. Total hardware revenue—which still makes up 80% of Apple's total business—is expected to rise by barely 1% this fiscal year, according to estimates from FactSet.

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Apple's AR device would have to be a major success to have a significant impact on a company that is projected to generate $400 billion in revenue this year. According to market research firm IDC, sales of VR and AR headsets are expected to reach 12.9 million units by 2023, which would represent a 32% increase from estimated sales last year. Even if Apple were to capture 50% of that market and sell its devices at twice the price of the current market leader, Meta Quest 2, it would only represent a 1% increase in Apple's total revenue for the year.

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Apple typically unveils new products close to their sales launch, but there has been a wider lag for new device families that need content from external developers. The first iPhone was shown off six months ahead of its retail launch, while the Apple Watch got eight months of cushion. Given the lack of killer apps that have yet to emerge for AR in general, a disappointment from Apple would send the message that even the world’s most well-capitalized design studio can’t crack the code for mass adoption of the technology. That reality would really bite.