Apple Vs. Meta: Battle Of The Mixed Reality


Investment Thesis

With Apple (NASDAQ:AAPL) set to launch its iPhone 14 in the upcoming “Far Out” product event on 07 September 2022, certain diehard fans are probably wondering if the tech giant will also introduce its mixed-reality headsets then. Rumors have been running wild In the market, given the multiple “leaks” in design, features, prices, and even down to production tests on the product.

We remain highly confident that AAPL’s AR/VR headsets would give Meta’s (NASDAQ:META) Quest VR a good run for its money, due to the smashing success of the former’s previous breakthrough products.

Meta Has Tried To Dominate The Metaverse With Questionable Success

Meta has been struggling to launch the Metaverse concept with its previous $2B Oculus acquisition in 2014 and the company’s rebranding from Facebook to Meta in October 2021. Since then, the company has faced multiple headwinds, given the $12.4B cash drain Reality Labs has imposed on its previously highly profitable business in FY2021. The fact that the segment has yet to report profitability was significantly increased by AAPL’s recent privacy changes worth $10B in reduced sales for the company.

Furthermore, Meta reported minimal profits for its headsets, due to its choice of subsidizing the sale price to $299 for the 128 GB Meta Quest 2 then (due to inflationary issues, the company had recently increased it to $399 for the same model and $499 for the 256 GB). This particular strategy has helped Quest to be more attractive and affordable for the mass public, with 8.7M units sold in 2021, representing a notable doubling YoY. In addition, Meta’s market share in the VR market has also grown to an estimated 80% share now, despite the other headsets offered by Sony (SONY) and HTC. Zuckerberg has also projected a rather aggressive vision of “a billion people in the metaverse spending hundreds of dollars each,” though we do not expect all to be using Quest.

Unfortunately, we expect Meta’s current dominance in the AR/VR market to erode once AAPL releases its headsets, despite the potentially eye-watering price tag of $2K for the latter. The iPhone 13’s price of $1.29K has obviously not turned off Apple die-hard fans at all, since the company reported a massive $162.8B of revenues from the whole iPhone segment for the last three quarters since its launch in September 2021. Thereby, pointing to AAPL’s superior pricing power and stellar premium branding globally. It is no wonder that the company still boasts the largest market cap globally at the moment, since it continues to report stellar gross margins of 43.3%, net income margins of 25.7%, and Free Cash Flow margins of 27.8% in the last twelve months , despite the unfavorable inflationary environment and global supply chain issues.

What Does The Drawing Board Look Like For AAPL’s VR Now?

Deeper down, this particular “very deep, philosophical competition” between AAPL and Meta will probably shape the future AR/VR headset ecosystem, as previously mentioned by Zuckerberg. In the iOS system, AAPL remains the master of a closed ecosystem with a more straightforward program development and a higher emphasis on privacy. Furthermore, it is able to command a steep 30% commission rate in-app spending for companies with revenues higher than $1M in the App Store, which accounted for approximately $25.53B of its revenues in 2021.

Nonetheless, it is essential to note that Meta currently commands a higher rate of 47.5% in Horizon Worlds, similar to YouTube’s rates. Unfortunately, it is also immediately apparent that the adoption of Horizon Worlds has yet to reach the critical inflection point, thereby pointing to Reality Lab’s minimal profitability at an operating margin of -448.8% in FY2021. In the meantime, Meta has always been a proponent of an open ecosystem with sharing of information (read: monetization through ads), which has obviously landed the company in hot waters due to its previous lack of privacy. The company was fined $19M for several data breaches, with a potential Facebook and Instagram blackout in the EU, bringing further headwinds to the advertising and social media giant.

We digress. Nonetheless, it remains to be seen how this intense battle will shape the future AR/VR ecosystem. Though we are of the opinion that AAPL would likely win this round yet again, given the robust Apple lineup and the global branding it has won through the recent privacy campaign. Only time will tell, since Meta has also been making massive efforts in improving consumer privacy thus far, though its reputation has also taken an enormous hit.

Despite the rumors, we are of the opinion that AAPL’s AR/VR headset would likely be launched in a separate grand event befitting its stature. Similarly to the very first event for the introduction of iPhone 1 in January 2007. That would be a much better fit for AAPL’s style, since iPhone 14 and Apple Watch Series 8 would naturally receive the media spotlight they deserve in the upcoming event. We expect the speculative reveal to be sometime in mid-2023, when the macroeconomics has improved significantly. Thereby, ensuring the appropriate market condition for its eventual success and consequent adoption. This is on top of the easing global supply chain issues and, potentially, the end of China’s Zero Covid Policy after President Xi’s re-election in November 2022.

We have covered AAPL’s future launches in the AR/VR and automotive segment in detail previously, which you may refer to below.

  • An Apple A Day Keeps The Portfolio Healthy (And Potentially, Recession At Bay)
  • Can Apple Be The New Tesla – Smartphone On Wheels By 2025?

In the meantime, we you to read our previous article on META, which would help you better understand its position and market opportunities.

  • Meta: Ad-Pocalypse Fears Are Here

So, Which Would Capture Audiences’ Hearts Globally? Almost Definitely Apple’s

The global AR/VR market is still nascent, since it was valued at an estimated $20.9B in 2021, on top of the aggressive projection of growth to $454.73B by 2030 at a tremendous CAGR of 40.7%. Therefore, the expanding pie could potentially grow to one as big as the global smartphone market at $457.18B in 2021. The smartphone device segment was large enough to fit multiple players at the moment, with AAPL accounting for 15.6% in the global market share in shipping volume and 27.5% in the global smartphone platform by Q2’22. This is in contrast to Samsung accounting for 21.8% of shipping volume and Xiaomi/ Vivo/Oppo for a total of 31.1% in Q2’22.

However, investors must not ignore the fact that the current demand for AR/VR devices remains concentrated in China, accounting for 56% of the total global share in 2021. Interestingly, AAPL’s iPhone 13 is also one of the most popular smartphone choices in China , accounting for 46% of the higher-end spectrum in Q2’22. As a result, there are many reasons to assume AAPL’s massive success and eventual leading market share in the country, once it launches its AR/VR headset in the future. That would be obviously detrimental to Meta, since Quest is neither accessible nor sold in China.

AAPL also similarly commands the lion’s share at 55.26% in the US smartphone market by July 2022, with the whole US market expected to report in-app spending of $42.3B by the end of the year. This is on top of FY2022’s projected global in-app spending of $137B. Thereby, speculatively ensuring AAPL’s AR/VR victory and massive profitability in the US market and globally, despite Meta’s earlier entrance. Especially, given the apparent benefits of seamless syncing to iOS systems from AAPL’s existing lineup.

Nonetheless, Meta’s future in the Metaverse seems relatively secure for the next two quarters, since there are already numerous successful VR games and applications on its Quest platform, with AAPL likely to enter much later to everyone’s batted breath and Meta’s potential chagrin. Let’s see.

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