In 2011, software engineer and entrepreneur Marc Andreesen — who was among the inventors of the first web browser — famously said that “software would eat the world.” It was a colorful way of emphasizing the new importance of software, and he said it a few years into the revolution of mobile computing ushered in by the iPhone. Hardware was disappearing behind software in an age ruled by app development and cloud deployment. But there are cycles, and a new one may be coming in which hardware once again becomes a central focus.
The shift is being driven by the importance of a few new technologies for the giants of information technology. A central point of competition is turning out to be the arrival of smart speakers, which Amazon [NASDAQ: AMZN], Apple [NASDAQ: AAPL], and Alphabet [NASDAQ: GOOG] hope to turn into conduits that will channel consumers’ purchasing behavior into their walled gardens. The big players are present at this year’s Consumer Electronics Show (CES), monitoring the incoming tide of new generic smart speakers. Smart speakers are a manifestation of the mainstreaming of artificial intelligence in consumers’ lives, and the race for dominance is intense. GOOG will have a booth at CES for the first time in several years.
The giants of the internet are once again competing to make consumer devices — smart speakers chief among them. Virtual reality headsets, which have failed to gain consumer traction due to unwieldiness and price, may have a last hurrah. The next significant category may be augmented reality (AR) headsets, which GOOG abortively attempted to launch as Google Glass a few years ago. The technology has improved, although we’ve gotten little but teases from GOOG’s collaboration with secretive start-up Magic Leap, which gave us a preview of their upcoming AR headset in December:
The release of Magic Leap’s headset in 2018, although it will be intended primarily for developers, may be a galvanizing event, if it delivers even a fraction of the functionality we’ve been teased with over the past few years. GOOG and Alibaba [NYSE: BABA] are both Magic Leap investors. You can find Magic Leap’s YouTube channel here — it’s cool stuff.
Many analysts expect more functional smart glasses (and eventually, smart contact lenses) to be the next smartphone-level disruptive process in consumer tech.
Of course, underlying all of these developments and potential developments is the need for hardware that offers stellar performance at low power, and that means that a new phase of consumer hardware development is going to open opportunities for chip designers. We continue to believe that the mass arrival of artificial intelligence will mean a powerful cycle for the most innovative semiconductor manufacturers; but although companies such as Nvidia [NASDAQ: NVDA] have ridden high on AI and gaming developments, we caution investors that dominance in this area is often fragile and brief.
Investment implications: The arrival of ubiquitous smart speakers is creating a battle among the big internet firms to win a new hardware war. The trend will be supportive for AAPL, AMZN, and GOOG as the new category unfolds and penetrates more households. AR has not fulfilled its promise, but contenders (GOOG, AAPL, Microsoft [NASDAQ: MSFT], and perhaps Facebook [NASDAQ: FB]) are hoping to for new devices in the next two years that could create another episode of mass adoption like that of smartphones themselves. Both smart speakers and AR glasses will require new heights of low-power, high-performance chips, and innovative semiconductor firms that can provide them will prosper. The big internet firms and many semiconductors had strong years in 2017 — but don’t count them out in 2018. Hardware may be getting ready to give the software a run for its money.
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