March 4, 2021
Good morning, and welcome to Protocol Next Up. This week: Microsoft's new social AR/VR platform Mesh, and how the Vizio IPO reflects changes in the world of consumer electronics.
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When Facebook announced that it was building AR glasses, everyone naturally assumed that the company's biggest competitor was going to be Apple. This week, a new threat emerged for the social networking giant: At its Ignite conference, Microsoft unveiled Microsoft Mesh, a new social AR/VR layer that developers will be available to tap into on a multitude of devices, and that could ultimately help the company become a force in consumer AR, as I detailed in my story this week.
Mesh is an ambitious undertaking, as Microsoft CEO Satya Nadella made clear during his Ignite keynote appearance. "Think about what Xbox Live did for gaming," Nadella said. "We went from single player to multiplayer, creating communities that help people connect and achieve together. Now just imagine if the same thing happened with mixed reality."
That comparison was no accident. Xbox Live is a consumer service with over 100 million monthly active users, and it's become the de facto standard for multiplayer gaming on Xbox and beyond. "We are building a service that a developer can just assume that his customer has the capability in the same way that they build Xbox Live into a multiplayer game," Microsoft's mixed reality director, Greg Sullivan, told me ahead of Ignite. "If you want to do collaboration in this application, in the multiverse, the metaverse, this is how. You need Mesh."
Facebook has long made social a core tenant of its AR/VR efforts, with Zuckerberg writing last year that "these will be the most human and social technology platforms anyone has built yet." However, in practice, Facebook has actually struggled to make social VR work. The company has already shut down two social VR apps, Rooms and Spaces. Horizon, which was announced as a successor to those apps in late 2019, has yet to launch to the public. "On the social side, looking back, it's kind of embarrassing at all the stages that we've gone through at Oculus," admitted then-CTO John Carmack 18 months ago.
But there's still room for Facebook to beat Microsoft at AR:
Facebook's AR/VR head Andrew Bosworth told me in 2019 that he doesn't see HoloLens as a good test case for consumer AR, saying: "If what I want to test is how people are using augmented reality as they go about their lives, then the test of HoloLens isn't a great one for me." In essence, Bosworth's argument was that you can't build an iPhone if you start out with a BlackBerry.
Sullivan pushed back against this notion, telling me: "The iPhone [was] this consumer device [that] kind of came into the enterprise. That's really atypical. Often, a new technology is adopted by commercial enterprises because the costs are high. And then, over time, you achieve economies of scale. Things get cheaper, and then they become a consumer phenomenon."
Microsoft's big advantage over Facebook and other competitors is that it's not a zero-sum game for the company. Maybe Mesh will help it turn HoloLens into a great consumer device. Maybe it will just catch on as a developer platform, and ensure that a lot of AR apps running on Facebook's and Apple's future devices will make use of the company's Azure cloud services. Either way, Microsoft is benefitting.
Or as Techsponential analyst Avi Greengart put it: "Microsoft's … strategy is so smart because [it] doesn't have to win the entire stack to win the platform."
"Name me one person under 30 years old who has a cable video connection." —Altice CEO Dexter Goei, whose cable company apparently can't wait to get out of the pay TV business.
"Eventually, the floor will start to drop out." —Media pundit and VC Matthew Ball believes that cord cutting will get a lot worse, and that the companies behind some of the biggest TV networks have effectively given up traditional TV.
Greg Goldfarb, who is VP of Products and Commerce at GoDaddy, admires the resilience and ingenuity of small business owners. “It is amazing to see entrepreneurs figuring out the new context really quickly to adapt and survive." We sat down with Goldfarb to talk about the rise in ecommerce, the impact of COVID-19, the major trends emerging this year and more.
Every company has its origin story. Some are cute and original, others are clearly invented after the fact. Few are as dramatic as Vizio's, which its founder, chairman and CEO William Wang shared in the company's S-1 prospectus this week.
In the filing, Wang recalled how two decades ago, a plane he had boarded to fly home crashed into a construction site. "The entire time, all I could think about was how I had to survive," he wrote, adding: "How I would do anything to get home. I ran to the front of the plane, forced open the emergency door and jumped out."
Wang explained that the experience made him cherish being home, and ultimately led to the launch of Vizio as a company focused on the entertainment aspect of said home. As unusual as this origin story may be, Vizio itself is in many ways a perfect example for a changing consumer electronics industry, and its S-1 can be read as a manifest of the challenges and opportunities this industry is facing:
TVs have terrible margins. Vizio generated nearly 93% of its 2020 revenues with the sale of TVs and sound bars. However, there's a reason Best Buy can sell 55-inch Vizio TVs for $300: The gross margin for the company's device business was just 9.7% in 2020. That's actually an improvement: Increased sound bar sales, which are cheap to make, and sales of bigger, more expensive TVs during shelter-in-place helped the company nearly double its hardware gross margin over the past two years. Back in 2018, it was just 5.1%.
The money is in advertising. As all smart TV platform operators, Vizio is also building out its own advertising and services business, with revenues more than doubling year-over-year, to the tune of $147 million in 2020. What's more, the gross margin of Vizio's ads and services business was 76% in 2020, and there seems to be a lot more headroom to grow: Vizio's ARPU was $12.99 in 2020; competitor Roku ended the year with an ARPU of $28.76.
Big video services hold a lot of power. Ever so often, smart TV platform operators fight with streaming services about revenue share agreements, leading to services not being available on all platforms at all times. Consumers notice this, and blame their TV maker, as Vizio noted: "At the launch of Disney+, the Disney+ application was not available for installation on our Smart TVs, which led to consumer dissatisfaction and complaints."
Monetizing data is hard when you don't own it. TV platform providers have long tried to get more direct access to the catalogs of streaming services to build better interfaces and recommendation engines, which could ultimately also help grow advertising revenues. Streaming services, on the other hand, want to keep customers in their walled gardens, and share as little data as possible. That's a problem, as Vizio noted in its filing: "Some of our agreements with third party content providers, including Netflix and Disney+, restrict us from using viewing data from consumers engaging with that third party's content. Accordingly, our contractual arrangements with third party content providers may limit our ability to monetize our relationships with them."
The TV business is not about TVs anymore. Vizio shipped more than 7 million TV sets in 2020, and generated around $2 billion in revenue — all the while only employing 527 people. That's because Vizio doesn't actually make any of its hardware, but instead relies on contract manufacturers and outsourced R&D shops.
Contract manufacturers are nothing new in consumer electronics, but Vizio has been in many ways a pioneer of a new crop of TV platform operators. As a nimble startup without any in-house manufacturing, Vizio has been able to go head-to-head with LG and Samsung, two companies that make their own display panels, components and smart TV operating systems. More recently, Roku and Amazon have taken this model even further, licensing their smart TV operating systems to third-party manufacturers like TCL and Toshiba.
However, these platform-centric business models come with their own risks, as Vizio notes: "Our [contract manufacturers] could become our competitors by selling directly to retailers, including our retailers, and discontinuing manufacturing or supplying us with their devices." In other words: If manufacturers realize that they can make a lot more money running their own services on the devices they build for the likes of Vizio and Roku, they may want to get rid of the middlemen.
I've been gardening. I've been cooking more. I even tried no-knead bread, which was quite good. Still, a year in, I'm in need of a new pandemic hobby. That's why I recently ordered my first Raspberry Pi, which I want to use to connect my record player to my Sonos system. Now, I only need to buy a special preamp, assemble the Pi, tinker with Linux, set up a dedicated audio streaming server, add it to my Sonos configuration and then run from our living room to the den every time I have to flip a record. On second thought, maybe I should have gotten a sourdough starter.
Thanks for reading — see you next week!