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VR Focus: Apple Bucks The Trend

Apple's failure to hop on the virtual reality bandwagon has raised questions about its long-term prospects. With major players like Facebook and Alphabet leading the VR land grab, many took Apple's path less traveled for a bad bet.

Fueling the doomsday rhetoric was Apple's third consecutive revenue decline during its fourth-quarter results in October. Against a backdrop of falling iPhone, Mac, and iPad sales, this marked the company's first drop in full-year revenues in 15 years.

Even then, analysts believe releasing a VR platform or headset would ultimately fail to live up to previous Apple products, since VR is an immersive technology, whereas Apple has always been about enhancing your experience of your world rather than taking you out of it, explained Jackdaw Research chief analyst Jan Dawson.

Given that the mainstream adoption of VR outside high-end gaming still has a long way to go, the stakes would be incredibly high for the iPhone maker.

"When you look at VR, it really is key to one specific industry: gaming," said Angelo Zino, a New York-based senior equity analyst at CFRA Research. "Of course there are other uses but the mass opportunity is within gaming," he added.

For Apple's part, its preferred battleground is artificial intelligence (AI) and augmented reality (AR) rather than VR, as computing platforms seek to make technology more personalized and contextual for consumers. Augmented reality allows users to interact with the real world in a more interesting way.

As a result, Apple has pursued a number of M&A deals in both segments. Earlier this year it bought Flyby Media, an AR startup that enables mobile devices to merge physical and digital worlds. Prior to this, Apple acquired German AR company Metaio in May 2015. And while Siri remains a product of Apple's most important AI acquisition to date, the company has since made other AI purchases, including Seattle-based machine-learning startup, Turi, for a reported $200 million this summer.

It is easy to see why Apple CEO Tim Cook is enamored by AR, VR's close cousin. After all, the groundbreaking success of Nintendo's AR game 'Pokémon Go' was testament to Apple's strong app ecosystem. Needham & Company analyst Laura Martin estimates Apple could generate as much as $3 billion of incremental revenue from 'Pokémon Go' over the next 12-24 months.

Even then, analysts remain divided over the prospects of Apple's bets on AR, seemingly at the expense of a clear strategy on VR. Describing Cook's decision to prioritize AR over VR as "smart," Zino insisted AR could become a core technology for the company.

"Apple is in a different position to some of its tech peers. Given its strength in the app ecosystem, AR could be an even bigger long-term trend for Apple," said Zino.

Following a huge rise in Apple's R&D spend in the last five years and rumors Apple could be working on Google Glass-style AR glasses, Zino said he expects the company to roll out new hardware within the next 18-24 months. SEC filings show Apple's total R&D expenses amounted to $10 billion in 2016, up significantly from $2.5 billion in 2011.

But on the other hand, AR continues to be clouded by uncertainty.

"This whole AR space is so new [so] there is no way to know which companies will hit the target and which will miss," according to Jeff Kagan, an independent industry analyst.

"Google being behind this AR effort is encouraging, but is not a guarantee of success," he said in an interview.

It is clear this is a long-term bet for Apple.

In an interview earlier this year, Cook said challenges with the technology would delay adoption of AR.

"But it will [eventually] happen, it will happen in a big way, and we will wonder when it does, how we ever lived without it," Cook said.

Meanwhile, a key argument for Apple's AI-focused strategy is that it hedges against the risk of high exposure to hardware, as rivals such as Facebook, Google, and Tencent increasingly compete on a cloud and software basis. This is because AI-enhanced assistants like Apple's Siri stand to make the iPhone more, rather than less, relevant over time.

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