AI’s ‘Invisible market’ opportunity

Author: Xuesong Zhao, Lead Fund Manager, Polar Capital Artificial Intelligence Fund

We are strong believers that user interface (UI) breakthroughs drive technology adoption. Looking back at one of the first big transitions in the technology sector, from mainframe to PC, the latter existed long before Windows was introduced, however it was Microsoft’s easily accessible user interface which expanded the market from 100 million users to 500 million in 10 years.

While an instinctive reaction during this transition might have been to invest in the unique components such as central processing units (CPUs) or hard disk drives (HDDs), the biggest opportunity for investors was an entirely new market or so-called ‘invisible market’ – packaged software. Five years after the PC market hit 500 million users, this industry grew from almost zero to $150bn.

A similar argument can be made for the internet transition. The web browser helped expand the user base but the biggest opportunity was not in the networking equipment, it was in the e-commerce and online advertising markets which grew from almost zero to $570bn and $75bn five years after the internet hit 1 billion users.

The same narrative played out within smartphones. Apple became the first company to top a $3trn valuation largely thanks to the app economy it created, now worth $6trn and from which they take up to a 30% cut. Identifying and taking part in the emergence of such invisible markets within AI lies at the heart of our decision to launch the Polar Capital Artificial Intelligence Fund seven years ago.

“LLMs understand what you say but LAMs get things done.” Jesse Lyu, Rabbit OS CEO

Most recently, we have seen ChatGPT’s user interface enable the rapid adoption of large language models (LLMs). The most obvious visible market at the moment is compute infrastructure and, while a paradigm-shifting new market paralleling our previous examples of technology adoption has yet to materialise, recent green shoots of hardware innovation in AI UI suggest it is only a matter of time.

At January’s Consumer Electronics Show (CES), US start-up Rabbit (private, not held) unveiled its R1 ‘AI companion’ device, whose large action model (LAM) is designed to add a layer to LLMs’ ability to generate text from human input by generating actions; from ordering a pizza upon voice command, to organising and booking a holiday.

In this instance AI is allowing product design to challenge the app-centric and phone-first model of consumption we have grown used to, prioritising utility over entertainment or novelty.

Humane’s (private, not held) AI Pin, a wearable AI assistant built on the company’s mission to “put us back in touch with ourselves, each other, and the world around us”, is based on similar post-app/smartphone values.

This is not to say the two innovations are surefire winners or that their approach to UI will prove successful - previous iterations of augmented reality products and physical devices such as Google Glass and Snapchat Spectacles failed to achieve widespread adoption. New products also face the obstacle of convincing users to carry another device and favouring it over a smartphone. However, the most important aspect here is the willingness to design beyond accepted user habits and create a new model of interaction, with AI at the core. 

If it were to herald the direction of travel for AI-first hardware, these proactive and immersive experiences could feasibly render the smartphone's centralised functions obsolete, making way for a future where AI assistants embedded in our surroundings handle everything from communication to health optimisation.

Solving for tomorrow

Investing in the enablers of AI, as well as the likely beneficiaries and those companies ready to create a new use case in invisible markets beyond what we naturally think of, and design for, today allows us to stay alert to AI adoption emerging in ways we might not have anticipated. By taking a long-term approach to monitoring and assessing AI readiness in a broad range of potential beneficiaries in a range of sectors, we believe we can position the Fund to benefit from AI-fuelled growth, corporate synergy and burgeoning business lines beyond short-term productivity uplifts. 

Discover more about the Polar Capital Artificial Intelligence Fund

This is a marketing communication. For information purposes only. This material is not intended to provide advice of any kind. Issued by Polar Capital LLP and Polar Capital (Europe) SAS. Polar Capital LLP is authorised and regulated by the United Kingdom’s Financial Conduct Authority (“FCA”) and the United States’ Securities and Exchange Commission (“SEC”). Registered address: 16 Palace Street, London SW1E 5JD. Polar Capital (Europe) SAS is authorised and regulated by France’s Autorité des marchés financiers (AMF). Registered address: 18 Rue de Londres, Paris 75009, France. Some information contained herein has been obtained from third party source and has not been independently verified by Polar Capital. All opinions and estimates constitute the best judgement of Polar Capital as of the date hereof, but are subject to change without notice, and do not necessarily represent the views of Polar Capital, and may not be achieved.