Market Insight

Apple’s iPhone 7 Launch Brings New Audio Products, Attempting to Capture Greater Share of Accessories Market in Face of Declining Sales

September 07, 2016  | Subscribers Only

Paul Erickson Paul Erickson Senior Research Analyst, Service Provider Technology

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Apple’s September 7th keynote introduced the iPhone 7 family and its elimination of the industry-standard 3.5mm headphone jack, along with these new audio devices:

Apple:

Lightning EarPods
•    Included with iPhone 7 / 7 Plus
•    Lightning connector instead of 3.5mm plug, similar otherwise to existing EarPods

AirPods
•    Completely wireless earbuds/pods, utilize Apple’s new proprietary W1 wireless chipset
•    5 hours of use per charge, and recharge in a portable case that supplies 24 hours total listening time worth of charging
•    W1 chipset eliminates the typical pairing process – remove AirPods from case, a connect dialog automatically appears on iPhone 7 and Watch 2
•    Device pairing/setup propagates across devices via iCloud
•    Physical design follows the same design language and construction as the company’s EarPods, only without wires
•    IR sensors detect when placed in ear and can initiate playback, and accelerometers detect taps, such as for initiating Siri for voice control commands.
•    $159

Beats:

Beats Solo 3 Wireless
•    Updated premium over-ear cans with Bluetooth
•    Controls on earcup for calls, playback, and initiating Siri
•    Fast charging via Micro-USB, 40 hours battery life
•    $299

Beats X
•    Neck-draped earbuds with Bluetooth 
•    Inline remote for calls, playback, and initiating Siri
•    Fast charging – but only via a Lightning cable, 8 hours battery life
•    $149

Powerbeats 3 Wireless
•    Active-lifestyle Bluetooth earbuds with earhook for retention, with updated ergonomics
•    Inline remote for calls, playback, and initiating Siri
•    Sweat and water resistance
•    Fast charging via Micro-USB, 12 hours battery life
•    $199

All three newly-announced Beats models incorporate Apple’s W1 chipset and thus have the same simplified pairing and setup as the AirPods with iPhone 7 and Watch 2.

Our Analysis:

Apple’s new products match, rather than exceed, the technological envelope already created by competitors in the audio and mobile accessories markets. However, when taken in combination with the W1 chipset, a rise in convenience is clearly offset by a clear aggregate move by Apple to move iOS device owners’ accessories purchases away from third parties and industry standards, and more distinctly into Apple’s own product families. This is particularly relevant given declining iPhone sales, the healthy growth of the overall headphone market, and Beats’ position atop the pile in high end headphone revenues. It should be noted that wireless models are the highest revenue-generating products within the headphone market, as well.

In totality, these moves represent Apple’s desire to bolster declining mobile device revenues by capturing as much of its device owners’ expenditures in the burgeoning audio accessories market as possible – via a deliberate transition away from industry audio standards and towards ones it controls, and the introduction of unique proprietary functionality.

AirPods

While the new EarPods are simply a revision of the prior edition with a Lightning connector, the new AirPods are a wholly new product. Though the product possesses strong battery life for the device class, the W1 chipset adds the only true groundbreaking functionality to the AirPods. Fully-wireless earbuds have been on the market for a while, with at least a half dozen brands currently offering their takes on the concept, including Samsung, Motorola, and Onkyo. Tapping to initiate calls or interaction, via accelerometer, has been on the market for years thanks to companies such as Jawbone and others. In-ear detection via a variety of means (Plantronics has used capacitive sensors since 2014), is also not new.

AirPods inherit a similar design to the company’s EarPods. The physical design attempted to fit all ears without using any type of foam or silicone buds / surfaces, for the sake of aesthetic and design simplicity as well as reduced cost. Unfortunately the result was mixed, as many EarPod users have complained of fit issues with the design, ranging from lack of sound isolation, to discomfort, to the pods easily falling out of ear during active movement.

There are no indications that this design has changed these significant fit-related issues inherent to using a smooth, non-conformal, unibody design with no other materials or structures for either adhesion to outer ear surfaces or the ear canal. Thus, it is expected that AirPods will inherit the same fit problems as EarPods, which are not insignificant; sound isolation is particularly important for both music playback as well as telephony, and pods falling out-of-ear during movement and activity and potentially being lost is less forgivable at the $159 cost level.

While the technological content of the AirPods as a product is competent, the physical design inherited from EarPods remains an Achilles heel, and will be the area that Apple is most likely to alter in a future revision.

The W1 chipset, however, brings new and tangibly beneficial convenience to consumers using AirPods or any other W1-equipped audio accessory. The chipset in combination with Apple’s new mobile devices, moves device pairing for the AirPods and new Beats products into more user-friendly territory compared to the traditional use case experienced by consumers using Bluetooth. In addition, allowing this pairing information to be propagated using iCloud and thus potentially never needing to be done again for any new Apple device, is also a positive for the consumer.

It is expected that the additional convenience of W1 functionality will be the true allure of Apple’s AirPods, more so than its own capabilities as full-wireless earbud set.

Beats

With the exception of Beats X, Beats’ new products are evolutionary updates to existing successful product lines, with W1 chipset addition the most substantial development of note. Beats’ premium pricing remains in place, but Beats X’s more accessible pricing for a Beats wireless product represents the pressure being exerted by competitors with credible products, premium construction, and price aggression.

Beats X is also a curious introduction that copies a form factor made popular by competitors as practical for use in active lifestyles – and thus seems slightly competitive with Beats’ own PowerBeats, a line that specifically targets the same use cases. This underscores the likelihood that Beats X, its form factor, and its pricing, are more of a product of market-driven competitive reaction by Beats than a deliberate evolution of its product line.

Overall, the new Beats products’ main unique proposition is W1 chipset functionality and their ability to easily link to the new Apple iPhone and Watch. Over time, it will be interesting to observe how deeply Apple/Beats seeks W1 chipset penetration, and whether it will keep the functionality exclusive to Beats and Apple products, or license W1 for use by third parties for a fee.

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