Market Insight

Apple Announces the HomePod: Will Apple's Bet on the Market's Most Expensive Smart Speaker Pay Off?

June 05, 2017

Paul Erickson Paul Erickson Senior Analyst, Connected Home
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Apple announced its HomePod smart speaker at WWDC 2017, marking its entry into that market as well as its formal manifestation of the concept of an all-Siri voice-controlled smart home in the future. 

With a 4-inch driver, a beamforming-capable 7-tweeter array, 6-microphone far field voice recognition array, acoustic modeling, multi-channel echo cancellation (useful for calling features undoubtedly to come), software-based distortion reduction, and automatic room adjustments thanks to its microphones, HomePod is thus far the most sophisticated audio product in the smart speaker race. HomePod is slated for December 2017 release in the US, UK, and Australia, at $349 USD.

Our Analysis:
 
Apple's HomePod is simultaneously the most technically sophisticated smart speaker thus far, the most capable audio product within the category, and the most expensive to date.
 
The HomePod’s multi-tweeter array is a competitive advantage even without beamforming, given that most smart speaker designs feature a single tweeter or a single full range driver. High frequencies, unlike bass, are directional. The multi-tweeter array allows for listeners to hear mid and high frequencies more clearly from different areas of a room compared to the single-to-no-tweeter-based competition.
 
Apple has taken a differentiated tack in pushing the audio fidelity of the HomePod, as well as its suitability to music. Along with technical capabilities and build, the focus on music is evident in the company’s building out of Siri’s music-playback-specific recognition library. The depth of commands available for music playback utilizing Siri’s voice interface, trump that of Google and Amazon. Given that music is one of several fundamental, high-utilization use cases for smart speakers, it is a keenly targeted differentiation by Apple – and a highlight of a competitive weakness of its competitors. Amazon and Google have both faced criticism for audio quality and fairly basic music playback capabilities on their respective devices.
 
HomePod joins an increasingly crowded mix of two ecosystem competitors in smart speakers, and a world of less expensive devices providing wireless music playback over Bluetooth and Wi-Fi. In this environment, its $349 price is problematic. To a certain degree, Apple can count on many already within the iOS ecosystem to buy the HomePod by default, but to grow beyond that base will require a notable reduction in price given the state of competition in the market. While Apple noted some of the virtual assistant functionality being built into Siri, and HomeKit integration, much of what was noted appears to bring essentially a level of functional competitive parity to basic capabilities already present in Google and Amazon's propositions.
 
While deep integration with Apple Music was announced, there was a notable absence of announcements of any other music services able to used with HomePod. If lock-in to solely Apple Music is another intention of HomePod, this may prove a competitive limitation in smart speakers compared to the competition, and in the audio-only multi-room speaker market against service-agnostic Chromecast Built-in-compatible products and stalwarts such as Sonos.
 
For Sonos, long a favored choice of iOS music enthusiasts for multi-room audio, HomePod is a shot across their bow. Apple’s speaker is placed in Sonos’ territory in terms of cost / audio quality selling proposition, décor-neutral styling, and automatic audio adjustment for the room (a la Sonos PLAY:5). Sonos’ current competitive pivot to accommodate voice control and virtual assistants agnostically, is even further validated by Apple’s high end entry into the smart speaker market.
 
Amazon Echo is $179, Amazon Dot is $49, Google Home is $129. With seasonal promotion and third party hardware adding to the pricing mix, a smart-speaker-enabled household with HomePod will be between 2 to 8 times as expensive as the competition. It is thus likely that Apple will not be able to move significant volume of the HomePod in 2017 given how price-competitive the connected audio market (smart speakers, and Wi-Fi connected speakers overall) is expected to be in the fourth quarter. HomePod 2017 sales are expected to be primarily early adopters, the brand-faithful, and the higher income end of the iOS user base.
 
Sonos' strategy shift highlights the questionable nature of Apple's price positioning during its HomePod presentation, that $400-$700 is a reasonable price to expect for a smart speaker with quality audio and thus $349 is competitive. Sonos, with formidable brand loyalty built on a reputation based on quality audio and a mature, well-sorted user experience, was arguably forced to pivot due to the surprise success of the smart speaker category. More specifically, the success of the lower-fidelity, less music-services-capable Amazon Echo - originally priced the same as Sonos' $199 entry-level PLAY:1 speaker. With the market firmly at sub-$200 in the US, positioning $349 as a bargain for a smart speaker on the basis of audio quality will be difficult.
 
Apple’s premium positioning ensures that it cannot hope to compete in pure volume with Amazon’s line (particularly the Dot) as an impulse-buy-friendly mainstream product. Instead, much like the Android-bound Google Assistant, over time it will be the iOS-bound nature of Siri that will spread the Apple-centric smart speaker proposition far and wide. Buyers will opt for the virtual assistant they are already familiar with. 
 
One notable difference from Google Home, however, is that Apple’s HomePod announcements were not accompanied by any indication of an SDK or tools to allow third parties to build similar hardware. As inexpensive third party Alexa and Google Assistant hardware begins to enable low cost of entry in Q4 2017 and beyond, Apple’s high cost of entry will slow HomePod penetration (and by extension the growth of Siri-controlled smart homes). Competitive pressures are expected to generate announcements of a near certain price cut (or release of a lower-priced model below $200) by June or September 2018.
 
More important than growing the HomePod market beyond the iOS-based available market, however, is its story-building role in firmly anchoring Apple’s efforts in the smart home around Siri – vital in a smart home race that has quickly evolved into one that focuses on voice as a unifying interface.
 
What Does HomePod Mean for Amazon and Alexa?
 
For Amazon, the elephant in the room, Apple now joins Google as a significant ecosystem competitor to Alexa. HomePod’s entry in the market also marks the official end of Amazon’s easy window of opportunity to seize market and mind share with Echo and Alexa while competitors were few or non-existent.
 
The HomePod is late to the game, but the smart speaker market is only now emerging from a long infancy. Over the long term, Apple, like Google, retains significant sustainable advantages over Amazon. Though the Echo line and the Alexa ecosystem have had a significant head start and have dominated the media cycle thus far, Apple’s ecosystem story is broader, larger, and more mature thanks to its established mobile device business. Potential buyers faced with the prospect of learning a new virtual assistant, or sticking with the Siri they’re already familiar with, are likely to side with Siri if the ability to execute fundamental tasks is equal or better.
 
In the long run, Amazon’s growth potential for the Alexa ecosystem is gated by how quickly two competitors with broader, deeper, and more international ecosystems build momentum and get up to speed. These two competitors also have long-run advantages in the amount and quality of user data that is able to be fed to their respective virtual assistants, and the resulting level of personalization and perceptiveness in the assistance that can be provided.
 
Google and Apple are now both in the market, and HomePod marks the real beginning of the home virtual assistant race. For Amazon, it is also a sign that Alexa’s competitive oxygen is going to be increasingly reduced over time – but only once the HomePod proposition drops in price.

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