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Apple's New HomePod vs. Amazon's Echo

By Evan Niu, CFA - Updated Jun 6, 2017 at 11:15AM

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Can Apple challenge Amazon in the market for virtual-assistant-powered smart speakers?

Apple (AAPL 0.11%) has officially stepped into the market for stationary speakers powered by virtual assistants, a product category that Amazon.com (AMZN 2.57%) pioneered in 2015 with the Echo. Amazon's Echo family continues to expand, recently adding the Echo Look and Echo Show. Apple has never put all that much weight into being the first to market provided it can be the best when it finally gets there.

With that in mind, how does the new HomePod stack up against the dominant Echo?

It's pricey at $349

For starters, consumers will have to consider the HomePod's premium price tag of $349. That's nearly twice the $180 that the standard Echo costs. Amazon also gets to benefit from falling costs, since the Echo came out a couple years ago, whereas Apple is now starting at the height of the HomePod's cost curve as a new product.

HomePod on a shelf

HomePod is expensive. Image source: Apple.

Of course, premium pricing is Apple's typical strategy, and the company attempts to justify this premium by saying that the combined cost of a Wi-Fi speaker and a smart speaker can easily run $400 to $700. That argument implies that the Echo's sound quality is rather poor, even if it's connected and smart. Other high-end systems, on the other hand, aren't connected and smart. Whether or not HomePod's sound quality can compete with other high-end Wi-Fi speakers remains to be seen, but the price tag is predicated on the hope that it can, especially since Apple is hoping that you buy several of them.

Apple Music is a clear advantage

Apple Music is already the second-largest paid music-streaming platform behind Spotify. Amazon bundles Prime Music into a Prime membership, but most people don't sign up for Prime for music streaming. Prime Music offers a paltry 2 million songs in its catalog, while Apple Music is now up to 40 million songs.

HomePod's integration with Apple Music will be an advantage, particularly if the customer is already entrenched in Apple's ecosystem, subscribes to Apple Music, and places high priority on music streaming when buying a smart speaker.

Playing catch-up

Beyond the hardware and price, the real competition will ultimately boil down to how powerful each product's respective virtual assistants are, which also has implications beyond just this product category.

Amazon has made incredible progress with building up an ecosystem of third-party Skills, which has helped cement Echo as one of the dominant smart home hubs currently available. Alexa now knows over 10,000 of such Skills (including The Motley Fool's!), up from just 1,000 Skills a year ago, and the catalog grows every week. Alphabet's (GOOG -0.08%) (GOOGL -0.16%) Google Home is quickly trying to catch up with third-party Actions, but is nowhere near 10,000.

Top view of HomePod

Siri serves as the brains for HomePod. Image source: Apple.

The importance of third-party integrations cannot be understated. Any virtual assistant can do basic tasks like fetch stock prices, provide a weather forecast, or attempt to answer basic questions. The real strength of virtual assistants and the devices that they power comes from third-party developers.

HomePod will support HomeKit, Apple's smart home platform, but HomeKit has been pretty underwhelming, even three years after introducing the application programming interface (API). Even popular smart home devices like Alphabet's Nest don't support HomeKit, although this could be a strategic competitive decision on Alphabet's part (Nest works with Alexa).

The silver lining is that HomeKit works across a wider range of devices, while Alexa primarily powers just the Echo family. If Apple can put more concerted effort into growing its HomeKit ecosystem, it has much greater potential considering the larger installed base. But that's a pretty big if right about now.

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