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Forget Apple Watch -- Could AirPods Be Apple's Killer Wearable?

By Evan Niu, CFA - Jun 29, 2017 at 7:48PM

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Look at the trajectories for wireless headphones penetration and smartwatch adoption.

If someone asked you to name Apple's (AAPL 2.45%) most promising wearable device, there's a good chance you'd answer Apple Watch. Many wouldn't even consider a device like AirPods to be a wearable device, since it's kind of a stretch to include wireless headphones in that product category, but that's precisely how Apple defines wearables. The Mac maker includes Apple Watch and its wireless headphones like AirPods or BeatsX to be wearables.

What if AirPods end up stealing the spotlight in the years ahead to become the company's killer wearable product?

Apple Watches submerged in water

Image source: Apple.

AirPods could be bigger than Apple Watch within a few years

That's the case that longtime Apple analyst Gene Munster, who recently started venture capital fund Loup Ventures, made this week. Munster argues that AirPods will continue to evolve and eventually deliver augmented audio, which is loosely defined as live audio that is enhanced by other inputs (you can consider it a subset of augmented reality, or AR). Within a decade, AirPods could be bigger than Apple Watch in terms of revenue.

By Munster's estimates, AirPods revenue could equal Apple Watch revenue by fiscal 2022, and average selling prices could creep higher to around $200 (compared to the current $159 price point) as Apple pushes into augmented audio.

Penetration vs. adoption

It might sound counterintuitive that a wearable accessory might overshadow Apple's first smartwatch, but if you look at two trajectories -- wireless penetration of the headphone market and adoption of smartwatches -- then you can see Munster's point. Headphones are a mature product category, but the market is continuing its transition toward wireless technologies due to the added convenience. Smartwatches are a relatively new product category, but the market isn't quite sure that there's a compelling value proposition.

For example, Research and Markets notes that "the move from wired to wireless headphones has been the dominant trend but this is now moving onto the use of sensors to drive differentiation and new use cases." The researcher estimates that there will be over 1 billion wireless headphones shipped between 2015 and 2020.

In contrast, the smartwatch market has already hit a speed bump, since there is yet to be a killer feature that appeals to the mainstream. For all intents and purposes, fitness remains a relatively niche use case. While the desire to be healthier is universal, the motivation to actually do something about it is not. Gartner recently estimated the abandonment rate of smartwatches at 29%, which Gartner says is because "people do not find them useful." Smartwatch adoption is approximately 10%, but that figure will likely continue to stagnate until manufacturers discover the killer use case.

Simply put, just about everyone that uses headphones will eventually want a wireless set, while not everyone is sure that a smartwatch is even worth purchasing. Unless Apple figures out a killer Apple Watch feature that changes its current trajectory, AirPods could very well overtake the device as Apple's most popular wearable.

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