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Apple Reportedly Working on New High-End Headphones

By Evan Niu, CFA - Feb 26, 2018 at 2:10PM

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The Mac maker is expanding its lineup of audio accessories.

With Apple's (AAPL -1.85%) AirPods having become something of a sleeper hit, it looks like the company wants to expand its lineup of audio accessories. Not only did Bloomberg report last week that the Mac maker is working on second-generation AirPods that will include "Hey Siri" and water resistance, it seems Apple might also have another headphone product up its sleeve.

The tech titan is reportedly working on a new set of high-end over-ear headphones, according to KGI Securities analyst Ming-Chi Kuo (via MacRumors).

Woman wearing AirPods

AirPods have been a huge success. Image source: Apple.

Rumor has it

Instead of leveraging the Beats brand that Apple paid so handsomely for, the new headphones are expected to be released under Apple's own brand, according to the report. While the Beats brand is remarkably strong in the premium headphone space mostly due to marketing, the company also had a reputation for terrible hardware before getting scooped up by Apple.

Apple has reportedly already tapped two suppliers to serve as contract manufacturers, and the new headphones should be priced higher than the $159 AirPods, justified by superior audio quality. The expected ship date is the fourth quarter of 2018 at the earliest.

Maintaining momentum

Developing a new set of over-ear headphones serves two strategic purposes. Apple has been focusing more on audio accessory products over the past couple of years in an effort to grow its Apple Music service. The company just recently launched HomePod, its first smart speaker, which only supports Apple Music. The rumored headphones would be a strong addition to the audio accessory portfolio.

Additionally, Apple considers wireless headphones to be wearable technology. The company includes Apple Watch, AirPods, and wireless Beats headphones in this category, which is currently enjoying strong momentum. Here's CFO Luca Maestri on the earnings call earlier this month (emphasis added):

It was our best quarter ever for Apple Watch, and when we add the results from Beats and AirPods, our total revenue from wearables was up almost 70% year over year. In fact, wearables were the second-largest contributor to revenue growth after iPhone, which is impressive for a business that started only three years ago. In total, our "other products" category set a new all-time record, with quarterly revenue exceeding $5 billion for the first time.

That was after wearables revenue had jumped 75% in fiscal 2017, generating at least $6.7 billion in sales last fiscal year. In releasing high-end headphones, Apple can maintain momentum in both its audio accessory business and its wearables business.

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