In addition to growing its services business, we know that Apple (AAPL +1.39%) is working on a new suite of audio accessories, including premium over-ear headphones that would compete with market leaders like Bose. The Mac maker has also been widely reported to be working on second-generation AirPods, which have proven to be a sleeper hit; the next version will likely include water resistance as a headline selling feature.
It looks like consumers and investors might have to wait a little while.
Image source: Apple.
So much for the fourth quarter
Prior reports had suggested that Apple would unveil these audio accessory products in the fourth quarter at the earliest, but Bloomberg is now reporting that the timeline has been pushed back to 2019. In addition to water resistance, second-generation AirPods may also include noise cancellation and boast longer wireless range, according to Bloomberg. Apple is reportedly also exploring various ways to add biometric sensors to AirPods, which could augment its wearables strategy that has been largely predicated on health-oriented features.
The company has hit some speed bumps in developing the over-hear headphones, which are expected to sport the premium Apple brand as opposed to the Beats brand that includes lower-end products as well. Apple has made strides with its wireless technology, delivered via its W1 wireless chip that enables both Bluetooth connectivity as well as audio playback. Naturally, Apple will look to incorporate that chip as well as its successors into a growing portfolio of audio accessories, getting the most bang out of its R&D bucks.
A second-generation HomePod is also in the pipeline, although details are scant. However, HomePod's deficiencies aren't related to hardware, but mostly revolve around software and services. Siri still trails rivals, and HomePod only supports a single music-streaming service, Apple Music. It's unclear how Apple may address these pitfalls in the next model.
A third-party opinion
As a side note, adding biometric sensors to AirPods (such as a heart-rate monitor) may allow the product to be included in third-party measurements regarding the wearables market. Apple considers its current lineup of wireless headphones to be wearable devices, but market researchers like IDC do not. IDC has previously clarified to me that in order to qualify as wearables, wireless headphones must include other functionalities such as "additional health/fitness sensors."
Investors do know that Apple's wearables business is approaching $10 billion, based on management saying it's now the size of a Fortune 300 company. Apple does often cite third-party market estimates, so getting on the same page as a prominent researcher like IDC would inevitably help the company create more positive headlines.
Apple already bought into the premium headphone market
Audio accessories are included in Apple's "Other products" segment, which also happens to include its wearables business. Other products sales have been growing, albeit not as rapidly as services.
Data source: SEC filings. Chart by author. Calendar quarters shown.
Still, there should be little doubt that Apple is prioritizing growing both segments in its ongoing quest to diversify away from iPhone reliance, since the company has grown wary of the iPhone dominating the investing narrative. Audio accessories won't generate the type of high-margin recurring revenue that services and other paid subscriptions will, but there are undeniable incremental opportunities in continuing to expand into a tangential market that Apple bought into with Beats.
