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A Silver Lining for Apple's HomePod

By Ashraf Eassa – Sep 23, 2018 at 2:00PM

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Some positive data points for HomePod.

It's probably fair to say that Apple's (AAPL 0.83%) first-generation HomePod didn't exactly revolutionize the smart-speaker industry, which is already dominated by heavyweights like Amazon (AMZN -0.59%) and Google (GOOG -0.19%) (GOOGL -0.15%). In fact, according to Strategy Analytics, HomePod "did not feature in the top-five ranking by shipments" during the second quarter of 2018. 

That might lead you to think that the HomePod is something of a dud, right? Well, not so fast. Strategy Analytics also says that HomePod "did top the market value rankings with 16% share of wholesale revenues." HomePod also apparently nabbed "a dominate [sic] 70% share of the small but growing [$200-plus] premium price band."

A white HomePod sitting on a shelf.

Image source: Apple.

In other words, Apple's HomePod has captured a significant chunk of industry-wide smart speaker revenues and has a very high share in the market for high-priced smart speakers (Apple's HomePod sells for $349). From that point of view, one could argue that the HomePod is a success.

Here's why Apple investors might want to view this data as a positive sign for the future of the HomePod product category.

Apple may fix the issues with first-gen HomePod

The first generation HomePod received praise for its sound quality, but it wasn't without its share of criticisms. The Verge, for example, criticized the fact that "voice controls only work with Apple Music," said that "Siri [Apple's virtual assistant] is still frustratingly limited," and complained that the device "can't tell different voices apart."

The good news is that Apple seems to be making real moves to improve Siri (Apple has real incentive to do this not only for the sake of HomePod, but for all of its product lines), and it wouldn't surprise me if a future version of HomePod were able to distinguish between different voices. As far as HomePod's voice controls only functioning with Apple Music, that may be a strategic move on Apple's part to compel those who are interested in the HomePod to subscribe to Apple Music. (Apple is, after all, very focused on growing its services business.)

Apple could introduce a cheaper HomePod

There have been rumors swirling for quite a while that Apple might introduce a smaller and cheaper version of its HomePod. Bringing out such a product would probably make sense, as it would allow Apple to attack a broader range of price points, ultimately allowing it to reach more potential customers. There's some risk that a smaller HomePod could cannibalize sales of the higher-end model, but the odds seem good that the net effect would be a bigger HomePod installed base (potentially strengthening the Apple product ecosystem as a whole) and greater total HomePod revenue and profits for Apple.

A key thing to keep in mind, though, is that the HomePod isn't a critical cash cow for Apple -- it's just one of the many products that's accounted for in its "Other Products" reporting segment (which, itself, made up just 5.6% of Apple's fiscal year 2017 sales). The fact that the HomePod isn't that important to Apple's financial results might give the company more freedom to introduce cheaper products that could potentially cannibalize pricier ones without worrying too much about facing Wall Street's wrath in the near term. By contrast, a product line like the iPhone is critically important to Apple's business, so it has to be exceptionally thoughtful about what products it brings to market, how it prices them, how it positions them, and so on.

The HomePod story is far from written yet, and I look forward to seeing how both the product and its performance in the marketplace evolve over time.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Amazon, and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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