Apple's HomePod Is Heading to China

Amazon.com (AMZN -1.64%) and Alphabet (GOOG 0.74%) (GOOGL 0.55%) subsidiary Google may dominate the global smart speaker market, but Apple (AAPL 1.27%) is about to beat its rivals to a crucial market: China. The Chinese smart speaker market is absolutely exploding right now, and is quickly catching up to the U.S. smart speaker market in unit volumes, setting the stage for potentially overtaking the U.S. in the foreseeable future. This year has been particularly pivotal for the Chinese market, with sales taking off in the second quarter. The U.S. and China represented 70% of the global market in the third quarter, according to Canalys.

Apple announced today that it will launch its HomePod in China in early 2019. What does that mean for Apple's prospects and the broader market?

Image source: Apple.

A booming market

The lack of U.S.-based smart speaker vendors has provided a key opening for local Chinese vendors like Alibaba and Xiaomi to grow, with those companies ranking No. 3 and No. 4 worldwide, respectively.

Data source: Canalys.

There were 8.3 million smart speakers sold in the U.S. in the third quarter, compared to 5.8 million units sold in China. The U.K. is a distant third market with just 1 million in unit sales.

Bloomberg notes that neither Amazon's Alexa nor Google Assistant support spoken Chinese (Cantonese or Mandarin), so those companies can't even really consider viably entering the Chinese market. Of course, Google's online services have also long been severely limited in the Middle Kingdom due to government censorship and restrictions. Google Assistant supports written Chinese (traditional) on Android phones, but on smart speakers is limited to English, French, German, Italian, or Japanese. Alexa supports just English, French, German and Japanese. Apple's Siri is fluent in Chinese, given the company's significant iPhone business in China.

Set your expectations to "meh"

Still, Apple's HomePod will have limited upside since the $350 speaker currently remains restricted to Apple Music. The Mac maker's music-streaming service is available in China, but it's unclear how many subscribers Apple may have there. Dominant music-streaming service Spotify is not available in China, even as it is preparing to launch in neighboring India.  

Tencent Music, which is about to go public after a delay, is the most popular music-streaming platform in China by far, encompassing the three most popular apps (QQ Music, Kugou Music, and Kuwo Music). Tencent Music also owns WeSing, which is more of a live-streaming and online performance music app. Across its various properties, Tencent Music had 655 million mobile monthly active users (MAUs) for online music and another 225 million mobile MAUs for social entertainment at the end of the third quarter. That means roughly half of the country's population uses one of Tencent Music's services every month, and a mere 25 million (4%) of those online music MAUs actually pay for the service.

This tells investors a couple of things. Chinese consumers have an extremely low propensity to subscribe to an online music service, and Apple Music has no free tier, limiting its appeal to most Chinese consumers. If HomePod doesn't support more popular music-streaming services, like those offered by Tencent Music, Apple will have almost no one to sell the device to anyway. That's before you even acknowledge that the most popular smart speakers in China sell for under $75.

Don't expect the HomePod to be a hit in China.