At this point, it might not even be that crazy to say it, but we think AirPods are going to be a bigger product for Apple than the Watch. After using AirPods for the past month, the Loup Ventures team is addicted. The seamlessness in connecting and disconnecting with our phones and enabling Siri has meaningfully improved the way we work and consume content. AirPods are a classic example of Apple not doing something first, but doing it better. And they look cool. We think there are three reasons that AirPods are more important than the Apple Watch.
Google has been talking about designing products for an AI-first world for about a year now. In our view, an AI-first world is about more natural interfaces for our screen-less future. Speech is an important component of the next interface. Siri, Alexa, Google Assistant, and Cortana are making rapid improvements in terms of voice commands they understand and what they can help us with.
We view AirPods as a natural extension of Siri that will encourage people to rely more on the voice assistant. As voice assistants become capable of having deeper two-way conversations to convey more information to users, AirPods could replace a meaningful amount of interaction with the phone itself. By contrast, using Siri on the Apple Watch is less natural because it requires you to hold it up to your face. Additionally, the screen is so small that interaction with it and information conveyed by it is not that much richer than an AI voice-based interface.
The core feature of Apple Watch is fitness tracking including step tracking and heart rate monitoring; however, we believe the ear offers similar, if not better, opportunity to track health data. We’ve heard from companies that have suggested that the ear offers much richer data than the wrist. To that end, Apple recently filed a patent for advanced earbuds capable of tracking “heart rate, VO2, galvanic skin, EKG, impedance cardiography, and temperature.” We believe that in the next two years, AirPods are likely to incorporate some of these additional health features with the main constraint being the tax on battery.
AirPods could also be the future of Touch ID. NEC has developed technology that uses the ear canal to verify identity by bouncing sound waves off the ear canal. One advantage of this approach is persistent or semi-persistent authentication vs a point authentication via fingerprint. We believe the ear-based biometric approach will be a fundamental requirement for AR and AI interfaces of the future where there won’t be a convenient place to read a fingerprint or enter a password.
AirPods are more important for Apple than the Watch, but it may take some time for it to show. IDC data shows that Apple sold 8.8 million Watches in CY16. We expect 10 million in CY17. By comparison, we expect Apple to sell around 8-10 million AirPods in CY17, assuming production improves in the next month. We expect over 20 million AirPods in CY18 vs 12 million Apple Watches. Given the higher ASP on Apple Watch of around $450 vs $159, the company will have to sell about 3x as many AirPods as Watches for revenue to be roughly equivalent. We believe this could happen by 2020 as the health and security features make AirPods a must have accessory that the Watch can’t match.
Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.