There is a lot riding on the HomePod, Apple Inc.’s (NASDAQ:AAPL) entry into the booming smart speaker market. With the runaway success of Amazon.com, Inc.’s (NASDAQ:AMZN) Echo, there were even thoughts that Apple could leverage its design chops and in-house music technology know-how to disrupt, then dominate the smart speaker market. HomePod sales could even move the AAPL stock needle.
Instead, a new analyst report says HomePod sales are “underwhelming,” while Apple is rumored to be scrambling to release a much cheaper version of its smart speaker in hopes of attracting more buyers.
Report: Apple HomePod Sales Not Hitting Target
According to MacRumors, analysts from Barclays spent a week in China visiting companies in Apple’s supply chain. The Barclays team’s verdict? Despite an initial planned production run of 6-7 million units, HomePod sales have been “underwhelming.”
Apple does not release sales numbers, but that assessment falls into line with the general reception the HomePod has received. After an initial flurry of orders when it first went on sale at the end of January, the reaction to Apple’s smart speaker has been decidedly “meh.” Strategy Analytics for one, is predicting Apple HomePod sales of just 3.8 million for all of 2018.
What Went Wrong?
In theory, Apple selling a boatload of HomePod smart speakers should have been like shooting fish in a barrel. Consider the factors that were in its favor:
- Apple owns Beats, a premium audio brand with advanced speaker know-how
- Apple had nearly three years to study the Amazon Echo, then Google Home to improve on pain points –including poor audio performance
- iPhone owners are 22% more likely to buy a smart speaker than Android owners
- HomePod is built around Apple Music, the second most popular music streaming service in the world with 36 million paying subscribers
It’s no wonder that the HomePod was looked at as a potential next big thing for AAPL stock.
So what went wrong? Probably the single biggest factor has been price. At $349, the HomePod is expensive. Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google Home Max is in the same range, but Google and Amazon both offer a range of smart speakers, starting at under $50.
Siri has fallen behind Alexa and Google Assistant in the voice assistant war, making the HomePod seem less capable than the competition. Some of the HomePod’s key features, like multi-room audio won’t even be available until a software update later this year. There’s no doubt that HomePod sales have suffered because of lock-in to Apple Music, instead of also supporting competing streaming services like Spotify.
And the delayed release, missing the key holiday shopping season — a time when the competition sold 18 million smart speakers — sure didn’t help.
Can Apple Turn It Around?
Ironically, HomePod sales starting out by setting launch records. According to data from NPD Group, the Apple HomePod had higher first-day pre-order numbers than any other smart speaker, except Amazon’s $49 Echo Dot.
The good news for AAPL is, that shows the demand was there. So how can Apple turn things around? Siri’s relative weakness compared to Alexa and Google Assistant isn’t a quick fix. And the company is unlikely to open up its smart speaker to embrace competing music streaming services.
However, the price is one area it could address. There’s not much room to lower the price of the existing HomePod. According to Bloomberg, the smart speaker costs Apple a whopping $216 to build. That’s more than twice as much as a second generation Amazon Echo sells for, and it means Apple has a mere 38% profit margin — much lower than the company is accustomed to.
However, rumors have been growing that the company is working on a cheaper HomePod, in the $150-$200 price range. This would still carry a price premium compared to an Amazon Echo, but it’s much more in the ballpark. If Apple could still make a cheaper HomePod sound better than the competition, paying an extra $50 would certainly be a lower barrier for consumers. If the company can get a new entry level HomePod into production in time for the 2018 holiday sales season, then it could be game on.
Smart speakers are currently the fastest growing consumer technology category, and 56 million units are expected to be sold in 2018. It’s clear that if Apple wants a meaningful piece of that pie, it’s going to have to make a move to boost HomePod sales because Siri, Apple Music, delayed features and a big price tag aren’t cutting it.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.