Above Avalon Podcast Episode 141: Viral AirPods

There’s a remarkable story found with AirPods. Nearly two years after launch, AirPods began to go viral at the end of November 2018. In December, search interest was up 500%. This is unprecedented for an Apple product. In episode 141, we take a deep dive into the AirPods phenomenon and how the product became part of culture. Additional topics include AirPods unit sales, the size of the AirPods user base, the keys to success in wearables, and thinking of wearables as battles for real estate on our wrists, ears, eyes, and body.

To listen to episode 141, go here

The complete Above Avalon podcast episode archive is available here

AirPods Have Gone Viral

Apple has a hit on its hands, or maybe we should say in its ears. AirPods have become the second best-selling Apple product out of the gate of all time. More interestingly, there are signs of AirPods now becoming a cultural phenomenon. AirPods do a superb job of demonstrating Apple’s competitive advantages with wearables, a product category that will come to define Apple for decades.

Videos and Memes

A few weeks ago, a video from “Inside Edition,” a U.S. TV newsmagazine, jumped out at me. The video, shown below, had the attention-grabbing headline “Can Your iPhone Be Turned Into a Spyphone?” The video’s focus was on the iPhone’s “Live Listen” feature, which turns an iPhone into a microphone. While the feature, designed to work with hearing aids, has been around for some time, Inside Edition’s video was focused on how AirPods can now be used to “spy” on someone. After watching the video, most viewers likely came away thinking AirPods have a built-in spy feature that Apple had secretly launched.

The video’s most up-voted comment was a reference to one of the more popular AirPods memes:

 
Screen Shot 2019-02-03 at 8.20.45 AM.png
 

The “Sorry, I can’t hear you over my AirPods” meme pokes fun at AirPods wearers for being oblivious to their surroundings. In some cases, a pair of AirPods are photoshopped on fictional characters right before something bad happens to them in a movie, as if wearing AirPods made them unaware of what was about to happen. There have been various spin-offs of the meme, with interpretations that are more subjective. Other memes have poked fun at people using AirPods as a social signal to flaunt wealth and status. These various AirPods memes took off at the end of December, just as millions of people received AirPods as presents.

Last week, another AirPods-related video caught my attention. This time, the video was posted on Twitter from Gabrielle Reilly. Her “AirPods earrings” clip is found below:

 
 


Reilly told BuzzFeed: “I absolutely refuse to lose [my AirPods]. My cat ate through two pairs of Beats Bluetooth earphones, and all my other earphones. So I got the AirPods because there was no wire for her to chew but I still needed something to connect them.” She refined the design and is now selling “Airings” for $20.

In what has become a daily occurrence, various pop culture references that poke fun at AirPods, such as the following tweet, are going viral.

 
 

Measuring Interest

While it is easy to look at AirPods memes, videos, and tweets as harmless fun or jokes, such a view misses what’s really taking place. AirPods have become part of culture. A product which the tech press declared too awkward-looking to ever go mainstream has now made headphones with wires look out of style. The various AirPods memes, videos, and tweets are byproducts of AirPods becoming incredibly popular in a very short amount of time. In essence, AirPods have gone viral.

One way of measuring the viral nature of AirPods is to look at Google Trends, which is powered by Google search data. As a general rule, Google Trends is a useful tool for gauging consumer interest in a product, especially for a relatively new product like AirPods. Compared to some of the other methodologies out there for gauging interest, like consumer surveys, analyzing the degree to which people use Google to search for something is a more reliable source.

The one caveat that is important to keep in mind with Google Trends is that if searches aren't taking place through Google, but instead on Amazon for example, that interest won't be reflected in Google Trends. For AirPods, this factor isn’t much of a concern.

As shown below, search interest for “AirPods” in the U.S. began to shoot higher this past November, nearly two years after launch. Search interest then peaked between Christmas and New Year’s. The data is indexed to 100, which denotes the maximum amount of search interest for “AirPods” during the selected time range. Indexing allows us to see how search interest levels have changed over time.

Comparing peak AirPods search interest over the three most recent holiday seasons, the juxtaposition is startling. The following are Google search interest for “AirPods” in the U.S. indexed to 100 (represents maximum search interest):

  • 2016 holiday season: 10 (AirPods search interest was 10% the volume of peak search interest).

  • 2017 holiday season: 20 (100% year-over-year growth in search interest)

  • 2018 holiday season: 100 (500% year-over-year growth in search interest)

Search volume for AirPods during the most recent holiday season was five times the search volume registered during the 2017 holiday season. Even more impressive, AirPods search interest this past December was ten times the volume registered during the December 2016 launch.

Two weeks ago, AirPods search interest (the blue line in the image below) exceeded Apple Watch search interest (the red line) for the first time.

No other Apple product has come close to this sudden surge in interest years after launch. For example, Google Trends for “iPad” in the U.S. from 2009 to 2019 is shown below. While the iPad saw a remarkable amount of interest at launch in 2010, interest levels ended up plateauing just two years later. The amount of iPad interest seen at launch was 30% the volume of peak search interest. This likely explains why iPad was like a rocket out of the gate when it came to sales, only for sales to plateau and eventually fall.

Measuring Sales

The surge in AirPods search interest isn’t just a reflection of people looking for AirPods memes and videos. The higher interest is reflective of stronger sales. According to my estimate, Apple is on track to sell approximately 40 million pairs of AirPods in 2019, representing close to 90% year-over-year growth. There are already at least 25 million people wearing AirPods. This total will likely exceed 50 million people later this year. These are massive sales and adoption figures for a two-year old product that has never received an update and rarely goes on sale for less than its $159 selling price.

The methodology and data behind my AirPods sales estimates are found in the following Above Avalon daily updates that are available for Above Avalon members here and here. (To become a member and access these daily updates, visit the membership page.)

As shown in Exhibit 1, AirPods are currently the second best-selling Apple product out of the gate in terms of unit sales, behind only iPad. An argument can be made that the iPad was an outlier and that no other Apple product will come to close to exceeding iPad unit sales.

Exhibit 1: Apple Product Unit Sales Out of the Gate

One issue found with Exhibit 1 is that quarterly unit sales are impacted by seasonality. In order to remove this seasonality, Exhibit 2 shows unit sales on a cumulative basis. While iPad’s clear sales lead is hard to miss, AirPods are the second-best selling product two years after launch, slightly ahead of iPhone at the same point after launch. On a cumulative sales basis, AirPods are outpacing Apple Watch by 40% at the same point after launch.

Exhibit 2: Apple Product Cumulative Unit Sales

Viral Factors

Despite Apple Watch selling well, there hasn’t been a similar kind of viral aspect to the product. There aren’t various Watch memes floating around Twitter. What is it about AirPods that turned the product into a pop culture viral sensation? There are likely a few factors.

  1. High Visibility. AirPods are literally hanging out of people’s ears. They are nearly impossible to miss when worn. Since the lack of wires make AirPods useful for outdoors activities including walking and running, they are bound to be seen in people’s ears while out and about. AirPods sightings have seemingly grown exponentially in recent months. Meanwhile, an Apple Watch is easily covered by long sleeves or jackets. In cold weather climates, Apple Watch visibility is reduced to indoor settings for months at a time.

  2. New and Different. AirPods, although a successor to wired headphones, look very different without the wire. The product also stands out from other wireless headphones. In some ways, Apple designers didn’t try to hide the fact that AirPods lack wires. The product is intriguing, sparking curiosity.

  3. Social Signaling. Wearing white EarPods signaled to others that an iPod, or eventually an iPhone, was found in the wearer’s pocket. Similarly, wearing AirPods signal to others that the wearer likely has an iPhone and is able to pay $159 for a pair of wireless headphones despite a wired pair being included in the iPhone box.

Strategy

AirPods end up playing a more strategic role for Apple than just being a fun smartphone accessory. AirPods represent one half of Apple’s wearables strategy.

Success in wearables will require two ingredients:

  1. Ecosystem. A selection of tools targeting different parts of the body.

  2. Design / Fashion Expertise. Developing wearable devices that people want to wear and be seen wearing.

AirPods demonstrate Apple’s significant lead when it comes to developing a wearables ecosystem and possessing a design / fashion acumen that other companies lack.

It won’t be enough for a company to just sell a smartwatch or a pair of wireless headphones. Instead, the key to mastering wearables will be to offer an ecosystem of devices that work seamlessly together. This dynamic will require companies to have an expertise in combining hardware, software, and services, something Apple has been focused on for decades.

The winners in wearables will be companies successfully waging simultaneous battles for real estate on our wrists, ears, eyes, and body (i.e. smart clothing). As shown below, there are three key pieces of real estate that are currently up for grabs or will soon be available for grabs: wrists, ears, and eyes.

 
 

In 2015, Apple entered the wearables arena with Apple Watch. The product kicked off Apple’s attempt to grab wrist real estate. The wrist has proven incredibly useful given its line of sight for viewing information at a quick glance in addition to its ability to foster certain health monitoring capabilities. While Apple Watch is going up against traditional mechanical watches, competition ends up being much broader. Ultimately, Apple Watch is competing for a place on wrists. One of the Watch’s fiercest competitors is non-consumption, or empty wrists.

A similar dynamic is now unfolding with AirPods. The device is Apple’s attempt at grabbing ear real estate. Competitors for this real estate include both wired headphones, like EarPods, and non-consumption in the form of empty ears. Even though AirPods may be light on features today, having tens of millions of wearers today increases the probability of subsequent AirPods versions seeing strong adoption.

The battle for our eyes is on the horizon, not quite ready for prime time. A pair of smart glasses have the highest likelihood of being Apple’s next major product category.

The key to grabbing real estate on our wrists, in our ears, and in front of your eyes is selling tools that people want to wear and be seen wearing. A product’s design, defined as how we use that product, is crucial in this regard. With Apple Watch, interchangeable bands have played a crucial role in driving Watch adoption. AirPods’ elegant charging case has come to define the product’s experience.

Instead of positioning technology as a barometer for wearables success, the intersection between technology and fashion will determine which products people will want to wear throughout the day. Lessons learned from Apple Watch, and now AirPods, will give Apple an advantage when it comes to developing a pair of lightweight and unobtrusive smart glasses.

Vision

Unlike Amazon and Google, which are desperately trying to position voice as a way to leapfrog over the current smartphone/tablet paradigm, Apple is approaching things differently. Instead of betting on a voice interface that pushes some information to a stationary screen, Apple is betting on mobile screens that are home to a digital assistant. Apple is placing a bet that consumers will want the familiarity found with touch screens to transition to a future of greater AI and digital assistants. Apple Watch ends up serving as a bridge to the future. The most valuable mobile screens in our lives will increasingly be worn on the body. In addition, Apple thinks screen manipulation via fingers, hands, and eyes will remain a crucial part of the computing experience for the foreseeable future.

AirPods play a role in this vision by harnessing sound on the go. Wired headphones are an endangered species as there is no place for wires in a wearables world. While the viral nature of AirPods may subside over the coming months, especially as adoption continues to expand, the biggest takeaway from the various AirPods memes, tweets, and videos, is that wearables continue to infiltrate society. We are witnessing the early stages of the wearables era.

Receive my analysis and perspective on Apple throughout the week via exclusive daily updates (2-3 stories per day, 10-12 stories per week). Available to Above Avalon members. To sign up and for more information on membership, visit the membership page.

Above Avalon Podcast Episode 140: Let's Talk Content

Some of Apple’s recent decisions regarding content distribution have sparked a debate. Is Apple embracing a new kind of strategy that elevates services at the expense of hardware? Episode 140 is dedicated to going over Apple’s content distribution strategy and how the company is looking to leverage its user base in an effort to establish one of the more formidable content distribution arms in existence. Additional topics include Apple’s history as a content distributor, how streaming is changing content consumption, misconceptions surrounding Apple’s content distribution strategy, the sudden collapse in stationary speaker buzz, Apple’s goals for its content distribution arm, and the various challenges facing the company.

To listen to episode 140, go here

The complete Above Avalon podcast episode archive is available here

Apple's Content Distribution Strategy

This past November, Amazon sent shockwaves across a number of industries by announcing Apple Music would be available on Echo devices. Earlier this month, Samsung announced Apple was bringing iTunes content to Samsung TVs. Apple also expanded AirPlay 2 support to include a wide range of high-end television sets. These announcements don’t represent some type of cultural shift away from hardware for Apple. Instead, the moves are part of Apple’s strategy to leverage its user base in an effort to establish one of the more formidable content distribution arms in existence.

Content Distribution

Apple has long held an interest in being the one to deliver content to its growing base of users and devices rather than leave content distribution to someone else. Apple’s content distribution arm delivers a variety of genres, listed below, to hundreds of millions of users and more than a billion devices.

  • Music

  • TV Shows / Movies

  • Apps

  • Podcasts

  • News

  • Magazines

  • Books

Apple has seen varying degrees of success when it comes to distributing content. With iTunes, Apple took advantage of the Mac’s low market share by getting the music industry to test a radical idea at the time: selling digital music online. iTunes ended up playing a big role in moving the music industry from albums to singles.

After years of strong growth, App Store revenue was approximately $45B in 2018. Apple has been a leader in the podcast space from the beginning. Written content distribution has proven to be trickier for Apple although the company has recently seen strong momentum when it comes to offering curated news to users in the U.S., Australia, and the U.K.

What Has Changed?

The landscape facing Apple’s content distribution arm is undergoing significant transformation.

Online streaming has taken over the music industry. The iTunes era of paid downloads is over as the idea of owning music is quickly becoming a thing of the past. Renting has become the preferred method of consuming music. The shifting landscape played a major role in Apple’s decision to buy Beats back in 2014.

According to the Recording Industry Association of America (RIAA), streaming now accounts for an astounding 75% of the U.S. music industry’s revenue. Digital downloads account for just 12%, slightly ahead of the 10% attributed to physical sales. In the U.S., approximately 50M people are paying a monthly subscription to consume as much music as they want. Globally, the total number of paid music subscriptions exceeds 200M. Apple Music has approximately 60M paying subscribers.

Turning to video, direct-to-consumer distribution has turned the industry on its head. Instead of the big cable bundle imploding, new, lower-cost video bundles such as Netflix and Hulu have exploded in popularity. These revised content bundles have the content people want to see, in addition to the distribution method that people want to use. More than 200M people pay a monthly subscription to consume video through these newer bundles. This number will continue to increase as notable names, including Disney, are about to enter the direct-to-consumer space.

One of the more interesting implications found with this new digital content landscape is how scale has been redefined. Success is no longer measured in the tens of millions of users like it was in the iTunes era. Instead, scale is measured in the hundreds of millions of users.

Spotify is the largest paid music streaming service while Netflix is the largest video streaming service. Amazon has seen the most success in the area of bundling access to content. Meanwhile, YouTube remains the behemoth in the ad-supported realm. Localized offerings in a number of emerging markets have also been able to capitalize on music and video streaming to develop compelling solutions, although few have seen success beyond their home territory.

The Strategy

Considering how Apple has approximately a billion users in its ecosystem, the company would appear to have enough customers to sustain a thriving content distribution arm. Such a strategy would involve Apple keeping its content distribution services exclusive to Apple hardware. However, upon closer examination, there is one complicating factor in such a strategy.

According to Tim Cook, there are 1.4 billion Apple devices in the wild. Given the number of Apple users, Cook’s disclosure means that at least 60% of Apple’s user base own just one Apple device. For hundreds of millions of people, the iPhone is likely that Apple device. This changes the dynamic facing Apple’s content distribution strategy.

Apple users are not monolithic when it comes to gadget buying. Instead of exclusively using Apple hardware, a majority of Apple users also own devices from other platforms such as Samsung Smart TVs and Amazon Echo speakers. Apple’s design-led culture and product development process ensure that there will always be product categories, such as TV sets and low-end stationary speakers, that Apple chooses not to play in or compete with.

With that in mind, Apple’s content strategy is as follows:

  1. Develop content distribution platforms.

  2. Give content distribution platforms the best chance of success by leveraging the user base and allowing certain content genres to be consumed on non-Apple hardware.

  3. Provide first-party hardware solutions targeting users who are looking for the best all-around Apple experience.

In summary, Apple’s user base provides the company optionality when it comes to distributing content. By not keeping some of its digital content distribution services exclusive to its own hardware, Apple reduces the risk of its users turning elsewhere for content.

Odds are good that a decent portion of Echo speaker owners also use iPhones. Given how the predominant use case found with stationary speakers is listening to music, these users may have been tempted to try Spotify or Amazon Music. By bringing Apple Music to Echo devices, Apple is able to leverage its existing customer relationships in order to improve Apple Music adoption. The same principle applies to letting Apple users send content played on an iPhone, iPad, or Mac to non-Apple speakers or television sets via AirPlay 2.

Another assumption underpinning Apple’s content strategy is that a portion of the Apple user base will gravitate towards premium content consumption experiences. Apple has the opportunity to sell these first-party solutions, such as Apple TV and HomePod, to users willing to pay for the best all-around Apple experience.

Misconceptions

There has been much confusion in the press as to Apple’s content distribution strategy.

  1. Apple is said to be deemphasizing hardware in order to grow services revenue.

  2. Apple’s decision to bring Apple Music to Echo has been compared to bringing iTunes to Zune music players.

  3. Apple is said to be no longer fully behind products like Apple TV and HomePod.

The preceding theories are off the mark.

A strategy characterized by Apple prioritizing services over hardware would revolve around Apple selling a $29 Apple TV dongle or a $29 HomePod mini speaker. Apple hardware’s function and value proposition would be altered to promote non-hardware Apple products. Neither device is likely to materialize as Apple isn’t prioritizing services over hardware. Instead, Apple is selling an Apple TV box priced at a 20% premium to a 32-inch TCL TV with Roku built-in. One HomePod goes for the same price as 12 Amazon Echo Dots or Google Home Minis.

When it comes to comparing Apple’s current strategy with that of iPod / iTunes, Apple didn’t have an ecosystem containing a billion users and 1.4 billion devices in the early-to-mid 2000s. Making iTunes available on other MP3 players, like Microsoft’s Zune, would have done little to improve iTunes or Apple’s broader ecosystem. The opposite is true today. Making certain content distribution platforms available on non-Apple hardware can help improve the service in question, which ends up adding value back to Apple hardware. In addition, Apple now has the ecosystem to not only target premium accessories to a segment of the user base, but also appeal to other users by bringing certain content distribution platforms to non-Apple hardware. A similar situation did not exist in the 2000s.

Speaking of premium accessories, Apple TV and HomePod are misunderstood products. The products are high-end accessories tasked with offering Apple users the best all-around experiences for consuming video content and listening to music, respectively. Making Apple Music or video available on other platforms does not change that dynamic. HomePod doesn’t have a weaker value proposition because Apple Music is available on a $29 Echo Dot. Apple TV is not kneecapped because AirPlay 2 support is available on a Sony TV set.

Motivation

Apple sees a massive opportunity in content distribution. There is a glaring weak point found in music and video streaming: brutal economics. Both Spotify and Netflix have business models in search of sustainability.

Spotify’s most likely path to sustainability boils down to amassing so many listeners that the balance of power begins to tilt towards Spotify and away from content providers. Either Spotify has to pay less for music, or the company will make a big move into original content.

Meanwhile, Netflix’s business model is based on a feedback loop that is consuming increasing amounts of cash. The move into original content is not proving to be a financial panacea either. Netflix clearly needs significant subscription price hikes over time, and the only way to guarantee those price hikes will stick is to continue ramping up content spending in order to sustain engagement.

Given Apple’s business model, the company doesn’t have to worry about such sustainability issues. Instead of releasing low-margin hardware that boils down to being nothing more than service conduits, Apple can use third-party hardware as Trojan horses for its own content distribution arm. This can be accomplished either by partnering with a company like Amazon to have Apple Music available on Echo devices or by expanding AirPlay 2 support to include a wide range of speakers and TV sets. AirPlay is a brilliant way of ensuring that an Apple product remains at the center of people’s lives.

Dedicated music and video streaming players will have to eventually prioritize profit and revenue. However, Apple has the luxury of not having profit be the motivating factor behind its content distribution arm. Instead, Apple is going for power. A few calculations prove this point. With Apple Music, 100M users paying an average of $7 per month would bring in $8B of revenue per year. Assuming 75% of that revenue goes back to music rights holders, Apple’s gross profit would be approximately $2B per year, or just 2% of Apple’s overall gross profit. Video streaming economics may end up being even less attractive from a cash flow perspective. Instead, Apple would be looking more at improving each service by grabbing scale and gaining influence and power in Hollywood.

Goals

Here are some of Apple’s specific goals for its content distribution arm:

Apple Music

  1. Grab enough users to position Apple Music as a legitimate alternative to Spotify and Amazon Music. From Apple’s perspective, scale in music distribution has gone from being a liability during the iTunes era to being the key to success with Apple Music. The decision to bring Apple Music to Echo speakers is a clear attempt to limit Amazon Music and Spotify adoption, especially among Apple users.

  2. Work more closely with the labels. By positioning Apple Music as an alternative to Spotify for the music labels, Apple is in a position to gain back the incredible amount of power it once had with the iTunes empire.

  3. Capitalize on the changing way music is consumed by investing in better A&R capabilities. Playlists are gaining power in the realm of talent discovery. Capitalizing on improved ways to find new talent stands to improve Apple Music playlists and Apple’s relationships with music rights holders.

Apple Video

  1. Convince third-party content creators to embrace the TV app. The key metric to watch in video streaming will be engagement. Accordingly, to have people spend an increasing amount of time in the TV app, Apple will look to establish a platform from which users can access various video bundles. This strategy resembles more of Amazon’s video playbook instead of Netflix’s. The idea underpinning this strategy is that video streaming won’t be a winner-take-all market, or even a winner-takes-most market.

  2. Use original content to elevate the TV app. Since one form of differentiation in video streaming is great storytelling, Apple has been focused on developing its own slate of original programming. One thing Apple can do to stand out from Amazon is make its initial slate of original programming free for TV app users. The idea behind such a move is to get people using the TV app, which will then increase the odds of people singing up and paying for third-party video bundles through the TV app.

Bundling. There is an opportunity for Apple to bundle various content genres into one monthly payment. Music and video make the most sense for a bundle although news and magazines are doable as well.

Experiences. Apple is one of the few companies to have a diverse content distribution arm in addition to more than a billion customers and devices. This gives the company a unique advantage when it comes to fostering customer relationships. In addition, Apple can offer premium experiences to those in the Apple ecosystem by having its content distribution arm work seamlessly with entirely new hardware form factors.

Challenges

Apple faces various challenges in its pursuit of establishing one of the more formidable content distribution arms in existence. The most difficult task is found with video streaming. There is about to be a brutal war in video streaming as a handful of companies with deep pockets begin to compete with Netflix. We haven’t yet seen genuine competition in the paid video streaming space. In a scenario where there are only one or two all-powerful streaming services, Apple will find itself at a bigger disadvantage. On the flip side, greater competition could prove to be a benefit to Apple if it means other streaming services will want to work with the company and its TV app.

With music, Apple appears to be going back to basics and fighting for every user whether it’s through bundling deals with mobile carriers or keeping existing users as users. It appears to be working. Apple is proving to be a formidable challenger to Spotify despite many having already declared Spotify to be untouchable years ago. In addition, by maintaining good relationships with a handful of labels, Apple has access to tens of millions of songs. The entire dynamic is easier for Apple to manage.

In terms of written content, Apple is in a good position when it comes to relying on human curation to surface content. However, there are questions regarding scalability and just how effective Apple can be in convincing publishers to get behind such efforts.

Big Picture

It is not too late for Apple to compete effectively in music and video streaming. Meanwhile, the turmoil found in distributing and consuming written content through traditional social media vehicles is still in the early innings. This will give Apple its best chance of finally cracking written content distribution.

Despite slowing unit sales, the iPhone continues to fuel growth in the user base. Meanwhile, wearables are boosting the number of Apple devices in the installed base. Not only are these positive developments when it comes to strengthening the Apple ecosystem, but they also increase the number of people in a position to rely on Apple for content.

With a pair of smart glasses not quite ready to be unveiled, now is the time for Apple to dedicate precious time and resources to strengthening its content distribution arm.

Receive my analysis and perspective on Apple throughout the week via exclusive daily updates (2-3 stories per day, 10-12 stories per week). Available to Above Avalon members. To sign up and for more information on membership, visit the membership page.

Above Avalon Podcast Episode 139: Thinking About Apple in 2019

January is a great time to embrace the unknown rather than come up with predictions for the next 12 months. Episode 139 is dedicated to going over my fifth installment of Apple questions as the new year kicks off. We discuss 56 questions facing Apple in 2019. Topics include everything from big picture themes to detailed questions about Apple’s product strategy. Additional topics include Apple’s financial picture, management changes, emerging markets headwinds, R&D, and capital expenditures.

To listen to episode 139, go here

The complete Above Avalon podcast episode archive is available here