AirPods Should Have Been Bundled with iPhones
I’m a financial analyst. I’m the guy who typically counsels companies to take the more profitable road. But even I think Apple should have included a pair of AirPods with the sale of every iPhone 7.
Apple missed a game-changing opportunity this week. They had a chance to frame the debut of their new iPhone 7 as the pivotal point in history where wireless audio finally went mainstream. Instead, the talk of the town is about how the new iPhone doesn’t have a headphone jack. Stephen Colbert gets the award for most comedic take.
This could have been an Oprah-like moment where everyone finds out that they’re getting a new car. If Apple had bundled the new AirPods in every box, the talk wouldn’t be about what iPhone buyers are giving up. Instead, the buzz would be about what everyone is gaining in return.
Nobody likes wired headphones…only most people don’t know it yet. They use them because that’s all they have. Today’s smartphone has taken the place of yesterday’s music player, and the majority use the headphones that came with it.
Apple had a chance to make that default set of headphones wireless. With one fell swoop, seventy million people could have discovered the convenience of wireless. Would some of them have complained about not having a headphone jack? I suppose about as many as would if someone who ordered a hamburger in a restaurant and had discovered that Filet Mignon was delivered to their table at no extra charge.
Now, everyone is still going to be using the headphones that their phone came with. That means still putting up with wires when they go walking or to the gym. And when those headphones are lost or destroyed, they are going to buy another set of cheap wired headphones because they’ve worked good enough for them in the past. Apple has preserved the wired status quo.
What a missed opportunity. If everyone had sampled their first set of wireless headphones, millions of people would have received their first taste of the convenience that it brings. Once you go wireless, it’s hard to go back to wired.
Impact on iPhone Margins
So would Apple have taken a hit to their iPhone gross margins if they had bundled AirPods with their iPhone? As the AirPods are designed today, yes. But not as large you might think.
By extending the life of the iPhone, they are gaining a certain amount of margin to play with. Also, by losing the headphone jack, they are reducing components from the product bill of material and reducing the complexity of product assembly. Replacing EarPods with AirPods wouldn’t have cost Apple anywhere near an additional $159.
At a 40% gross margin, the AirPods cost roughly $95 for Apple to make. That’s significantly more than the $40 of gross margin leeway that I calculated Apple had as a wireless budget. However, I would have argued that Apple would offset some of this loss by also gaining additional sales and revenue on all the replacement Airpod sales in the future.
As I mentioned before, once you go wireless, it’s hard to ever go back to wires. As people, inevitably lose or break their AirPods, many of them will immediately purchase another set. Assuming that people like the AirPods, all these users are bound to tell their family and friends that they too should experience this newfound convenience, spurring even more sales. This is incremental sales volume that Apple wouldn’t have received otherwise.
Courage
I would disagree with anyone who thinks that removing the headphone jack wasn’t a courageous move by Apple. Unlike Samsung, Apple’s fortune rests on this one product more than anything else. Apple can’t afford for this cash cow to start exploding all over the place. There is a real risk that sales could be harmed by the absence of a headphone jack. And it wasn’t just courageous move in a self-serving way either.
Corporate competitors often exist in a kind of Mexican standoff. For example, let’s say that a new safety feature exists which would benefit the consumer but does nothing but shrink profitability and margin for the manufacturer. If the customers aren’t clamoring for it, nobody wants to be the first guy to add cost to their product and implement the new safety feature. This could be potential product suicide if the customer decides to purchase from your competitor who is consequently cheaper.
One of two things must happen. Either an outside force like a federal government must intervene and mandate that everyone implement the new safety feature at once, or one of the corporate citizens takes the plunge first and shows the market why this new feature is important. If the public responds and said corporate citizen doesn’t go bankrupt, the other companies will generally follow. This is corporate leadership, and it doesn’t happen often.
So why is “courage” not an entirely self-serving statement? The public isn’t clamoring for wireless headphones en masse for a few reasons. One, they are still relatively expensive compared to wired headphones. Two, typical wireless battery life isn’t great and the connection problems are a pain. But the current state of the art is held back by relatively low sales volume. No one is willing to invest in the research and development it is going to take to advance wireless technology when they perceive no payoff for such a small market.
Besides offering the market a wireless option that is both relatively inexpensive (compared to other truly wireless earbuds) and I’m assuming relatively trouble free, Apple is also going to grow the entire market for wireless products. This benefits everyone, not just Apple. If Apple can convert just 20% of their iPhone buyers into going all wireless, they have just added well over ten million new buyers into the industry. That’s going to be over a billion dollars of new sales revenue. This could greatly alter the cost/benefit scenarios in the R&D labs of headphone makers all over the world. The public is going to see price drops and technology advancements from companies other than Apple that wouldn’t have been made otherwise.
This new volume is what would cause prices to come down and spur the influx of new technologies that will make wireless better. But it hinges on people making the switch. Yet Apple just unveiled their new iPhone that is shipping with wired headphones and an adapter for the old-style 3.5mm headphone jack. Why? What were they thinking? Is this decision making by committee? Or maybe they don’t have the production capacity to offer them at scale yet, in which case, they should have waited to remove the headphone jack until they did.
Yes, it took courage to remove the headphone jack. Everyone benefits if the wireless industry grows. But Apple should have put their money where their mouth is and offered AirPods in every box.
Nobody likes wired headphones…only most people don’t know it yet. They use them because that’s all they have. Today’s smartphone has taken the place of yesterday’s music player, and the majority use the headphones that came with it.
Apple had a chance to make that default set of headphones wireless. With one fell swoop, seventy million people could have discovered the convenience of wireless. Would some of them have complained about not having a headphone jack? I suppose about as many as would if someone who ordered a hamburger in a restaurant and had discovered that Filet Mignon was delivered to their table at no extra charge.
Now, everyone is still going to be using the headphones that their phone came with. That means still putting up with wires when they go walking or to the gym. And when those headphones are lost or destroyed, they are going to buy another set of cheap wired headphones because they’ve worked good enough for them in the past. Apple has preserved the wired status quo.
What a missed opportunity. If everyone had sampled their first set of wireless headphones, millions of people would have received their first taste of the convenience that it brings. Once you go wireless, it’s hard to go back to wired.
Impact on iPhone Margins
So would Apple have taken a hit to their iPhone gross margins if they had bundled AirPods with their iPhone? As the AirPods are designed today, yes. But not as large you might think.
By extending the life of the iPhone, they are gaining a certain amount of margin to play with. Also, by losing the headphone jack, they are reducing components from the product bill of material and reducing the complexity of product assembly. Replacing EarPods with AirPods wouldn’t have cost Apple anywhere near an additional $159.
At a 40% gross margin, the AirPods cost roughly $95 for Apple to make. That’s significantly more than the $40 of gross margin leeway that I calculated Apple had as a wireless budget. However, I would have argued that Apple would offset some of this loss by also gaining additional sales and revenue on all the replacement Airpod sales in the future.
As I mentioned before, once you go wireless, it’s hard to ever go back to wires. As people, inevitably lose or break their AirPods, many of them will immediately purchase another set. Assuming that people like the AirPods, all these users are bound to tell their family and friends that they too should experience this newfound convenience, spurring even more sales. This is incremental sales volume that Apple wouldn’t have received otherwise.
Courage
I would disagree with anyone who thinks that removing the headphone jack wasn’t a courageous move by Apple. Unlike Samsung, Apple’s fortune rests on this one product more than anything else. Apple can’t afford for this cash cow to start exploding all over the place. There is a real risk that sales could be harmed by the absence of a headphone jack. And it wasn’t just courageous move in a self-serving way either.
Corporate competitors often exist in a kind of Mexican standoff. For example, let’s say that a new safety feature exists which would benefit the consumer but does nothing but shrink profitability and margin for the manufacturer. If the customers aren’t clamoring for it, nobody wants to be the first guy to add cost to their product and implement the new safety feature. This could be potential product suicide if the customer decides to purchase from your competitor who is consequently cheaper.
One of two things must happen. Either an outside force like a federal government must intervene and mandate that everyone implement the new safety feature at once, or one of the corporate citizens takes the plunge first and shows the market why this new feature is important. If the public responds and said corporate citizen doesn’t go bankrupt, the other companies will generally follow. This is corporate leadership, and it doesn’t happen often.
So why is “courage” not an entirely self-serving statement? The public isn’t clamoring for wireless headphones en masse for a few reasons. One, they are still relatively expensive compared to wired headphones. Two, typical wireless battery life isn’t great and the connection problems are a pain. But the current state of the art is held back by relatively low sales volume. No one is willing to invest in the research and development it is going to take to advance wireless technology when they perceive no payoff for such a small market.
Besides offering the market a wireless option that is both relatively inexpensive (compared to other truly wireless earbuds) and I’m assuming relatively trouble free, Apple is also going to grow the entire market for wireless products. This benefits everyone, not just Apple. If Apple can convert just 20% of their iPhone buyers into going all wireless, they have just added well over ten million new buyers into the industry. That’s going to be over a billion dollars of new sales revenue. This could greatly alter the cost/benefit scenarios in the R&D labs of headphone makers all over the world. The public is going to see price drops and technology advancements from companies other than Apple that wouldn’t have been made otherwise.
This new volume is what would cause prices to come down and spur the influx of new technologies that will make wireless better. But it hinges on people making the switch. Yet Apple just unveiled their new iPhone that is shipping with wired headphones and an adapter for the old-style 3.5mm headphone jack. Why? What were they thinking? Is this decision making by committee? Or maybe they don’t have the production capacity to offer them at scale yet, in which case, they should have waited to remove the headphone jack until they did.
Yes, it took courage to remove the headphone jack. Everyone benefits if the wireless industry grows. But Apple should have put their money where their mouth is and offered AirPods in every box.
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