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Apple's Newest Billion-Dollar Idea A Show Of Its Strengths

This article is more than 7 years old.

Apple's decision to remove the headphone jack from the iPhone 7 has generated its share of controversy to be sure. But it's also an illustration of a singular vision at the company (1) Find a pain point (2) Design a fix to eliminate the pain, and (3) Turn a profit doing it.

In this case, the hyperbole has masked what Apple is really after. It is certainly true that the space vacated by the headphone connector is already being put to use. The iPhone 7 Taptic Engine -- a vibration / haptic effect generator -- fits behind the new Home button and intrudes into the space perviously occupied by the jack. So while Phil Schiller called the decision to remove the jack "courageous," the reality is that it was pragmatic. Making the Home button offer a virtual press instead of a physical one was a necessary stop on the road to making the button disappear into the screen itself someday and the Taptic Engine makes that possible.

History repeating

Apple has done this before, where one design change begets another. It happened when the TouchID sensor was introduced on iPhone 5s only to be followed by Apple Pay via an NFC chip on iPhone 6. But while this technological rationale might make sense -- and it might fix Apple's pain --  it lacks a clear justification users might understand. Unless of course one actually uses headphones like designer Edward Aten. He blogged earlier this year about the 3 1/2 days of his life he expected to spend simply untangling his headphone cords.

I suspect Aten's estimate is low. He estimates that it takes 32 seconds a day across four instances while I often find that a single detangling takes a minute or two -- never mind all the time I spend neatly wrapping the cord in a futile effort to stop the tangle in the first palce. Whatever the average, across the roughly 600 million iPhone users it likely adds up to 200,000+ man-years of lost productivity annually.

Enter AirPods

That iPhone user base hasn't grown so large simply as a function of Apple technology. Instead, the iPhone sells around the world in part because of its design, because of the Apple brand, and because of the perception that it's a premium product. It's not a stretch to say that Apple's all-white headphones, redesigned in 2012 as the EarPods because of their more anatomical shape, are the most iconic in-ear listening devices on earth. (Yes, it's true they don't fit some people, but for many they are the only headphones used with their Apple devices.)

It seems almost absurd to say today given how ubiquitous they've become, but the original Apple headphones were considered a reach with their all white design -- especially the cord. Everyone knocked them off anyway and there are countless sub-$10 headphones that resemble Apple's, at least from a distance. To say Apple is used to this would be an understatement. But the reaction is always the same: Move the goalposts.

To do that with headphones, Apple is set to release its AirPods just a few weeks from now. Maintaining the iconic shape of the EarPods while ditching the cord, Apple will blend the familiar design with a refinement of a technology it didn't actually pioneer: wireless headphones. The company has taken this approach to build the products that brought it from the bring of bankruptcy to becoming the world's most valuable company. The iPod and iPhone weren't the first MP3 player and smartphone, but each brought a unique suite of attributes that made them game changers.

(Blue)tooth ache

Anyone who has used Bluetooth with a headset or in a car knows how finicky the technology can be. Pairing a headset can be a pain and sometimes the link drops without explanation. Recharging often involves a tiny, proprietary cable and many headsets offer little information on the state of their battery. AirPods promise to fix these problems with a small charging case that not only allows for simplified pairing with Apple devices, but also allows the headphones to be recharged several times before the case itself needs power. (That power is supplied by a standard Lightning cable, which most Apple users have several of.)

Which brings us to the spot where everything comes together: Apple needs every cubic millimeter of iPhone internals it can find, it knows users waste plenty of time fiddling with headphones, it can use its design and technical skill to fix both. That the removal of the headphone jack is an inconvenience to some (albeit not much of one as a $9 adapter allows the use of existing headphones and one is included free with iPhone 7) is consistent with Apple's history. It pushes forward even in the face of criticism that it's behaving in a user unfriendly manner.

Billion-dollar baby

But whether you believe the pain is justifiable or not, the clearest gain of all will accrue to Apple's income statement. If even 1% of iPhone users will adopt AirPods in the first year, Apple stands to add around $1 billion in revenue. According to Bank of America/Merrill Lynch, that estimate will prove wildly low. A report in Business Insider citing the firm suggests that 12% of the U.S. iPhone base will purchase AirPods. Those estimates tend to be high because they ask about intent, but it's certainly possible the worldwide total will be >1%.

The proportion is of similar magnitude to first year sales of the Apple Watch, which some estimates peg at 12 million in its first year, about 2% of the existing iPhone base (the Apple Watch requires an iPhone to be useful). That made Apple the second-largest watchmaker in the world by revenue, with about $6 billion. By that metric, the AirPods are unlikely to prove a bigger business at launch but they very likely have a big future.

Apple continues to sell more than 200 million iPhones a year, with a portion going to Android "switchers" as CEO Tim Cook likes to remind people. If each year just a few percent of them buy a $299 Apple Watch or a $159 pair of AirPods, the company will have an iPhone add-on business that might alone make the midpoint of the Fortune 500. And while the AirPods technically will work with any smartphone, that they will work best with Apple devices makes them yet another tool to increase lock-in to Apple's ecosystem. While someone that owns just an iPhone might someday defect to Android, a customer with Apple Watch, a Mac, AirPods and perhaps an iPad is far less likely to.

Still, that AirPods are likely to be a big hit financially for Apple shouldn't diminish the user benefit they are likely to provide. This is again a case where what's good for the company is good for its users. It's also likely that as with Apple Watch, the first AirPods will frustrate some, confound others and generate plenty of negative coverage on technology sites. But while critics are likely to consider this a money grab on Apple's part, it's also very consistent with past behavior -- and likely to produce a similarly positive outcome.

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