HomePod, The Smart Speaker Market, Analyzing Apple’s HomePod Strategy

I know many of you subscribers follow me on Twitter and have probably seen some of my commentary which has largely been voicing concerns about Apple’s strategy with HomePod. If not, my concerns boil down to a few things.

  1. It’s differentiation: HomePod is coming out competitive in only one area to the current crop of what we loosely call “smart speakers.” HomePod’s competitive advantage is sound quality. I have heard it in action and I can tell you it is amazing. Incredible sound quality for such a small device. It will literally be the best sounding speaker most of its owners have ever owned. That being said, there is not a large market for high-quality audio, and that is unfortunate I know. We have qualified in our research that most Echo owners are completely content with the sound quality and say it is “good enough” for their needs. More on this point in a bit.
  2. Price:Rarely am I worried about the pricing of a product from Apple. This is one of those times. Note this tweet from Christina Warren which is fascinating on several fronts.

    While it sounds crazy, I do have a sense this will be the common sentiment among consumers. Now, those who are passionate about their audio (we used to call them audiophiles and we still kind of do) will jump on this product immediately. There is a market for those who appreciate amazing sound and HomePod is a steal at $349 for that market. As will buying many of these devices for their home. The hard reality is this is a small part of Apple’s customer base.

  3. Amazon will be a more formidable competitor than Google for Apple: Perhaps this sounds crazy but its true. And yes, this is a regional point because Amazon is not in every market but the US is Apple’s second largest user base to China and it is incredibly important to Apple. Amazon is much more like Apple in their customer-centric and consumer experience focused approach. This is the big way Amazon is different from Google and a big reason why I think Amazon as a competitor should concern Apple more than Google ever did. Yes, Amazon has its challenges as well, but we can’t underestimate the way Alexa is acting–and has the potential to be–like a trojan horse to Apple’s ecosystem and customer base.

Now let’s go beyond the root of those concerns and look at the market as we understand it today. Last quarter, in the US market, things we call “smart speakers” like Amazon Echo’s (Alexa enabled) and Google Home devices sold roughly 15 million units. Now, a key point here is ASP. It is absolutely true many of those were on the low-end of the price spectrum since sales of Dot’s and Google Home Mini’s were as low as $29 at points. That being said, the ASP of Google’s Home devices was lower than that of Amazon Echo’s. Amazon has the larger installed base, and as a whole the higher priced, better quality sound Echo’s have sold better than dots. Our research confirms this around Amazon’s Echo-system (see what I did there), that buyers of Echo’s do want at least one that sounds pretty good for a main room in the house and are happy with lower cost Dots in other rooms of the house. Where with Google, more people are either getting their first smart speaker at the low-end of the price spectrum to try it out and see if they like it. We know the customer path for Echo’s is to buy one then buy more for other rooms, we don’t know if that is the case for Google Home owners yet.

I believe Amazon still has roughly ~70% of the smart speaker installed base which now is around ~40-~45 million devices. That does not mean a smart speaker is in 40-45 million homes since there is a good chunk of that customer base who owns multiple. If I had to guess I’d say 25% of US homes have a smart speaker. Consider that an educated guess, but we do plan to quantify this number when we do our third annual research study on voice assistants, smart speakers, and the smart home.

While it is true this category is just getting started, 25% of US households is no trivial number. Despite the price variances, sales in the 40 million in less than a few years is also no trivial number. I agree this category is just getting started, and it is early, but it is also moving faster than people think including Apple.

The other point worth making is the overlap of the customer base of Echo owners and Apple customers is high. In the US market, our research suggests about 40% of Echo owners today are iPhone owners. I’m using data prior to Q4 2017 to come up with that number there is a good chance it is higher than 40% at the moment but I can’t confirm that yet.

That’s a brief overview of what we know today about this market. The signal that Echo owners have tended to gravitate to better sound quality for at least one room in the house is positive.

Apple’s Strategy with HomePod
I think I understand Apple’s strategy here so I’d like to outline it. Apple is leading with music because that is the primary use case for smart speakers today. Going back to our chart on weekly tasks done by Echo Owners and Google Home owners, you see play song and connect to music service is a top 5 weekly activity.

When you look at this chart, there really isn’t anything in the top five or so actions that HomePod won’t be able to do sufficiently. That is positive for Apple. Especially since I think Apple’s strategy here is lead with music and then increase functionality over time and ultimately out-integrate Amazon across Apple’s device ecosystem. Meaning that if you have at least one iPhone, Apple Watch, iPad, Mac, AirPods, or even all of them, then this whole system will work better together. That is Apple at its best to present the best user experience, particularly when you own more than one Apple product.

I also do expect Apple to have some unique smarts to Siri that may not be found in other products. Particularly around Apple Music and the idea of a smart DJ. The assistant angle Apple can provide differentiation where others can’t is around music. This could be an interesting angle to watch that hits on the audio/music use case first.

Apple’s advantage, is of course, that Siri is already always available to their customer base in their pockets, Macs, tablets, wrist, and ears. This is a huge advantage and the single biggest reason why we can’t count Apple out when it comes to the smart home (where Amazon no doubt has the lead). That being said, I want to draw an analogy that may or may not be true it is just worth pointing out.

I made the point Amazon is trying to use Alexa as a trojan horse. This trojan horse is about what is next, not what is here today. I’m absolutely convinced voice assistants are, one of, if not THE, critical piece of the puzzle for the next era of computing. That is the era that comes after smartphones. So if we look at smartphones being where PCs were decades ago, I can argue that the iPod was Apple’s trojan horse to Microsoft’s computing dominance. At the time, many analysts and pundits in my community believed Microsoft would no doubt win in mobile computing, smartphones, etc., because so many people owned Windows computers. It was very hard at the time to see how anyone could poach Microsoft’s user base given how dominant Microsoft was in PCs yet it happened slowly but surely as Apple began deepening its relationship with customers through the iPod. Then when the iPhone came around Apple had already gained the trust of tens of millions of customers and that paved the way to the iPhone and the rest is history.

I don’t know if it will play out the same way, I’m only making a point that there is never a guarantee that the dominant computing/platform company of one era will automatically be relevant or win the next era. This is why I think Amazon should worry Apple more than I think they do. Alexa is clearly a trojan horse strategy and Amazon is absolutely trying to get Apple’s customers to trust Alexa more than Siri.

It’s not voice vs. non-voice UI that is at stake it is a smart assistant battle that is brewing and part of the groundwork for the next computing platform era.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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