AirPod’s Pro Impressions, Apple’s Advantage, Apple Earnings Key Points

AirPod’s Pro Impressions
Apple has another hit on its hands with AirPods. Reviews are coming out overwhelmingly positive, and I wanted to share a few first impressions having used them for a day now, but also dive into a few technical details I learned that I think are worth highlighting.

Impressions. AirPod’s Pro two newest features are the ones I want to talk about. Noise-canceling, or active noise canceling (ANC), and transparency mode deliver on all fronts. I’ve tried a number of other wireless earbuds, some with ANC and some without, and I own the Bose QC2 and Sony WH1 both costing over $300. I was very curious to try the noise-canceling against the over-ear Bose and Sony the most, but where AirPods beat other in-ear wireless headphones is in fit and comfort.

When it came to noise-canceling, AirPods are much more in the camp of the over the ear Bose and Sony in terms of quality of noise canceling. As good as the Bose QC 352 are, I still find the Sony WH1 as my preferred for both comfort and noise-canceling quality, and while the AirPod’s came close, the Sony headphones still had the best noise canceling. But there are tradeoffs that I think need to be pointed out.

AirPod’s remain, in my opinion, still the most comfortable and versatile headphones on the market. I said when I first wrote about my experience with the first AirPods that you forget you have them in. That is not the case with all other headphones I have tried and for sure any over the ear solution. Outside of price, this comfort and the true feeling of audio freedom is why I think AirPods are the best selling headphone on the market.

Couple that with active noise canceling that is darn close to the highest end consumer products from Bose and Sony, and it’s hard to doubt the total value Apple has brought to market. While I’m still not sure AirPod’s Pro will replace my Sony as my go-to while on airplanes (a luxury I know), AirPod’s Pro will open up many more use cases where I used to use my Sony’s and will no longer need to.

I need to mention a few things I learned about what’s going on inside AirPods. First off, the active noise canceling is an Apple proprietary solution. They are not using someone else technology, and instead, the H1 chip is utilizing ten audio cores to provide a dynamic, active noise canceling solution that is constantly adapting to the audio, fit of your ear in case an AirPod moves, and other factors. The chip is constantly sampling and adjusting as much as 200 times per second to deliver the best audio and noise-canceling in every situation you find yourself.

Apple included a microphone in AirPods that points inward toward your ear, and this microphone allows them to do this dynamic ANC as well as dynamic EQ. This microphone is constantly listening to the audio and how it responds and adjusting on the fly and is ingenious when it comes to a dynamic and constant quality of audio and ANC. Apple also custom developed a high excision and high-dynamic-range amp. This customized amp is also tuned to be part of the solution and plays a key role in the quality of audio.

A few of those components are pictured here in this breakout.

Lastly, the system in package (SIP) is custom to AirPods and designed by Apple to specifically fit the new AirPod’s design and form-factor. This point goes back to the absolute advantage Apple has with one of the best, the best by many insiders standards, silicon design team on the planet. With each new product, Apple seems to customize more, and more of the critical components and the rewards they reap from that investment are bountiful.

Speaking of Apple’s advantage..

Apple’s Advantage
I had an interesting discussion on Twitter with a journalist who suggested that Apple’s magic pairing process for AirPods was an unfair advantage they allow themselves by controlling as much of the hardware, software, and services stack as they do. For reference, here is the point he made.

No way for others to compete is certainly a stretch, and the danger of his position is it argues against integration, which has tremendous benefits to consumers and a companies core business. Also, for his point to stand, Apple would need to lock the iPhone to AirPods and let no other headphones work with iPhone. As long as choice exists, his point will not stand up to scrutiny.

There is nothing inherently wrong with companies owning more of the technology stack to provide differentiation or competitive advantage. Apple is not alone in this as Amazon, Microsoft, Google, and more are tipping deeper into integrated waters because of the competitive advantage it allows. There will always be choice, but in some cases, it may be easier, cheaper, or work better to go with the custom solutions a company offers.

I find the position disingenuous also because the anti-compete point is solely being made on the back of Apple’s magic in pairing. Yes, it is easier to pair AirPods, but no, it is not difficult to pair any other headphone to iPhone. It’s honestly no different on any other platform or how it has been historically. His point completely falls down when you look at HomePod, which has the same magic pairing process yet only 2% of the smart speaker market with Amazon and Google, with raising ASPs of speakers, taking the lions to share. If this magic pairing process made it hard for other companies to compete in, then HomePod would be doing better than it is. I note the price is higher of HomePod, but again, it shows that competition is possible even with Apple’s magic in pairing.

There may be areas to look into Apple for anti-compete, like App Store, but Nilay’s point about the magic in pairing is absolutely not one of them. Owning more of the stack is the advantage Apple lends itself and a key advantage that will deepen their differentiation. Apple could abuse this, but they know better.

Apple Earnings Key Points
There are a few points around Apple’s earnings that I’ll write a follow up on, but there are a few key points I want to make sure to hit today that I thought were significant.

  • Services On Track to Double by 2020
    Apple’s services business just keeps growing, and for many of my long-term readers, this is not a surprise. I’ve long written about how Apple’s platform is the best positioned to drive services and subscription revenue not just to Apple but to an entire iOS ecosystem. At the end of 2016, Apple’s services business was about $25 billion in that year. In early 2017, Tim Cook stated the goal to double that business by 2020. Apple’s fiscal year 2019, the services business was $46 billion, which makes hitting $50 billion a year in 2020 a highly likely target.

    A key point Apple management made about services on the call was that services grew YoY in all geographies, calling out China. This is a significant part of the services growth story because it signals that every market where Apple competes, consumers are spending money, and the services opportunity continues. This deepens Apple’s loyalty and stickiness in every geography.

  • Wearables Has a Head of Steam
    Wearables rev increased by 54% YoY. That’s big, and it shows how strong Apple Watch and AirPods are becoming in the market. We are not that far off from both Apple Watch and AirPods having an installed base of 100 million devices. But the key story here is how under-penetrated AirPods and Watch are as a part of Apple’s installed base.

    An analyst asked this exact question on the earnings call to try and get Tim Cook to give a number, but given the sales trends I’ve tracked, and my model of Apple’s product installed base, I’m confident AirPod’s and Apple Watch combined are below 20% penetration into the installed base. This means there is still significant headroom for growth, which means wearables will continue to be a bright spot for Apple and a means to continue to off-set flattening sales of iPhones.

  • Apple’s Hardware Lending via Apple Card. Lastly, a new announcement of a feature for Apple Card caught my attention. Tim Cook announced on the call a new feature coming to Apple Card that lets consumers pay for an iPhone over a 24 month period with 0 interest. At first blush, this is very similar to Apple’s upgrade plan. However, it is much more clever. The goal here is to shift the upgrade plan concept to Apple Card, with the benefit of 3% cashback but also driving more users to Apple Card, which is the true goal. However, where this gets interesting is that it shows us the groundwork for how Apple will start to offer to finance other Apple hardware. I’m now absolutely convinced Apple will offer similar deals for Apple Watch, Mac, etc., where Apple Card owners can finance Apple hardware, and thus Apple makes it easier for people to get the hardware they want. This, in turn, drives more Apple Card usage, deeper loyalty and lock-in, and all the strategic benefits that make Apple Card quite interesting as a finance platform. Apple Card is so much more than a credit card, and I think it is critical to understand this.

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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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