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Headsets Mean Little to Apple in the Near Term but a Lot Over the Long Term
Apple, Themes
It's been eight years since Apple jumped into a new product category. On June 5 that will likely change when Apple is expected to preview its $3,000 developer version of a mixed reality headset at WWDC. Many investors are skeptical about the prospects of the device given headsets are currently a solution looking for a problem. I believe the trend of more immersive consumer tech experiences will continue, which should pave the way for a robust headset market. By 2030, I believe the wearables/glasses segment could account for 10% of Apple's sales (assuming they don't release a car), a business similar in size to Apple's Mac and iPad businesses today.

Key Takeaways

WWDC is the logical preview point given the device needs developers to build use cases.
While the data suggests the headset market is further along than when Apple typically enters, I believe it's the most nascent.
By 2030 the headset should account for 10% of Apple's business.

Winning the developers is key

In December of 2021, I incorrectly predicted Apple would preview its mixed reality headset at WWDC in June of 2022. This begs the question: will we really see it this year? Coming into these events there’s a pattern of product rumors gaining momentum and sometimes falling short. This year feels different. Notably, Bloomberg’s Mark Gurman, who has a high hit rate when it comes to product predictions, has been steadfast that the new device is coming this June.

What stands out to me is the timing of the launch. Typically WWDC is reserved for Apple to showcase new software to developers. Product announcements at the event tend to be modest upgrades compared to entering new product categories with both the iPhone and iPad being announced in the month of January and the Watch in September.

The reason why Apple is picking WWDC as the MR headset’s preview point is the importance of winning developers. History suggests when there is a hardware paradigm shift, winning developers is critical.

  • In the 1980s Microsoft did it, paving the way for the success of the PC.
  • In 2007 Nvidia released CUDA (Compute Unified Device Architecture) which made it easier to develop applications that run on Nvidia’s GPUs.
  • In 2008, a year after the iPhone was released, Apple did it, changing the phone into a computer in your pocket.

In other words, Apple gets it. There is likely going to be a shift away from phones over the next decade, and that shift will include more wearables. If Apple waits for the utility of these wearables to become apparent to the masses, it could be too late. By that time Meta, Google, or Microsoft would already have made enough hardware and software progress that will make it difficult for Apple to gain traction. iPhone’s hardware was the most advanced on the market in 2007, and developers jumped on board. Now is the time for Apple to win developers over with a best-in-class device. If they do that, developers will jump in and build products that unearth the utility of the device, and the virtuous product/developer cycle begins once again.


Getting in earlier than normal

Joanna Stern from the WSJ recently outlined the historical timing of Apple entering a new product category.  What jumps out to me from her reporting is the surprising number of headsets sold last year: 8.8m. That compares to 3.3m MP3s sold in the year before the iPod, 81.9m smartphones before the iPhone, and 6.9 smartwatches before the Watch. I believe that data overstates the category’s success to date.

The headset market is more nascent today than even the MP3 market in 2000 because I believe the number of active headsets (used at least once a month) is low. I suspect three-fourths of those 8.8m units sold last year are not being used, which puts the active base of units sold last year at 2.2m, below the ~3m active base of MP3s back in 2000.

Tech geeks (present company included) have purchased and tried out wearables, and so far have been underwhelmed.


Impact to Apple's Model

There are essentially two outcomes that matter when it comes to modeling the impact of wearables to Apple’s business.

It’s a flop. Even though the product has never been seen, I believe most investors expect the product to be closer to a disappointment than a success. In that case, the impact on the model resembles the Newton. The product underwent six years of development and was on the market for five years (1993-1998) before being nixed by Steve Jobs on his return. While Newton’s failure to find a market was a drag on earnings, it did not risk sinking the company. At the time Apple’s central challenge was related to falling Mac market share. If the headset is a bust, the product would add fractional revenue, and the $25B in expenses related to development and marketing over the next five years, would only have a modest 3-4% negative impact on earnings.

It’s a hit. This outcome will take time given the likely $3k starting price point at launch, and the likelihood it won’t be until 2027 that the product reaches a more friendly $700 consumer price point. In this scenario, unit growth will be modest at around 20% a year through 2026, picking up to 60% in 2027 once the price declines. By 2030 (its eighth year), I believe Apple could sell 75m headsets,  which compares to the Apple Watch reaching just around 45m units in its eighth year in the market.  The math continues that 75m units at $700 will generate around $53B in revenue. Assuming Apple grows its top line by an average of 5% per year through the end of the decade (which lands total revenue in 2030 at around $550B), the headset/AR glasses segment would account for about 10% of total Apple sales in 2030. This compares to both the Watch and AirPod businesses which each account for about 5% of sales today.

Putting it together the wearable segment will be more critical to Apple’s business than the Watch or AirPods, and less important than the iPhone. My thoughts on the iPhone’s place in Apple’s product lineup have changed since I started writing on Apple wearables in 2017. At the time I saw the headset as a replacement for the phone. Now I expect the wearable to be complementary to the iPhone long term.


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