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Here’s Why AirPods Are The Key To Apple’s Next Big Growth Cycle

From Jon Markman: A few weeks ago, the battery in my daughter’s MacBook Pro laptop went on the fritz. It wouldn’t charge; she was chained to a wall plug. Among other inconveniences, there was no way for her to take notes during lectures at Purdue University, where she is a junior.

The laptop was five years old, but it had a great 15-inch screen and everything else worked fine. She looked into having the battery replaced by the factory or by a campus-area computer store. But quotes ranged from $700 to $1,000, plus she’d have no computer for at least a week.

As a result, we spent a while on the phone over a few days, talking over the alternatives. She was open to the idea of switching back to the Windows world, since you can get much better specs (CPU speed, RAM and SSD size) for your money. She knows I’m a big Windows and Android advocate, but I could hear in her voice that she really wanted to stick with Apple.

The whole exchange reminded me of her birthday gift in January 2003 when she was 8 years old. She wanted a portable music device, and there were lots of brands to choose from (most of which have disappeared) with better specs than the new and exciting iPod. But Apple marketing had pierced her brain, and even though it was more expensive with lower capacity, the brand prevailed.

I am mentioning this now because the status of Apple Inc. (NASDAQ:AAPL) as a prestige brand has been under siege more in the past year-and-a-half than at any time in the past decade.

The company created the modern smartphone, and then leveraged it by clever promotion into the largest market capitalization in the country, by a whopping $70 billion over Alphabet (GOOGL) and by $130 billion over the third-largest company, Microsoft (MSFT).

Yet a lack of diversification into any new product lines and a lack of noticeable innovation in the iPhone have led to open season by boo birds, who believe the company cannot maintain the fat profit margins that sustain its success.

My daughter’s decision-making process suggests that Apple has still maintained its edge in the sort of marketing prowess that keeps margins wide. People still believe in its products, and they want to be associated with them, regardless of other key factors such as price and features.

So Apple continues to mint money and maintain shareholder value. The stock reached a new one-year high last week as it prepares to release Q4 2016 earnings this afternoon. And it looks like after two years in the dog house, Apple has an excellent chance of re-emerging as a leader.

One key reason: The next big thing in computing is voice. Companies have been falling all over each other to get their gear to work with Amazon’s Alexa, the artificially intelligent digital assistant. It’s cool. Investors are stoked. Rightfully so. Meanwhile, Apple’s Siri, despite a five-year head start and glowing forecasts, has become the butt of incompetence jokes.

So, Apple doubled down instead of laying down. It decided to put Siri in users’ ears with expensive, unattractive wireless headphones called AirPods. And it looks like the company has a shot at using AirPods to build an even bigger marketing moat around its golden goose, iPhone.

What makes AirPods so important is a tiny system-on-a-chip (SoC), the W1. This chip provides AirPods with tremendous range — and the ability to instantly pair over Bluetooth with any Apple smartwatch, iPad, Mac computer or iPhone signed in to an iCloud account. That’s a neat trick with huge benefits.

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Matt Weinberger at Business Insider writes : “I’m going to call my shot right here based on these factors: Apple’s Echo competitor, whenever it arrives, won’t have Siri built in, but rather will use Bluetooth and the W1 chip to connect directly to your iPhone and call Siri from there. It would look like the Amazon Echo or Google Home but use the W1’s insane range to link to your phone from anywhere in your house. This would accomplish Apple’s goal of requiring you to have an iPhone to use its best stuff.”

Weinberger makes a good point. And that strategy does scream Apple.

There are some potential hurdles. The supposed magic feature of AirPods is easy Bluetooth pairing. Nifty animations and Apple propaganda aside, painless Bluetooth pairing is not revolutionary. Modern devices require only one initial pairing. After that you are good to go.

And then there is the industrial design. Let’s face it, AirPods look dorky.

To compete in the marketplace for AI digital assistants, Apple is betting its huge install-base will not only buy the $159 earbuds, but also wear them continuously to call on Siri.

That may be a stretch as Alexa, Microsoft’s Cortana and Google’s Assistant find their way into cars, homes and appliances. Meanwhile, Samsung’s Viv and Facebook’s M digital assistants cannot be dismissed. Although neither has seen widespread release, they too bring massive install-bases. They’re players.

Despite promises of the next big thing, Apple is still an iPhone company. Recently, even Peter Thiel, the controversial Silicon Valley investor, opined Apple’s best days are past. Smartphones are no longer the center of innovation, he argued. Thiel has a point. Software is now far more important than most hardware.

The exception is iPhone. If Apple can use Siri to continue selling tens of millions of premium smartphones for a hefty profit, the shares have much more upside.

The Apple Inc. (NASDAQ:AAPL) was trading at $120.92 per share on Tuesday morning, down $0.71 (-0.58%). Year-to-date, AAPL has gained 4.40%, versus a 1.38% rise in the benchmark S&P 500 index during the same period.

This article is brought to you courtesy of Money And Markets.

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