Apple did not selfishly kill the headphone jack

Apple did not selfishly kill the headphone jackIn its special event on Wednesday, Apple disclosed that iPhone 7 will not have the standard 3.5mm headphone jack. As you might imagine, panic ensued.

Not really. But I saw plenty of editorials about how Apple was pinching the headphone jack just to boost its wireless headphone sales. Here’s a perfect example from The Verge: “The biggest winner from removing the headphone jack is Apple.” The big complaint?

The iPhone 7 will be bought by tens of millions of people during the next few months alone, and its lack of a headphone jack is going to make many of them consider buying Lightning or Bluetooth headphones. Apple profits from both.

That seems to make sense, right? Apple is in the business of selling headphones, wired and wireless. If Apple can force people to (a) buy more headphone generally, and (b) buy the more profitable wireless headphones specifically, then doesn’t killing the headphone jack make financial sense?

In this very limited sense, yes. But the counter-argument is that Apple’s Beats sales are meaningless. They’re inconsequential, when we’re talking about the whole revenue picture. Angering your customers over a trivial sales bump is stupid. And very little evidence points to Apple being stupid.

For Apple, revenue from Beats is practically meaningless

The table below is from Apple’s most recent quarterly financial report, filed at the end of January. We can see how Apple’s sales are broken up first by geography, then by product.

When it comes to Beats, we want to look at “Other Products”. This is the footnote Apple uses to describe this bucket: “includes sales of Apple TV, Apple Watch, Beats® products, iPod and Apple-branded and third-party accessories”.

What number do we see for the most recent quarter for “other products”? $2.2 billion. What was Apple’s total sales in the quarter? $42.4 billion. “Other products” made up 5% of Apple’s total revenue. And remember, that’s not just Beats. It’s Beats, plus Apple TV, plus Apple Watch, plus iPod, plus all the accessories. All of that, together, contributes about 5% to Apple’s total revenue.

Apple 10-Q report

What’s a reasonable number for Beats alone? I don’t know. 1 or 2% of total revenue sounds about right, given this breakdown. Without more detail, we can’t say for sure. But we can say that Beats supplies considerably less than 5% of Apple’s total sales.

When you put Beats sales in perspective, I think it’s easier to see why Apple’s move wasn’t motivated by financial gain. Apple just can’t hope to move its sales or profitability needles via Beats, no matter how hard it tries.

Even in a wildly optimistic scenario, headphone sales just aren’t interesting to Apple

Grand View Research estimates that the headphones market could be worth $17.6 billion in 2022. Let’s do some super conservative math. Say Apple didn’t sell any headphones today. Say that through eliminating the audio jack, Apple instantly makes the headphones market worth $17.6 billion. Finally, say Apple could immediately gobble up 100% of this market.

What would this outcome mean? Apple generated $234 billion in sales last year. Adding $17.6 billion would be a 7.5% bump. That’s a nice bump. Let’s put it in perspective. From 2013 to 2014, Apple’s sales grew by 7.0%. From 2014 to 2015, sales grew by 27.9%. Adding 100% share of an unrealistically large headphones market would represent a ho-hum year for Apple.

And once Apple made this huge, unrealistic leap, headphones-wise, it would be back to the drawing board. It would have to come up with new ways to manufacture further growth. 

Apple needs a growth story — headphones don’t qualify

Apple executives aren’t motivated to ramp up revenue and earnings at all cost. Apple executives are motivated to ramp up the stock price. And the stock price doesn’t respond the same way to different kinds of revenue or earnings growth.

Stock market investors pay a premium for long-term, sustainable growth. That’s why every company tries to tell the most compelling growth story imaginable. Slowing sales momentum was the big reason that Apple’s recently quarterly reports have been received so poorly. As soon as its largest revenue driver (iPhone) started sputtering, investors became very worried.

Do you think Apple can articulate a compelling growth story around headphones? Hardly. There’s a reason Apple recently broke out, and highlighted, its financial performance around services. When you generate over $200 billion in annual sales, and over $50 billion in annual earnings, growth comes from getting in front of seismic market shifts. Services does seem to be one such shift.

I might be a sucker, but I buy Apple’s technology argument

I’m much more inclined to believe that Apple really does have conviction around its view of a wireless future. They eliminated disc drives and wired ethernet ports ahead of the curve. It’s not surprising that they’re doing the same thing with the audio jack.

I also think that if you’re not an engineer, or haven’t done design work, you underestimate the importance of capturing even small spaces. The inside of an iPhone is the most elaborate of jigsaw puzzles. Capturing a millimeter here or a millimeter there can be the difference in adding a new feature, or upgrading an existing one. Eliminating the headphone jack matters.

I just don’t buy that Apple would risk pissing off its customers for a short-term bump in wireless headphone sales. I’m not saying big companies aren’t greedy. What I am saying, though, is that big companies tend to be very good at cost/benefit analyses. And the cost/benefit analysis of stripping out a headphone jack to ramp up headphones sales doesn’t make sense.

This criticism of Apple acting selfishly is rooted in a misunderstanding of scale. Headphones sales really don’t matter to Apple. They don’t matter to Apple because they don’t matter to investors. They’re peanuts. Apple isn’t going to build its next wave of momentum around headphones.

It’s much more likely that killing the headphone jack is part of a continued push further into wireless tech. Apple has been very good at placing bets on the trajectory of new technologies. I wouldn’t start betting against them now.

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