Apple's mistakes with HomePod will cost it a huge new market, according to a brutal Deutsche Bank analysis

Apple

Even fancy ads can't up the HomePod's appeal.

• Analysts at Deutsche Bank said Apple's HomePod smart speaker has "missed the mark" because it's too limited and expensive compared to Google and Amazon's competitors.
• This is important, because smart speakers might be the gateway for big tech firms into the growing smart home market.
• Amazon and Google currently dominate the smart speaker market and have managed to get their personal assistants into the homes of millions of people.
• Apple needed to get the HomePod right the first time if it wanted to dominate smart home products, the analysts said.
• Now it might be too late.

Apple has, at times, looked invincible. It's close to becoming the first $1 trillion company, and it has maintained high profit margins even as sales of its core product, the iPhone, fall.

But its HomePod smart speaker, its first big product innovation since the Apple Watch, is looking like an expensive mistake. And that early misstep might cost Apple an important new market.

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That's according to Deutsche Bank's brutal analysis of the HomePod's performance and its importance in smart homes.

In an investor note, analysts at the bank wrote: "We believe that Apple had a real opportunity to become a major player in the smart home with its introduction of the HomePod smart speaker. However, poor reviews and a significant fall-off in demand post the launch suggest the company has missed the mark."

Reviewers have found that the HomePod has major limitations, like not being able to pair with Android phones, and not playing well with streaming services other than Apple Music. All of these issues could be fixed in later iterations or with a software update, but it might be too late.

Deutsche Bank predicted that devices featuring personal assistants like Alexa, Google Assistant, and Siri will be vital to smart homes. It's important to get early attempts right, in order to influence how consumers think about future smart home products. Apple has probably missed its chance to shape that narrative.

Here's what the analysts wrote, emphasis ours:

"[We] think big tech companies have larger intentions beyond giving consumers an amusing way to get the weather or play music. While today's devices are relatively simple and have limited capabilities, we believe they represent the future of how consumers will interact with their home environment.

"In our mind, these devices are the first explorers making contact in a new world; behind these devices we see a wave of new solutions, tied to the VPA [virtual personal assistant], that are ready to take over the rest of the home. As a result, being early may be critical to a company's success as it drives initial lock-in."

In other words, Apple's early stumble with the HomePod might cost it the entire smart home market.

AP

The HomePod.

The HomePod was meant to take on the Amazon Echo, Google's Home speaker, and even companies like Sonos. The Echo is the most popular smart speaker in the US, though Google's Home is gaining. But the HomePod is pricey. At $349 or £319, it's $200 more expensive than its rivals.

"Apple decided to stick with its premium pricing strategy, introducing the HomePod at $349," the analysts wrote. "In our view, this essentially limits the product's market appeal to Apple fans who will pay anything for a new Apple device and to consumers with high disposable income."

For the HomePod to be a knockout success, Apple would need to persuade all 40 million Apple Music subscribers to buy one

The HomePod's limitations means it's only appealing to hardcore fans of Apple Music, given it doesn't integrate well with the likes of Spotify. As Deutsche Bank noted, one way to predict the HomePod's future success is to look at how many Apple Music subscribers there are.

Apple has said it has 40 million paying subscribers - that's growing, but it's still behind market leader Spotify with 73 million paying subscribers.

If every Apple Music subscriber bought a HomePod, it might add an extra $0.90 to Apple's earnings per share, Deutsche Bank calculated. But the analysts "view this assumption as unrealistically high", since not every Apple Music subscriber wants a HomePod. And no other Apple product has managed to hit unit sales of 40 million in its first year. Given the HomePod's limitations, it's unlikely that's the product to buck that trend.

The analysts estimated that Apple has cut speaker production to 200,000 to 300,000 units per month, in line with reports from Chinese media, meaning the firm would ship around 3-4 million speakers in 2018. That's considerably worse than the competition: Amazon said it sold "tens of millions" of speakers over the holiday period in 2017, while The Verge calculated that Google sold around 6 million Home speakers between October and January alone.