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3 Reasons Apple's HomePod Is Struggling

Leo Sun, The Motley Fool

Apple's (NASDAQ: AAPL) HomePod smart speaker isn't flying off the shelves, according to recent reports. Bloomberg's Mark Gurman, citing a source "familiar with the matter", recently claimed that Apple "lowered sales forecasts" for the device and "cut some orders" from contract manufacturer Inventec, and that its inventories were "piling up".

A Chinese media report claims that Apple cut its HomePod production by about 60% to 200,000 units per month and suggested that it might be developing a cheaper model. KGI Securities analyst Ming-Chi Kuo expects Apple to sell just 2 million to 2.5 million HomePods this year, a stark contrast to Rosenblatt Securities' earlier forecast that Apple would produce six million HomePods in 2018.

Apple's HomePod.

Apple's HomePod. Image source: Apple.

So why aren't customers excited about the HomePod? Let's take a closer look at the three biggest problems with the product.

1. It arrived late to the market

With the iPod, iPhone, and iPad, Apple disrupted markets that it didn't create. However, Amazon put the smart speaker category on the map when it launched the first Echo device in late 2014, and it remains the dominant player.

Amazon controls 55% of the U.S. smart speaker market, according to a Loup Ventures study in February. The Google Home ranks second with a 23% share, while Microsoft's Cortana-enabled devices hold 15%. Meanwhile, Apple's HomePods control just 3% of the market.

Apple initially announced the HomePod last June and scheduled it to be launched in December. But that launch was delayed to late January, and Apple missed the crucial holiday shopping season -- which was soundly dominated by the Amazon Echo.

2. It was poorly priced

Apple is widely considered a premium brand, and it enjoys unmatched pricing power in phones, tablets, and personal computers. That's why Apple launched the HomePod at $349 -- much pricier than the second-generation Echo ($100) or Google Home ($129). Both Amazon and Google also sell cheaper versions of their speakers, like the Echo Dot and the Google Home Mini, for $50.

Amazon's Echo.

Amazon's Echo. Image source: Amazon.

The HomePod also competes against higher-end wireless speakers, many of which cost between $200 to $400. Audiophiles might like Apple's computing devices -- but they're more likely to stick with established audio brands for their home speakers.

3. It has a much smaller ecosystem

The HomePod is integrated with Siri, Apple Music, iTunes, iCloud, and HomeKit -- which connects to smart home devices. That connectivity might appeal to heavy users of Apple services, but that ecosystem is still much smaller than Amazon and Google's platforms.

Amazon's Echo speakers and Alexa-enabled devices allow users to reorder products from its online marketplace, control smart home devices, stream media, ask questions, make calls, and perform other tasks. Developers are also creating thousands of new skills and apps to enhance its abilities.

The Echo is also becoming a clear extension of Amazon's massive marketplace. Back in January, research firm CIRP noted that the average Echo owner spends $1,700 per year on Amazon, compared to $1,300 for the average Prime member. That's why Amazon is constantly offering special discounts for its Echo devices.

Google Home.

Google Home. Image source: Google.

Google Home is integrated with Google Assistant, which makes it a useful tool for users who are heavily dependent on Google's own sprawling ecosystem of services. Like Echo, Home is tethered to a wide range of first-party and third-party services, and it can be used to stream music or news, make calls, and control smart home appliances.

Apple is trying to wedge itself between these two market leaders with a pricier device tethered to a less appealing ecosystem. If Apple sticks with this strategy, the HomePod will remain a niche device for hardcore Apple fans instead of the mainstream device the company wants it to become.

The bottom line

At $349 per unit, KGI's sales estimate of 2.5 million devices indicates that the HomePod could generate about half a percent of Apple's projected revenues this year. Therefore, the HomePod could completely flop and barely hurt Apple's overall growth.

But if the HomePod fails, it would represent a missed opportunity and indicate that Apple's pricing power is ultimately limited to certain device categories. As I noted last June, the HomePod is an ill-conceived "me too" device instead of an innovative design aimed at disrupting a flawed market -- as Apple did so elegantly with smartphones and tablets.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Leo Sun owns shares of Amazon and Apple. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Amazon, and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.