Apple (NASDAQ:AAPL) may be having issues with iPhone sales and an underwhelming response to new services like Apple News+ and Apple TV+, but the company is doing quite well with its AirPods. However, that success — and the rapidly growing wireless earbud market — is bringing out competitors. The latest tech giant to be making a play for the AirPods’ market is Microsoft (NASDAQ:MSFT), which is reportedly working on what may end up being named “Surface Buds.”
Consumer demand for wireless earbuds has been growing, helped by the trend started by Apple of eliminating the headphone jack in smartphones. It’s expected to hit $10 billion by 2023. That being said, the big upside for Microsoft stock isn’t just the potential revenue in play by selling Surface Buds, it’s also something much bigger.
Microsoft Working on Surface Buds Wireless Earbuds
Thurrott, a website known for breaking MSFT product news, is reporting that the company is currently working on a new product with the code-name “Morrison.”
According to Thurrott’s multiple un-named sources, Morrison is a set of wireless earbuds that may end up being called Surface Buds when released (potentially in 2019). They are expected to have Cortana onboard, and could incorporate advanced capabilities like noise cancellation and tech that’s described as a way to “improve interactions between a phone and the earbuds to make reading content easier on the phone.” Whatever that last feature actually is (and whether it makes it into the production version), the core concept should sound pretty familiar by now: The so-called Surface Buds are aimed squarely at Apple’s AirPods.
If the idea of MSFT making earbuds seems farfetched, remember that last fall the company launched Surface Headphones. These are premium priced ($349.99) wireless headphones with active noise cancellation, touch controls and — most importantly — Cortana on board.
That’s where the real upside for Microsoft stock lies, the Cortana integration.
The Growing Field of AirPods Competitors
When Apple introduced the AirPods alongside the iPhone X in 2017, the bizarre-looking wireless earbuds were widely mocked. It didn’t take long before traditional earbud manufacturers realized their mistake, though. AirPods were a surprise success and demand went through the roof.
AirPods currently hold 60% of the global market for true wireless earbuds, and in March the company released its second generation version with hands-free Siri.
And it’s Siri that has caught the attention of the big tech competitors like MSFT. These companies realize that Apple is following the Amazon (NASDAQ:AMZN) playbook, sneaking Siri into a popular product category the way AMZN added Alexa to a wireless speaker with the Echo. They’ve seen how that’s played out, with the explosion in smart speaker popularity driving up Alexa’s popularity — despite the fact that Amazon has no horse in the smartphone race.
Since the AirPods were first announced, we’ve seen Pixel Buds (with Google Assistant onboard) from Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google and Galaxy Buds from Samsung with Samsung’s Bixby voice assistant baked in. Amazon is reportedly working on Alexa wireless earbuds, in a move that could extend its reach to the smartphone.
Microsoft releasing Surface Buds would follow that same pattern and the move would offer the same prize that Amazon is shooting for. With Microsoft’s own smartphone ambitions shattered — on both the hardware and Windows front — selling consumers a set of Surface Buds is a way to get Cortana into use on smartphones.
Getting Cortana into more widespread adoption has huge advantages for MSFT. With machine learning, the more a voice assistant is used, the smarter it gets. The more popular it is, the higher the likelihood third-party electronics manufacturers will offer support in their products, such as smart home devices. Cortana uses Microsoft’s Bing search engine by default, and that opens the door for ad and search placement revenue potential (paid Bing search netted MSFT $1.8 billion in 2017) when Surface Bud owners start asking for things like nearby restaurants or movie recommendations.
Surface Buds may sound like a niche product, but they’re MSFT’s play to regain a mobile foothold — with billions of smartphones potentially in play. If the company can convince consumers that Surface Buds are superior to AirPods or Pixel Buds, Cortana adoption has a chance to grow. Added to the revenue hardware from selling the earbuds, that would be good news for Microsoft stock.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
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