U.S. Markets closed

Microsoft Latest Tech Giant to Build AirPods Rival

Evan Niu, CFA, The Motley Fool

Ever since Apple (NASDAQ: AAPL) took the wireless earbud market by storm with AirPods in 2016, competing tech giants have been chasing the Mac maker with products of their own that hope to replicate AirPods' popularity. Apple released second-generation models last month with incremental improvements that will help it fend off rivals a little bit longer. Alphabet subsidiary Google released Pixel Buds in 2017, Samsung launched Galaxy Buds just last month, and Amazon.com reportedly has Alexa-enabled earbuds slated to debut later this year.

Microsoft (NASDAQ: MSFT) isn't going to sit idly by.

Woman wearing AirPods

Image source: Apple.

"Surface Buds" incoming?

Thurrott reports that the software giant is similarly developing wireless earbuds, which are internally codenamed "Morrison." The product will probably be dubbed Surface Buds, although that could change between now and release. Most companies are integrating their respective virtual assistants into their wireless earbuds, which is now a key criteria in qualifying as wearable devices, as far as IDC is concerned, and Microsoft's Cortana is expected to make an appearance.

Microsoft unveiled its Surface Headphones last year, its unexpected foray into the wireless headphone space that feature adjustable active noise cancellation and Cortana integration. At $350, Surface Headphones compete head-to-head with popular headphones like the Bose Quiet Comfort 35. Expanding into in-ear earbuds would be a natural addition to Microsoft's audio accessory portfolio, and it's worth noting that Apple is reportedly working on premium over-ear headphones as well.

Trying to take a bite out of Apple

Apple has never disclosed AirPods unit volumes, but IDC estimated the Mac maker shipped 5.8 million ear-worn wearables (also unfortunately referred to as "hearables") in the fourth quarter, which would include AirPods, as well as certain Beats models.

More recently, Counterpoint Research estimated that Apple grabbed a whopping 60% of the hearables market in the fourth quarter, but sales slowed in the first quarter as consumers waited for the second-generation AirPods. The rest of the market is fairly fragmented, with most players grabbing relatively small slices for themselves, according to Counterpoint's estimates.

Chart showing Hearables market share in the fourth quarter

Image source: Counterpoint Research.

Meanwhile, Microsoft's first-party hardware ambitions have only grown over time, with its line of Surface-branded products resonating among consumers and enterprise users. Surface revenue soared to a new quarterly record of $1.9 billion in the fourth quarter, following a slew of product introductions in October, including the aforementioned Surface Headphones.

Chart showing quarterly Surface revenue

Data source: Microsoft. Chart by author. Calendar quarters shown.

Strong performance of the Surface portfolio has helped Microsoft mitigate softness in its Windows OEM business, where it licenses its flagship operating system to third-party manufacturers. "Results in our Windows OEM business were lower than expected, partially offset by strong Surface results," CFO Amy Hood said in January. Surface is selling well, and additional complementary accessories should help Microsoft build on that momentum.

More From The Motley Fool

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, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of AMZN and Apple. The Motley Fool owns shares of and recommends GOOG, GOOGL, AMZN, Apple, and Microsoft. 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.