In late 2016, Apple (NASDAQ: AAPL) announced the iPhone 7 and iPhone 7 Plus smartphones -- the company's first without a dedicated headphone jack. At the same time, the company announced AirPods, which represented Apple's take on wireless earbuds.
Despite some of the hand-wringing around the removal of the headphone jack in the iPhone 7-series smartphones, those devices drove a successful product cycle for Apple, with iPhone unit shipments rising 2% and iPhone revenue growing 3% (suggesting a richer product mix).
The AirPods, however, weren't just successful -- they were arguably game changing. AirPods sales have been growing at an incredible rate and have been instrumental in driving the rapid growth of the company's wearables, home, and accessories segment. (Last quarter, it grew 33% year over year to more than $7.3 billion.)
Of course, the success of Apple's AirPods inevitably spawned a horde of competing devices from everyone, including audio specialists and other device makers. And according to one report, Apple, though it still enjoys a dominant share of the market, lost some share last quarter. Here's why investors shouldn't fret, though.
Dissecting the data
According to new data from Counterpoint Research, Apple captured 60% of the wireless earbud market in the fourth quarter of 2018 with its AirPods, meaning that it not only dramatically outsold any other individual competitor but outsold the competition in aggregate.
With that being said, Counterpoint Research did note that Apple's share "was dented as customers waited for the new generation of AirPods" and that "[the] strong performance of second-tier brands, such as JLab and QCY, also had a negative impact on Apple's market share." (Counterpoint Research did not make freely available the data for the prior quarter or the precise market share numbers of the non-Apple competitors.)
The analysts also predict that "[as] more companies enter the market and roll out new devices equipped with advanced features at a reasonable price, consumers will get a wider choice in the future," leading Counterpoint Research to conclude that it "[expects] the competition to intensify going ahead."
Is this bad for Apple?
The phenomenon that we're seeing play out for Apple in wireless earbuds is precisely what we're seeing in the smartwatch market. As you might have heard, Apple's share in the smartwatch market declined drastically in 2018 relative to 2017 levels. At the same time, Apple keeps reporting strong growth for its wearables, home, and accessories segment as Apple Watch continues to post impressive unit and revenue growth.
What's happening with Apple Watch is that the overall market is growing dramatically, and Apple is continuing to grow rapidly within that growing market. The exact same thing seems to be happening in wireless earbuds. Apple is losing market share because even though it's enjoying robust sales growth in that market, the market itself continues to balloon.
It's also worth thinking of it from another perspective: There's already a very large market for earbuds in general, but a large portion of that market has consisted of wired earbuds. Consumer preferences are likely to continue to shift toward wireless earbuds, which will naturally encourage the leaders in the wired earbud market to produce wireless products.
So as those wired earbud makers start offering wireless products, the wireless market naturally expands. And since those wired players are already established, they're bound to bring many of their customers along with them into the wireless world, driving down Apple's market share.
But this doesn't reflect poorly on Apple's execution with respect to its AirPods products (and, frankly, I think the company stands to enjoy a share boost as it ramps up its newly released second-generation AirPods). If anything, it shows that the rest of the industry is working feverishly to catch up with Apple, which had the foresight to build a product line of AirPods before anybody else did.
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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: short January 2020 $155 calls on Apple and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.