HomePod and Apple’s fork in the road

The release of the HomePod speaker marks Apple’s belated entry into the world of AI voice assistant hardware. The HomePod is quintessentially Apple in every way: its appearance is aesthetically pleasing, its sound quality blows competitors out of the water, it is expensive and presumably earns high margins for Apple, and it works exclusively within Apple’s ecosystem. This last point has industry observers and tech pundits scratching their heads – what, exactly, is Apple’s strategy with the HomePod?

This very important question may seem trivial at first. Why, the HomePod is a Siri-enabled smart home assistant! Apple is finally coming to claim its share of the connected home pie! However, this is not quite right. The HomePod is a speaker of unquestionable quality, but to call it smart is a stretch. The device is powered by Siri, which is typically regarded as the “dumbest” of the three major AI assistants (the others being Alexa and Google Assistant). Whereas the HomePod costs $500 and can perform a handful of voice-controlled functions with HomeKit-enabled accessories, Amazon’s Alexa has over 30,000 skills, is compatible with over 1,200 connected-home brands, and the Amazon Echo costs $150.

Alternatively, it could be argued that the HomePod really is just a speaker rather than a smart home hub. The modern Apple as we know it was born out of Steve Jobs’ love of music, and music is deeply ingrained in Apple’s DNA. It is not surprising that Apple should release a “smart” speaker with the best audio quality. What is surprising is that Apple appears to be taking what is a short-sighted approach to its consumer AI and connected-home strategy.

The HomePod is only compatible with iOS, and voice control is only compatible with Apple Music and HomeKit accessories. This is classic Apple – keep your customers tightly locked in a walled garden, even if it means limiting the target market to a subset of the 36 million Apple Music subscribers. If you prefer Spotify, too bad – it’s time to unsubscribe and sign up with Apple Music instead. If you prefer an actually smart AI voice assistant that is compatible with all your existing connected-home devices, the Amazon Echo is your got-to solution.

While it is easy to understand Apple’s near-term motivations – i.e. sell premium hardware differentiated by software to encourage more Apple Music subscribers (and potentially other Apple services down the track), I find it difficult to envisage how this is the best long-term strategy. There are three things to consider. Firstly, it is very likely that voice will be a key interface with the next generation of computing form factor (whatever it may be). A voice-enabled AI operating system would be a seismic shift from what we have today. Secondly, Apple and Siri are already lagging in the AI race and the gap appears to be widening. Apple dominated the smartphone era with its premium hardware differentiated by software, but the next computing form factor may have greater emphasis on software (i.e. the AI capabilities) and Apple may not have the software that enables it to sell hardware at a premium.

Finally, as connected homes and the Internet of Things expand, there are increasingly two distinct computing environments – one for personal mobility (smartphones, laptops, even cars) and one for the home (lights, audio, thermostats, TVs, smart appliances etc). The smoother the interface between the two, the easier one’s life will be. If Apple maintains its closed ecosystem philosophy, there is a risk that Apple users find these two environments less compatible than they ought to be. While the most ardent Apple fans may be willing to deck out their entire homes with Apple-compatible devices (possibly at great expense) and live with using Siri (possibly to great frustration), could Apple’s pursuit of lock-in ultimately turn the average user off the brand?

It is early days, but I believe Apple’s strategy around the HomePod will be telling of its long-term philosophy towards the changing consumer technology landscape. So far, stacking more bricks atop the walled garden has proven to be a successful and highly lucrative strategy, but that is not to say walls can keep barbarians out (or citizens in) forever. Apple is known to play its cards close to its chest, so anything written on the subject is speculation at best. However, as long-term investors, it is important for us to ask and consider these difficult philosophical questions, regardless of how strong a business might be today.

Montaka owns shares in Apple (NASDAQ:AAPL)

DH5_2155Daniel Wu is a Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.

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