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Increased Bundling of Premium Headphones By Mobile Handset Vendors Could Impact Audio Retailers' Bottom Line
This year at IFA 2017, LG announced that it will bundle its flagship V30 smartphone with B&O Play headphones. LG’s smartphone audio is tuned by B&O and the headphones are made specifically to produce optimum playback with the V30 handset. This follows Samsung bundling AKG headphones (which it now owns via its Harman acquisition) exclusively with its S8 model. These headphones are claimed to be worth $100, although this model is not available to purchase at retail. There are also rumours Apple will push AirPods more aggressively with the new iPhone X, perhaps via the mobile channel (a ‘Soft’ bundle as opposed to in the box ‘hard’ bundle).
A trend is emerging of handset vendors bundling premium headphones ‘in the box’ as a point of differentiation, in what is an increasingly homogeneous handset market. Headphones have become an important accessory – from both a wearable fashion and technology perspective. Earphones have become a visible point of differentiation, as phone designs have become standardised and are in pockets and bags as opposed to a visible, wearable accessory. With this in mind, the incentive for mobile vendors is pretty clear, especially when one considers that consumers are spending $13billion at retail on headphones, more than ten times what they were a decade ago.
Since Apple’s iconic white EarPods were included with the iPod and later with iPhones, they have become the world’s top selling SKU in the retail aftermarket for headphones (so additional to those bundled with phones). They accounted for 6.4% of unit sales in H1 2017, generating revenues of $533 million off volumes of 22 million units. A further 214 million EarPods were bundled with iPhones over the same period. Some might think that bundling headphones with a device which is replaced every two years might impact the aftermarket negatively…in fact, due to the shorter life of bundled headphones (approximately one year) – the net effect on the aftermarket has actually been positive. People use them and want to replace them when they break or are misplaced.
A key value driver of headphones in the aftermarket stems from consumers’ desires to own a ‘better’ pair. If handset vendors start bundling premium headphones, this might satisfy the need for that ‘better’ pair and consequently, replacements for bundled headphones could potentially lengthen beyond one year, negatively impacting the aftermarket. The handset market is worth over $330 billion in trade value and the cost to bundle headphones - even premium models - is negligible. Retail margin on premium headphones is more than 50%, whilst the bill of materials (BOM) cost is relatively small.
However, the headphones aftermarket is much smaller ($9 billion at trade level this year), so there is the real prospect that bundling strategies in the mobile handset market (which shifts 1 billion pairs of headphones per year) could adversely affect the retail aftermarket, which shifts barely a third of this total.
Bundling of premium headphones with mobiles could be hugely beneficial to headphone vendors savvy enough to partner with smartphone companies for ‘in the box’ bundling, as it would drive up volumes significantly. Flagship phone models from LG and Samsung ship on average 3-5 million and 55-60 million units per year respectively. Consumers would also get a good deal from this strategy. However, those retailers who deal in high-end headphones but are not involved in selling smartphones, will need to keep an eye out for this trend, as it could deprive them of a lucrative business.
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