Apple is said to turn up audio ambition with new headphones

[SAN FRANCISCO] Apple's AirPods earphones have been a surprise hit. Now, the company is planning a push into the high end of the market.

The Cupertino, California-based technology giant is working on noise-canceling, over-ear headphones that rival headsets from market leaders like Bose and even the company's own Beats by Dre brand, according to people familiar with the product's development. The company plans to launch the headphones as early as the end of this year, but has faced development challenges that might push back the release, the people said.

Work on the Apple headset has been on-and-off over the past year. The company encountered similar problems with the HomePod during its development, including multiple redesigns, according to the people. It's possible Apple will redesign the headphones again before launch, or scrap the project altogether, they warned, asking not to be identified discussing private development work.

An Apple spokesman declined to comment.

The latest plans call for headphones targeting the high-end of the market, replicating Apple's approach with the US$349 HomePod speaker, released earlier this year. In addition to noise-cancelling capabilities, Apple plans to include similar wireless pairing functionality to the AirPods, according to the people familiar with the product's development.

This would be the latest in a long line of music-focused products and services from Apple. The iPod and the iTunes Store revolutionised how music was consumed - as digital downloads rather than physical CDs. The company's largest ever acquisition was the US$3 billion purchase of Beats in 2014 - a deal that got Apple into high-end headphones and music streaming.

The HomePod's sound won glowing reviews this year and Apple is already preparing other audio accessories like upgrades to AirPods that add water-resistance and a new wireless chip that enables "Hey Siri" voice activation.

So far, the AirPods have been a key driver of newfound success for Apple's Other Products segment. The category, which includes AirPods, Beats headphones, the Apple Watch, Apple TV and iPad accessories, generated more than US$5 billion in revenue for the first time in the company's fiscal first quarter, representing 36 per cent year-over-year growth. Within that category, wearable product sales, which include the Watch, AirPods, and Beats headphones, surged 70 per cent last year, Apple said on a recent earnings call.

Inventec, the Apple manufacturing partner that builds HomePod speakers and AirPods earphones, may miss out because Apple is likely to work with a different supplier, the people said. Primax Electronics and Shin Zu Shing, current Apple suppliers, are likely to partner with Apple on the new headphones, KGI Securities analyst Ming Chi Kuo wrote.

When the company acquired Beats Music and Beats Electronics in the 2014 deal, Apple executives said the successful Beats by Dre headphones business was one of the drivers.

Apple-branded headphones would seemingly cannibalise Beats headphones, although Beats also sells lower-priced wireless headphones that probably won't directly compete with the new product. Athlete-oriented wireless Beats earphones still seem to be selling well despite the popularity of AirPods.

Apple previously discarded the Beats Music streaming name when it launched Apple Music in 2015. However, given the strength of the Beats headphone name, the company will likely keep that brand while developing a different new one for the new headphones.

Beats, Bose, Sennheiser, Sony and Skullcandy are the leading players in a headphone market that will generate US$20 billion in annual revenue by 2023, nearly doubling this year's projected sales, according to Research and Markets. Researcher NPD Group said last year that sales of AirPods and Beats headphones gave Apple 27 per cent of the wireless headphone market and almost half the dollars spent on the category.

Pricing will be key for the new Apple headphones. The HomePod is priced more than US$100 higher than its main voice-activated competition from Sonos, and US$200 more than an Amazon Echo, but US$50 less than a competing Google Home Max. Beats and Bose both charge US$350 for their high-end wireless headphones, while Sennheiser prices range from US$100 all the way to US$500.

Apple's cost for each US$349 HomePod is US$216, resulting in thinner profit margins than typical Apple hardware products, according to TechInsights. AirPods have been tricky to assemble and use unusual design tricks, likely making them expensive to produce. The Apple headphones will likely use similar audio technology, driving up costs.

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