One of the bigger success stories for Apple (NASDAQ:AAPL) in recent years has been the launch of its wireless AirPods in late 2016. AirPods opened up what appears to be an incremental multibillion-dollar revenue stream. And, given how seamlessly AirPods work across the company’s product portfolio, it can also be argued that AirPods make Apple’s product ecosystem stickier. 

Even though Apple hasn’t updated its AirPods product line since the initial launch, sales continue to be strong, with Apple CEO Tim Cook attributing the “almost 50% growth” in the company’s wearables product revenue “to strong sales of Apple Watch and AirPods.”

Image source: Apple.

Now, a new report from Economic Daily News, as reported by MacRumors, says Apple is preparing to launch upgraded AirPods “that feature a new surface coating, wireless charging, and a black color option.”

Here’s why Apple investors should care.

Upgrades and new customers

The current AirPods seem to be selling well, but since Apple has been selling the same models since the initial launch, there’s nothing for owners to upgrade to. If they go for an updated version of the AirPods, it could lead to an acceleration in revenue growth. That’s nothing but upside for Apple. 

Updated AirPods could also attract customers who might have been on the fence about buying the original models. The changes in store don’t appear to be too dramatic, although Apple does seem to have a long-term pipeline of AirPods innovations coming that might fit that description.

Potential pricing strategies

It’s far from guaranteed that Apple will stop selling the original AirPods once the second-generation version arrives. In fact, Apple has long discounted previous-generation products when newer products have arrived, in a bid to broaden the accessibility of a particular product category. 

There are two ways I can see Apple handling the pricing of the new AirPods and the current ones, if both were on the market at the same time. The first would be to simply offer the new model at a higher price, while keeping the price of the current-generation AirPods unchanged. The second would be to launch the new AirPods at the same price as the current model and then discount the current model. 

There are merits to each direction. The former would allow Apple to drive up revenue and profit through average selling price expansion. The latter would put downward pressure on average selling prices and potentially gross margin percentage but, in exchange, Apple might be able to accelerate unit shipment growth. 

We can be sure that Apple will do significant market research and financial modeling to figure out which approach is better. 

Investor takeaway

Apple is a product company, and it’s a good thing when a product company introduces better versions of what it was previously selling. Today, Apple’s wearables business doesn’t represent a huge percentage of its overall revenue — in its last fiscal year, only 6.6% of revenue came from the “other products” segment, which includes (among other things) Apple’s wearables revenue. But it is a rapidly growing segment that stands to become more important over time. 

Therefore, it’s critical that Apple continues to innovate in the wearables market, and that means continuing to push hard to advance hit products like its AirPods.

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: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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