Fortune Article

Apple’s AirPods wireless earbuds may be small in size, but they’re a huge business.

This year, the company will sell 50 million AirPods, at $159 for a pair, according to Wedbush analyst Dan Ives. That would translate into nearly $8 billion in revenue.

Apple released its first AirPods in 2016 at a time when the iPhone was still soaring. In the past year, however, iPhone sales have started to trail off and Apple has sought other sources of revenue to offset those declines.

AirPods, a ubiquitous accessory for people walking to work and strolling to class, are partly filling that role. The question is whether AirPods, combined with another hot business, services, which includes Apple Music and iCloud, will be enough.

What is clear is that Apple is crushing the competition with AirPods. Last year, it accounted for 60% of the global wireless earbuds market, easily surpassing Jabra’s Elite Active 65t, which had a 10% share, according to Counterpoint Research.

In an interview with Fortune, Creative Strategies analyst Tim Bajarin said that the AirPods’ momentum can be directly attributed to its design and $159 price, which by Apple standards, at least, counts as affordable.

“They were priced very reasonably making them attractive to all of Apple’s customers,” Bajarin said.

During a quarterly earnings call last week with investors, Apple CEO Tim Cook merely said that AirPods were in “phenomenal demand” without providing any details. He would only say that the company’s wearables division, which includes AirPods and Apple Watch, accounts for more revenue than 300 of all Fortune 500 companies.

A bigger story

If the $8 billion figure for AirPods revenue is accurate, that business alone would rank No. 384 in the Fortune 500, just ahead of Foot Locker, Motorola, and chipmaker AMD.

Still, it’s difficult for any emerging Apple product to make much impact on the company’s $265 billion in overall annual sales. As big as the contribution is from AirPods, it only accounts for about 3% of that amount.

But it’s not just revenue from AirPods that is substantial. Ives told Fortune that the earbuds have especially high gross profits.

He estimates that Apple makes a gross profit—the difference between a product’s sale price and the cost of producing it—of $90 to $100 on every AirPods sold. That implies a manufacturing cost of $59 to $69 per pair.

On that basis, AirPods would account for a gross profit of $5 billion—a sizable amount on its own. But compared to Apple’s overall gross profit last year of $101.8 billion, the contribution from AirPods is modest.

But again, context matters. Apple’s gross profit from AirPods exceeds what many major technology companies generate in revenue annually, including Twitter and computer security company Symantec.

An even bigger future

As for the future, Ives says Apple’s AirPods sales will grow 50% annually. Its share of the company’s overall revenue will increase from 2.5% this year to 3% in 2020 and 3.5% in 2021, Ives added.

More importantly, Loup Ventures analyst Gene Munster said that AirPods have quickly become an important source of growth for Apple’s wearables division. And because that growth is so strong, declining iPhone sales aren’t so worrisome, he said.

Creative Strategies’ Bajarin said that revenue gains from AirPods is due in no small part to a huge numbers of iPhone users who can quickly pair the earbuds with their phones for listening to music and making calls. There’s a clear demand for “high-quality earbuds that work seamlessly with all Apple hardware,” he said.

But it was perhaps Wedbush’s Dan Ives who best summed up the AirPods story so far.

“AirPods have been a massive success story.”