On its own, AirPods could be a $175 billion enterprise

If a private company was performing the way Apple's AirPods are in terms of rapid sales growth in units and revenues with strong margins, it could be valued at $175 billion next year, making it the 32nd largest company in the U.S.

Midas Kwant tweeted out his estimate, figuring that a year after launching in 2016 Apple sold 16 million AirPods, followed by 35 million last year. Kwant believes that there are an estimated 50 million to 60 million AirPods that will be sold in 2019.

In 2020, Kwant predicts Apple will sell 100 million units. At an average selling price of around $200, that's $20 billion in revenues. With a 35% net profit, that's $7 billion in annual profits. With a fairly conservative 25 P/E multiple, Kwant says that would be a $175 billion valuation.

Of course, an independent company wouldn't have Apple's instant brand appeal or global retail operations, or access to the free advertising that its installed base of users generates. It would be a tall order for any entrepreneur to create a hit pair of new headphones pairing style and high technology -- and then be able to sell it in the quantities and price Apple is.

It would also be virtually impossible for a smaller company to develop custom silicon custom-designed for a product the way Apple has with its H1 chip. The speculative investment in building custom silicon would be impossible to fund on the mere hope that customers would continue to buy twice as many units in 2020.

Apple, Beats, Spotify

That makes it impressive that Apple's executive team has added such a significant new expansion of operations on top of its existing business. The company has long sold basic headphones, but only since its acquisition of Beats Electronics has it invested in high-quality sound and innovative new audio technology that users can buy in premium devices ranging from AirPods to Beats to HomePod, along with much higher quality speakers in its iPad, iPhone, and MacBook models.

The $3 billion acquisition of Beats also gave Apple a streaming music business to offer in the model of Spotify. Without that, Apple was sitting on the stagnating music business of iTunes media downloads, which were falling out of favor with buyers. By offering a leading streaming service with Apple Music, the company retains an installed base of music consumers that Apple can market its audio hardware to.

Apple Music is often contrasted with Spotify as if the two companies are locked in a zero-sum game of subscribers. However, as with other subscription services, the more competition in and awareness of a service there is, the larger that business can become.

Additionally, the total number of paid subscribers to a service can be a poor measurement of success. For example, there's some controversy on how accurate or comparable subscriber counts are. For example, Spotify counts every potential member of a family subscription. So if a couple buys a family plan, those two people are five "Spotify users." A lot of families do have kids, but the average affluent family doesn't have three.

Also, the value of lots of subscribers is a liability when you are only losing money. That's particularly the case in the terrible business of music streaming, where customers pay very little and streaming companies seek to pay musicians as little as possible just to earn something for themselves. Spotify has yet to make any significant money from streaming, despite rapid growth in its revenues and subscribers. Yet, the company is still valued at $25 billion.

As it did for years with iTunes, Apple can afford to run Apple Music at break-even, investing in the service as a way to protect and drive sales of its hardware.

Apple's ability to acquire Beats for $3 billion and develop it into a broad and deep series of business opportunities that include Beat's original headphones, Apple's own new HomePod, Apple Music, and the new breakout hit of AirPods is impressive. There weren't many predicting that when Apple announced its plans in 2014.