Apple set to get Beats in $3.2bn deal
Fri 9 May 2014
A big story covered widely in the media although not yet official that the computing and smartphone giant is buying Beats, the seven year old headphone and download company of rap performer and producer Dr Dre (Andre Young).
It would be Apple’s biggest acquisition to date but is only a fraction of the funds available to them. So the issues debated by the media are why, and why not more of them?
Should the acquisition go through, it would be ironic in a way. Dre and Iovine came up with the idea for Beats by lamenting the decline in sound quality ushered in by Apple’s own iPod and the MP3 era.
“For convenience and speed, everyone sacrificed sound,” Iovine (Jimmy Iovine, co-founder of Beats) told USA TODAY three years ago. “The emotion of the music is almost unrecognizable to what is recorded in the studio,” said Iovine, who is the chairman of Interscope/Geffen/A&M records.
The deal would come as Apple’s sales are flagging, a problem that stems from a lack of major new products that bring consumers to Apple stores, according to an investor note from Needham analyst Charlie Wolf obtained by Apple Insider. Apple also faces intense competition from Microsoft, Google and smartphone maker Samsung.
Why splurge on Beats, which can cost more than $300? Part of the reason: the cool factor. Despite the hefty price tag, the headphones, a streetwise fashion statement with a signature “B” on the ear, are as popular with teens as they are with celebrities.
The deal could also be Apple’s entrée into the streaming business, where it has recently experimented with limited success. Subscription services such as Spotify and Rhapsody are the biggest growth area in the music industry. Revenue went up by more than 50 percent last year, topping $1 billion for the first time, according to a recent International Federation of the Phonographic Industry report.
Why is Apple buying Beats? We have no clue.
Seriously, we wish we could explain how this is a brilliant move, and it’s a perfect tuck in for Apple, but we’re stumped.
After months of people hammering Apple for doing nothing with its cash, it’s finally ready to make a big acquisition, and it’s baffling.
But why has Apple been unable to internally develop a streaming music service? After all, the company has a multitude of talented software and hardware engineers. Three reasons.
First, Apple was late to the streaming music game, perhaps because its iTunes franchise was built around buying individual music tracks. Simply put, the iTunes business model is not about streaming music.
Second, Apple’s specialty is hardware and software design, not media. The company has run into trouble in its negotiations with big media companies.
Third, Apple CEO Tim Cook is an operational wizard — and a genius at managing Apple’s supply chain and inventory — but he’s not a product visionary like Jobs.
Several times over the past year, Mr Cook has made clear to investors that he is not philosophically opposed to big, bold deal making in the way that his predecessor Steve Jobs was.
Earlier this year, he told the Wall Street Journal that “we have no problem spending 10 figures for the right company”, adding: “The money is also not burning a hole in our pocket.”
Indeed, Richard Lane, analyst at Moody’s, says that Apple may not be able to pull off many more such acquisitions, in spite of its $150bn cash pile.
Almost 90 per cent of Apple’s cash is offshore and it has committed the vast majority of its domestic cash and likely future cash flows to more than $60bn in dividends and share buybacks over the next two years, Mr Lane says.