Apple is in talks to acquire Beats Electronics for $3.2bn (£1.9bn), according to the FT.
Beats, founded by hip-hop icon Dr. Dre and music producer Jimmy Iovine in 2008, made its name selling high-end headphones with celebrity endorsements. But for anyone left scratching their head over why Apple would want the rights to some posh headphones, the key to the deal appears to be the Beats Music streaming service it launched in January.
Beats Music – which is based on technology from MOG, which itself was acquired by Beats in 2012 for a reported $10-16m – enables users to stream songs, or download them for a limited time, from a 20m-strong library. The app – available on Android, iOS and Windows Phone – also features recommendations from guest curators and personalisation algorithms which pick songs based on the users listening habits.
The Dre-founded company also has an air of cool around it that many commentators believe Apple has started to lose, with no major device launches or innovations from the company in the past few years, and even the companys flagship product, the iPhone, appears to have lost its lustre somewhat.
The bigger picture
Compared to other major tech players like Google and Facebook, Apple has traditionally avoided this kind of high-profile high-cost acquisition. Apples largest acquisition to date is NeXT, a computer company founded by Steve Jobs when he was forced out of Apple, which it bought for $404m in 1997 – a figure which would be dwarfed by the Beats deal if it goes ahead.
Back in 2011, smartphone manufacturer HTC bought a 50.1 percent of HTC for $309m, which enabled it to build Beats Audio speakers into its handsets, before it sold back 25 per cent in 2012.
In September 2013, Beats, founded by music producer Jimmy Iovine and hip-hop artist Dr Dre, took a $500m investment from Carlyle that valued the company at $1bn, so if the $3.2bn figure is accurate, Apple is paying a hefty premium for the business.
With 2014 being the year of crazy tech acquisitions, Apple obviously doesnt want to miss out. When Google buys Titan Aerospace or Nest, and Facebook acquires WhatsApp or Oculus VR, they are making bets on the future. Whether its drones, the internet of things, mobile messaging or virtual reality, each of these domains are clearly part of the future in some way and the value of buying early is not to be disrupted later. It makes at least some sense.
The music business is anything but future technology. Music is no longer the key battleground, Apple won out with iTunes and has dominated the industry ever since. Music is no longer a lock-in service as music streaming services are platform-agnostic meaning Beats would provide almost zero ecosystem value for Apple. This feels like more of a bet on the past, and at $3.2 billion (the largest ever acquisition for Apple), a big bet. So what is this all about?
Frost & Sullivan comments
“The pricing model for music is changing,” says Frost & Sullivan ICT consultant Lawrence Lundy. “iTunes unbundled the album and its à la carte model of selling music won out. There are signs that the subscription model is now overtaking à la carte. Music subscription revenue increased 50 per cent to $1.1bn in 2013, whilst downloads declined by two per cent in the same period, the first time since the iTunes store launched.
“But Beats Music only had 111,000 subscribers as of March 2014, and the paid-for figure is likely to be considerably lower if you strip out the 90-day free promotional trial offered by AT&T. Spotify has over 6m paying users and Deezer has over 4m. The key differentiator for Beat Music is its curated experience. Quality content discovery is still too complicated for most users and curation solves the what to listen to problem.
“With 64 per cent market share of the premium headphone market in North America, Beats were on track to record revenues of $1.4bn in 2013. Beyond market share, the most valuable part of Beats is the brand. Much like Apple products, serious professionals bemoan the poor quality specs and dismiss Beats as poor quality. That misses the point. Headphones are now for more than just listening to music; they are a piece of clothing, an item that can reflect personality. That cool factor translates into revenues, as customers flock to pay a huge premium. Cool, premium and high margins – the business sounds a lot like Apple.”
“But the proposed purchase is a music subscription play first and foremost. Apple needs to move to a subscription model and must feel that the iTunes organisation is not capable of changing the business model. The curated product and ease of discovery fits with the Apple ethos, and it has plenty of runway for growth especially if bundled with a iPhone contract in the future. Second, they get a profitable $1.4bn business, a strong brand, and a team that has intimate knowledge of designing products customers want to wear. All of which seems like an awful lot for a $3.2bn price tag.”