Saturday, May 17, 2014

Why Would Apple Want To Buy Beats?

James Comyn, Head of Digital Marketing at onefinestay, on Quora,
Beats was supposedly dreamt up when Jimmy Iovine dissuaded Dr. Dre from following his lawyers advice to “sell sneakers” with the immortal line – “F*** sneakers, let’s sell speakers”.(1) This rhymed response morphed into a headphone business with Beats by Dr. Dre Studio headphones debuting in 2008. Monster Cable manufactured the products under exclusive contract, and it was marketed by Dre himself as headphones that would allow people to “hear what the artists hear, and listen to the way that they should: they way I do.” (2)
The company was simply a branding project to create value from Dre’s existing audience and marketed as such. The company has not been market leading innovation-wise but followed well trodden paths into noise-cancelling and portable bluetooth speakers. Both with varying degrees of success.(3)(4)
The brand was big enough that in 2011, HTC bought a 50.1% stake for $309m (valuing it at ~ $620m) (5) allowing HTC to improve its international image (and create differentiation in the handset market). This spurred Beats onto licencing the brand to other industries (e.g. HP – I am actually typing this on my work laptop which has a red b marked on it. I have not felt the sound quality to be any different as a result. Certainly no different to that produced by my MacBook)
With the purchase of MOG in 2012, Beats bought itself into another market with well-established players – online streaming. This was supposed to drive the company towards its goal of an end-to-end experience (Dre’s mouth to Dre’s Record to Dre’s Streaming platform to Dre’s headphones), but again, smacks of leveraging the Hip Hop producers image (and now global Beats brand).
HTC sold back half of its shares in 2012 for $150m (6) (what seems like a small loss on the investment) and then again divested the remaining amount in late 2013 for $265m.
So late 2013, Beats was approx $1.05bn.
Why does Apple AAPL +1.46% want this company? It has no track record of innovation, significant patents, or ip. Its core products are effectively handset peripherals. The only real value to Apple would be if the acquisition of Beats gives them access to a market that they can’t easily break into.
Herein lies the rub.
Beats is cool. Association with Dre brings a certain swagger, and they have built a solid business off the back of celebrity endorsements.
Who remembers iTunes? Yes I know it still exists and holds the largest number of credit cards on file of any company in the world. But who uses it? Streaming has become the standard way for people to access music. If you did some research and looked at the proliferation of streaming services vs purchasing there would be significant divergence in the younger demographics.
Apple launched iTunes Match and I have access to it – do I use it? No I use Spotify. Do my younger cousins use it? – no they use Spotify. (Or Beats Music…)
So at a time where the music credentials of Apple have taken a hit (even Samsung are smashing them), Tim Cook probably thinks this gives them a well needed shot in the arm. Oh and he gets Iovine as a “Special Advisor.”
I call bull. Especially at a reported 3x their late 2013 valuation … Yes, Apple needs to address streaming, and yes, they have a ton of cash, but is Beats the answer? Time will tell.
Iovine and Dre are the winners here. All the way to the bank. I think Forbes puts top end estimates at $800m.
Many people are commentating that Iovine will bring the music industry with him, but I think they are clutching at straws to make this a “good” deal for Apple.


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