Why Would Apple Buy Beats?

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beats_wireless_headphones_white.jpgRumors have circulated for the past few days that Apple is in discussions to buy Beats, the headphone and streaming audio company, for $3.2 billion. Assuming this turns out to be true, and not a hoax, like the recent story about earbuds with blood pressure sensors, which the gullible tech (and non-tech) press reported gleefully, the question to ask is: Why?

Beats makes headphones, earphones and speakers (both portable speakers and car stereo systems), and also runs the Beats Music streaming music service. While the Beats Music service could make sense – there have been rumors about Apple launching a full à la carte streaming music service, like Spotify, to replace or complement iTunes Radio – the rest of the company doesn’t.

First, lets look at Beats Music. Beats bought MOG, a streaming company, in 2012 for $10 – $16 million. The Beats Music service was rolled out in January, 2014, and, while it’s garnered good reviews, it’s a new player in a crowded market. There’s no reason for Apple to pay $3.2 billion for a service like that. (According to Digital Music News, Beats Music has only 111,000 subscribers.)

As for the headphones, Beats’ products are very popular, but they’re generally considered to be all style with little substance. The sound of Beats headphones may be appropriate for certain types of music, but pretty much all objective reviews of their sound quality are negative. (This forum thread on Head-Fi gives a good idea what people who care about sound quality think of them.)

Beats Audio is a thing – a process? – that Beats says provides “sound as the artist intended,” but we’ve heard that a lot. It seems that it’s nothing more than some equalization and different wiring, but the company doesn’t seem forthcoming; nothing on their website explains what’s so special about their products. Beats Audio is available on some mobile phones and PCs, but it doesn’t seem like something Apple would want to add to its products.

There’s a core disconnect between Apple and Beats. Apple makes products that are more expensive than others, but that are, in most cases, objectively better; Beats makes headphones that are more expensive than others, but that seem to be fluff. Their bass-heavy sound and fashion-based marketing approach – it’s true that certain people think these headphones are stylish – don’t fit with the way Apple sells products. Apple is understated; they focus on design and quality; Beats is brash and loud. (I’ve only listened to Beats headphones for a few minutes in stores; they are not at all what I look for in headphones.)

The history of Beats is interesting. Mobile phone maker HTC bought 50.1% of Beats in August, 2011, presumably to try and make their phones seem hip with younger users. Less than a year later, HTC dumped half of its stake, and a year later sold back the rest, making a small profit on the deal. The private equity firm The Carlyle Group – that had investments from the bin Laden family, and the Bush family – invested $500 million in Beats, in September, 2013, giving the company a value of around $1 billion. Could the company suddenly be worth three times that amount, just months later?

This all strikes me as odd. While we may be witnessing a sharp change in direction from Apple, Beats simply doesn’t seem to fit with Apple’s image. While it could give Apple more creed with younger users, I doubt the company really needs that to sell iPhones. If it’s about expanding the iTunes Store, and adding streaming music, that cred only touches certain users; the iTunes Store is more than hip-hop, rock and loud pop. And, again, the streaming service is certainly not worth what Apple is rumored to be paying.

It will be interesting to see if this is true.




9 replies
  1. Chip says:

    I think it’s a combination of things. The hardware business is doing north of $1 billion in sales a year, so this is not a dangerous purchase for Apple, even if the purchase price were expensive for them. Hardware business is very successful

    Even more, it’s a successful *brand* where two-thirds of sales go to Android users, and where it’s popular amongst teens around the world.

    Third, it’s something of an acquihire, with music-focused execs (Jimmy Iovine and the management team) who know the business and are deep with contacts who can smooth the transition for Apple’s licensing of streaming music. Consider that right now Eddy Cue not only is responsible for the content of the iTunes Store, as well as running it and the App Store and iBookstore, he’s also responsible for Siri, Maps, iAd and iCloud. Apple *needs* seasoned execs to relieve Cue’s burden.

    Fourth, the streaming service. It’s small, it’s new, but it’s actually superior to other ones in its ability to cull and edit (I hate the word “curate”) and present an intelligent DJ-powered experience without the DJ breaking in. And ‘the word’ allows for significant – and fun – customization. It’s features are distinctive and offer a superior streaming experience, and Apple can take advantage of it immediately (or after negotiating licensing deals).

    Finally, I doubt that we’re looking at $3.2 billion out of the gate. Much more likely that it’s something like $1.5-$2 billion plus additional payments based on retaining employees plus meeting internal benchmarks.

    Beats the brand will probably live on. iTunes Music may get its own iOS app and be renamed with streaming as Beats. Apple may even continue to use the services of Beats’ outside design shop Ammunition so as to maintain a fresh eye on youth-oriented design (and Jonny Ive can focus more on core products). Speculation, yes.

    But it boils down to Beats having a number of possible benefits to Apple at relatively low risk. If you had a couple of billion dollars you could throw at this – or leave it in the bank accumulating at a couple of percent interest – Beats makes a lot of sense

    Reply
    • Kirk McElhearn says:

      Those are all valid points. However, getting the people wouldn’t cost that much; and Apple does not have any sub-brands (except for FileMaker Pro). So unless it’s a 180-degree change of direction for the company, I just don’t see them buying a brand and continuing to sell that brand. Changing the headphones to the Apple name wouldn’t make sense, because of the brand goodwill that Beats has among certain demographics.

      Reply
      • Chip says:

        I agree – that’s why I said that Beats the brand would probably live on. Indeed, keeping the branding would make it easier to sell the hardware business if needed.

        But I disagree about getting the right people – there’s no one quite like Iovine, who has close contacts at all the major labels and is widely successful and persuasive. When you consider that iTunes by itself would be #130 on the Fortune 500, it’s clear that Apple needs a COO for that division who isn’t also responsible for tangential (yet important) things like iCloud and the App Store. Luke Wood and Matt Costello and the management team at Beats could not easily have been replicated piecemeal. These guys are music-oriented dealmakers that Apple could really use. Iovine and Wood are able to make and seal deals that current Apple management cannot – indeed, Jobs used to powwow with Iovine on a regular basis while meeting with music industry heads. With Jobs gone, Iovine and his crew are uniquely capable and respected as artist- and business-friendly.

        And surely Apple liked what it saw in the Beats streaming experience. Apple’s music sales numbers are beginning to tank (down 5.7% in the last year, and down 12.5% in the last quarter) and it needs to get into streaming *now* and Beats offers a distinctive and superior experience that makes Apple instantly competitive.

        Reply
  2. Chucky says:

    “The sound of Beats headphones may be appropriate for certain types of music, but pretty much all objective reviews of their sound quality are negative.”

    This is really unfair. Beats headphones have electrolytes!

    Reply
  3. James says:

    Why the aside about the Bush and bin Laden families investments? I don’t understand the relevance.

    Reply
    • Kirk McElhearn says:

      The company is fairly well known for its investments from such people, and its heavy investments in defense contractors. It’s been closely linked to high-ranking US government officials for a while.

      Reply
  4. Stef says:

    Read something on affordable luxuries generally. Got me wondering Is Cook recommissioning Apple from “computers for the rest of us” to “the best in tech for the rest of us”?

    The first mission statement has held up for thirty years. Altho’ Apple dropped the word computers from its name years ago, its mainstay products are still computers … traditional computers, with storage, processors, and screens.

    New tech might not have storage, processors, or screens. Just sensors (nearables) connected to servers (farables) through hubs (hubbles), that is, phones and tablets.

    The corollary would be “the best in tech for the rest of us … us including China.” Sounds like China is a big part of Apple-think these days.

    Not cheap tech. It’s about great tech. The best tech … for the rest. The purveyors of cheap tech did not and never would create the iPhone, the Mac, or the iPad. Cheap is a good thing too. But cheap doesn’t get you great, whereas as great engenders cheap.

    Ah. Here’s what’s in my gut: As we watch the world shift toward inequality and as the wealthy run the show more and more, great, simple, useful, and affordable tech is kinda subversive, yes? The iPhone proves that great does good all around.

    Reply
    • Kirk McElhearn says:

      It’s possible, but that’s another reason why I’m skeptical about Beats: the headphones aren’t the best; they’re overpriced fashion items.

      Reply
      • Chip says:

        As opposed to the “audiophile” quality (Steve Jobs’s own words: https://www.youtube.com/watch?v=R3MvnKOb5Ko) iPod HiFi? ;)

        Or its current $79 in-ear headphones?

        In other words, overpriced, non-top-of-the-line products are not foreign to Apple. So Beats aren’t the highest quality hardware – so what, it’s the #1 brand, it’s profitable and products can be improved. It’s a fashion item – the whole Nano line has been for years (as is the yearly color refresh of iPhones).

        Besides, it’s not simply the hardware side of the business – it’s also the deep bench of music execs as well as the streaming service.

        They’ve never bought and kept an extant brand before – so what, companies do it all the time. They’re “doing a 180″ on adding sub-brands – no, they’re not stuck on refusing to do what other consumer products companies do *regularly*.

        Indeed, it’s refreshing that Apple is not insularly depending on a NIH mindset, and they’ve buying execs/hardware/software *already* profitable … for the mere cost of one month’s profits. It’s a sound deal, fairly unspectacular to me, and it is both complementary to Apple’s products as well as offering to fill in holes in streaming and management.

        Reply

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