Originally published on LinkedIn June 18, 2014
What was Apple really buying with the acquisition of Beats, an aspirational brand, headphone technology, future earnings or acqui-hire? The other logical assumption is, Apple could have been fending off future competition by assuring its global hegemony in the ever evolving digital music space. Besides the established players, there are new entrants like Amazon and Google Music under Google Play, all contending for the number one spot.
Not too long ago, having an iTunes account was the cool thing. However, the ascendancy of music streaming model, popularized by Spotify, SoundCloud and Pandora radio in cars, suggests that consumers may have selected their de facto preference; which is the subscription model of, all you can listen to. Streaming allows your music to follow you everywhere because it’s stored in the cloud not on a device. In 2013 at Apple’s Worldwide Developer Conference (WWDC), Eddy Cue, Apple’s SVP of Internet Software and Services launched iTunes Radio. Since Apple already launched its streaming music service, and can leverage millions of existing iTunes consumers, what is the point or value of buying Beats Music a year later? The answer, perhaps for the cool of it, Beats Music was growing so fast that in the ensuing years, it could have eroded Apple’s brand equity or cool factor in the music space, that is the sort of challenge huge incumbents do not like.
Acqui-hire Motive and Synergy
Perhaps Apple is setting up a super iTunes or iBeats music festival. If so, how does the Beats brand fit into the equation? Given Dr. Dre’s industry clout, talent for music production, distinct sound creation, business acumen and spotting talent e.g., Snoop Dog, Eminem and Kendrick Lamar, we can see how this makes perfect sense. Additionally, given Jimmy Iovine’s uncanny ability to spot talent, develop them and business smarts, the combination of these individuals empowers Apple with the credibility it might need to execute on new business initiatives, especially when it has the coolest music executives in the world. Jimmy Iovine is one of the most powerful music industry executives, he was also an advocate and friend of Steve Jobs going back to the beginnings of iTunes, when Jobs was trying to convince the record industry. Iovine was one of the first non-Apple staff, Eddy Cue showed iTunes to, there’s always being a relationship. Hence we can see why and how the deal materialized and was consummated rather quickly. More important not too many companies that would align from a business angle have that kind of money to buy Beats Music.
Culture and Business Data
Everyone is talking, and asking questions about the Apple and Beats culture, will they merge well, will it work etc. Short answer, yes it should work their value propositions definitely align; Apple manufactures high priced cool electronics. Beats manufactures high priced aspirational headphones, with sixty four percent or more market share as reported by Beats, research via NPD group. If you watched Apple’s June 2, OS X Yosemite launch, you would have heard Apple’s executive Craig Federighi speaking with Dr. Dre, via a phone call and Dre asked, what time should I show up for work. The main question is how long will their marriage last, Jimmy Iovine and Dr. Dre match well because they come from the same industry and do similar work. They are both well respected individuals with strong personalities; they work exceptionally hard, but do not seem like people who would like to work for others. They are not 9-5 men, not because they can’t do it, but their work lifestyle of being in the studio recording, shooting videos, making movies and mentoring artists is not conducive to 9am-5pm. Does anyone expect Dre or Iovine to wear a suit and tie for work, obviously not; even Apple employees do not dress up. Are they going to be there 9-5 Monday to Friday, we shall see, or more appropriately, hear. They are probably going to work as strategic executive consultants; that seems like the most amicable working agreement which would last. Will Beats music operate independent of Apple, as Tumblr operates independent of Yahoo, it would probably be wise for Beats to keep innovating and growing, while Apple collects the revenue and assumes marketing and operational expense.
As of march 2014, iTunes had 700-720 million iTunes customers and it’s still growing at a 40% growth rate annually, and expected to reach 800 million by the end of 2014. More stats which will not make immediate sense regarding the $3 billion purchase. About half of the 700-720 million iTunes accounts are linked to credit cards and Apple has 40 million iTunes radio listeners compared to Beats roughly 250,000 subscribers, amassed since the launch in February of 2014, most of which, came as the result of a deal signed with AT&T. I guess we can only surmise that Apple has already looked into its crystal ball and seen the future. Streaming music business is expected to grow to $5 billion by 2017
My Strategic Recommendation
The ability to experience both services seamlessly will make sense, since Beats is retaining its identity. It will result in a frictionless user experience (UX) for both. Apple could create a login application similar to Facebook’s Connect, and they could name it Apple Connect, or modify the current iTunes Connect, to accommodate signing to Beats Music. The objective is to enable millions of iTunes consumers the ability to login to Beats Music or iBeats and switch back and forth.
Bluetooth voice activation: if Apple really wants to blow away the competition, it could attach a tiny mouthpiece microphone which slides inwards, into the headphone. Once the mouthpiece is released users speak into it and that will initiate and execute, via voice command, the track they would like to listen to. Since Siri can already find and play music, it’s just a matter of connecting the mouthpiece microphone from Beats headphone to Siri for command execution (perhaps easier said than done).
In addition to owning the coolest electronic fashion statement Beats headphones, Apple gets the brand, growing subscription business, future earnings which comes from ultra-mass proliferation, plus exceptional talent and marketing geniuses who could help market Apple’s other products.
What about the technology?
Beats original technology came from Monster Sound; which has exceptional design sense, and keeps pushing the envelope on headphone tech. As for which is better between Beats or Monster Sound headphone, that’s up to the masses to listen with and decide.
In order to paint a vivid picture, let’s contextualize the economic dent, or lack thereof; Apple’s 2014 fiscal second quarter revenue was $45.6 billion, with a net profit of $10.2 billion. The ratio of acquiring Beats for $3 billion to quarterly revenue is 6.58 or 7%. A simple way of presenting that is saying Beats Music cost Apple only seven percent of what it makes in three months. A further simpler way to present it is, after Apple pays for all its obligations the net profit which it made, and makes every three months is able to buy Beats Music 3 times, with $1 billion left. As of Feb 2014, Apple was the most valuable company in the world by market cap. It can afford to take huge gambles to solidify its future. Even for a conservative corporation like Apple, whose largest acquisition till date is $3 billion, it’s like a dime in the bucket. Investments are made based on future earnings, or more precisely perpetual value, if it’s around that long.
Who Won iBeats vs iTunes? It’s a win-win scenario both companies got what they wanted. Beats was burning cash fast with its impressive and effective marketing tactics. Apple needed the coolest music property which combined (hardware + growth + potential) and one which comes with industry heavyweights, that would help rejuvenate Apple’s music business. As explained above, under the economic sense paragraph, $3 billion is somewhat insignificant to Apple for an investment with massive future potential.