Beats and Apple: Does such a marriage make sense?

May 11, 2014

Apple's rumored to be courting Beats Electronics with a $3.2 billion deal. Does such a deal make sense?

Rumors spread like wildfire on Thursday that Apple is negotiating to acquire Beats Electronics for $3.2 billion. I'm skeptical that the arrangement makes a lot of sense for Apple.

Beats is the brainchild of Dr. Dre and his long-time collaborator, record executive Jimmy Iovine. The company got its start back in 2008 with an arrangement with Monster Cable. Beats' first headphones featured noise cancellation technology and a bass-rich mix; the company used endorsements from musicians and celebrities to expand brand awareness.

Beats divorced itself from Monster following the conclusion of their contract in 2012. After a brief dalliance with mobile handset maker HTC, Beats negotiated an investment from equity firm The Carlyle Group. Carlyle plowed half a billion dollars into the company, valuing it at twice that.

Beats Electronics is a consumer electronics company on the rise, to be sure. Colorful, bass-heavy Beats headphones are recognizable, aspirational fashion statements. They're not cheap, either — some models top out at more than $400. The company's expanded its line with branded earphones and its "Pill" speakers. Beats also licenses its technology for use in HP computers and Chrysler, Dodge and Fiat automobiles.

Apple doesn't buy brands

But a strong brand seems like an unlikely reason for Apple to drop three times what a company is worth for the privilege of buying it. Apple doesn't buy brands, they buy technology.

From that standpoint, Beats' audio technology is wholly unremarkable. The on-board circuitry does some trickery with digital signal processing to expand bass and highs, but ask any audiophile — it's smoke and mirrors, not superior audio engineering. What's more, Beats has stirred dozens of manufacturers to produce similar products that are as good or better. The only thing that differentiates them is brand.

Beats Music, the company's streaming music service, is another part of the puzzle. Beats Music has garnered plenty of positive (and negative) reviews since its launch. No one outside of Beats Electronics knows exactly how many customers have actually signed up to pay $10 a month after their trial subscription runs its course.

But streaming music services are where it's at in music going forward. Digital music sales are in decline as services like Spotify, Rdio, Pandora and others appeal to more and more customers willing to pay a monthly subscription fee to listen to music, rather than downloading songs and albums a la carte.

Apple understands this, which is why in 2013 they launched iTunes Radio. The service is only available in the United States and Australia, though other countries are expected to come online this year. Beats Music is restricted only to the U.S., though it promises that more countries are coming soon.

If there's one thing Beats Music has going for it, it's that it reaches an audience that Apple has heretofore ignored: Android users. But again, developing an Android app and ecosystem — expanding iTunes into Android — doesn't seem like anything beyond Apple's technical acumen.

The only other angle that makes any sense at all is if Beats Music's streaming music rights are transferable. This doesn't seem likely. But if it is the case, it would give Apple a huge leg up against Spotify and other streaming music competitors.

Within Apple's reach

So again I scratch my head and wonder what, exactly, is the point.

If Apple does acquire Beats Electronics, it'll be the single biggest acquisition Apple's ever done by almost an order of magnitude. Even Apple's acquisition of NeXT, which heralded Steve Jobs' return to the fold, the creation of OS X and an almost complete reinvention of the company, was a relatively scant $400 million.

That's not to say it's impossible to imagine. Apple's sitting on a pile of cash larger than the economies of some countries, and Tim Cook is on record saying a billion-dollar acquisition isn't out of the question. The Wall Street Journal:

"...We have no problem spending ten figures for the right company that's the right and that's in the best interest of Apple in the long-term. None. Zero."

Is acquiring Beats Electronics in Apple's best interest? I don't think so, but I'm not on Apple's board of directors, either.

What do you think? Does an Apple/Beats deal make sense, or is this just Wall Street dreaming about what to do with Apple's cash hoard again? Let me know in the comments.