Bits and pieces on the potential Apple, Beats deal

Lots has been written about Apple’s potential acquisition of Beats. This is my attempt to gather some of the facts in a single place.

The company behind the Beats products is Beats Electronics LLC. From their web site:

Formally established in 2008 as the brainchild of legendary artist and producer Dr. Dre and Chairman of Interscope Geffen A&M Records Jimmy Iovine, Beats Electronics (Beats) comprises the Beats™ by Dr. Dre™ family of premium consumer headphones, earphones, and speakers as well as patented Beats Audio™ software technology and streaming music subscription service Beats Music™. Through these offerings, Beats has effectively brought the energy, emotion and excitement of playback in the recording studio to the listening experience and has introduced an entirely new generation to the possibilities of premium sound entertainment.

Additionally, Beats reaches consumers through strategic product partnerships that include Chrysler Group automobiles and Hewlett Packard computers and monitors.

Led by Co-Founder & CEO Jimmy Iovine, Co-Founder Dr. Dre, and President Luke Wood, Beats Electronics is based in Santa Monica, CA.

This is a potential acquisition, not a formally announced deal. The Financial Times broke the story and it moved across the internet like a wave.

The supposed acquisition price is $3.2 billion. The last cash injection into Beats Electronics was $500 million by Carlyle Group, a private equity placement firm. The money was placed last September (2013). Once the money was placed, the company was valued at $1 billion. A valuation increase from $1B to $3.2B in a little over 6 months is quite a leap. That said, I suspect Apple can add a lot to the Beats brand.

Beats has a streaming music service that appears to be part of the deal. Currently at about 200,000 subscribers, this does not seem to be a huge impact in the streaming space, but there certainly is potential there.

This would be Apple’s largest acquisition ever.

Bottom line, there is a lot of teeth gnashing and hand wringing from analysts over this deal. That doesn’t bother me at all. If it happens, I feel certain Apple has thought this through from soup to nuts and will turn this acquisition into an asset whose value exceeds the purchase price.

  • taitaisanchez

    I would sell both of my kidneys and my first born child to see Jony Ive hanging out with Dre.

  • tast

    from soup to nuts

  • JohnDoey

    Or it could just be that Beats is disappointed in the poor results of its streaming service and has floated this idea to the media.

    Apple doesn’t even announce when they have acquired a private company like Beats, let alone pre-announce, let alone announce the price. And they don’t usually overpay for a company, either.

    I use Beats headphones, so I would like to see this deal happen and see Apple Beats join Apple Mac and Apple Logic and Apple iTunes as giant music brands, but the rumor doesn’t sound right to me. The only part that makes sense is that they want Jimmy Iovine on their executive team, but $3.2 billion sounds high for that.

    • nuttmedia

      Conjecture on misguided publicity stunts aside, let’s assume for a moment the deal is reality and the $3.2b pricing is accurate.

      Ostensibly, the $1b Carlyle valuation strictly considered the prospective economics of the headphone and music subscription service. What would justify a $2.2b control premium?

      In what business segments, specific to Apple, is this relevant and how would Beats—its technology, access, resource, brand etc—enhance the value of those lines? iPhone/iTunes ecosystem is an obvious answer, but how to unlock that value?

      Benedict Evans floated an idea on an interesting branding play using Beats band as a market segmenting vehicle to penetrate the sub-$300 phone market. Intriguing concept, but most certainly there are others.

      Are there as yet unknown segments which would make the synergies more readily apparent? Beats’ success can be chiefly attributed to its strength and influence in fashion, particularly within culturally influential market segments. Wearables’ success will be entirely about fashion and less about tech.

      The point here is to resist the urge to be overly dismissive of this transaction. I think Tim Cook, the Board, and Apple’s Executive Committee has more than earned a benefit of the doubt regarding its ability to manage its business. Better to view this through a lens of success than one of doom to understand and appreciate the possibilities.

  • Sam Doohickey

    This is purely a strategic move. No one in their right mind would pay for those crappy, some might say even dangerous, Beats headphones. I suspect this has more to do with the agreements the Labels have made with Beats Electronics rather than simply a software or hardware acquisition. Let’s speculate a bit.

    What if the Labels want to use Beats as a way to weaken the iTunes juggernaut. Perhaps, they gave Beats favorable licensing agreements in an effort to destabilize Apple’s grip on all things music. This purchase would give Apple oversight and control over these agreements. The transaction also eliminates an uprising competitor. I suspect that Apple will let Beats products and services ‘wither on the vine’ while they exploit these licensing agreements.

    The downfall of Beats electronics is no real loss to anyone, save the urban market. It might even save those fools from permanent ear damage. On the other hand, the streaming service is rather contradictory to Apple’s overall business model. Remember Apple made $16 bn last year from iTunes software and services. Since they don’t break that down into sub categories it’s tough to gauge what percentage of that is music downloads, but I suspect its significant. I also suspect their Radio service is losing money. I believe Apple will refuse to innovate streaming music distribution because they simply prefer ownership over subscriptions. They see it as a fundamental moral issue rather than a technical one.

    So how does Beats fit into the Apple culture? Not sure on this one. I highly doubt we’ll ever see MacBooks with ‘Beats’ speakers in them, or even an Apple surround sound system. Apple’s past acquisitions have proven insignificant when they remain only subsidiaries, but rather instrumental when they give them a competitive advantage over rivals. I seriously doubt Dr. Dre will be a member of Apple’s executive team and Iovine will only play an ‘advisory’ role. Perhaps, they’ll start a publishing arm within the iTunes ecosystem in an effort to thwart the music Labels. I, for one, would relish the thought of musicians using iTunes as the primary tool to publish and distribute their music directly to their fans, eliminating the endless middlemen that have infected the industry for decades. If this is to be the case, then an epic battle will be waged over this.

    And what’s this all mean for the happy music lover? It means we’ll continue to have fewer choices for how we listen to our music while it continues to be locked behind Apple’s neglected and bloated behemoth, iTunes. Ultimately, all mergers and acquisitions fall on the shoulders of the customers. They own it, but we have to pay for it whether we like it or not.

    • monkeyrun

      Those agreements are most likely not even transferable.

    • nuttmedia

      You are certainly entitled to your opinion, but your rhetoric suggests an incomplete understanding of the dynamics of these markets and business, and worse, an unhealthy perspective on the urban market.

  • David Malcolm Puranen

    Honestly I’ve thought the beats headphones looked almost cool when they first came out. But they embrace an anti-minimalism. People like them because they’re big and gaudy, the exact opposite reason of why they like Apple products.

    I think this would probably be one of the most nonsensical moves Apple could make, and would be the first thing that I’ve seen that would have made me seriously wonder if Tim knew what he was doing.

    • Their design aesthetic has changed quite a lot. Beats headphones are a lot sleeker now, especially the lighter headphones and earphones. The large cans are going to be large no matter what, and for isolation listening it’s what people who like large headphones want.

      • Sigivald

        Yeah, I don’t recall the originals, but the current Beats designs (like the ones Apple sells on the Store) are pretty clean; almost Apple-ish in their minimalism.

        I mean, if this had an Apple logo on it rather than Beats, would you be too surprised?

  • staze

    Could it be a mistake? It was a possible it was an April Fools joke as pointed out by Gruber on DF. The purchase follows no known Apple logic as has been posited by many others.

  • The more often this “news” (check the source) is repeated, the less sense it makes.

  • lucascott

    “That said, I suspect Apple can add a lot to the Beats brand.”

    But what can Beats add to Apple. Especially at that price.

    Frankly given the sources that are claiming this I can’t but feel like the whole thing is false and it’s more about hyping Beats to raise it’s value. Or if there is truth it’s a lot less than it seems. Like perhaps Apple has been in talks to buy off some patents or tech used with the whole Beats Music service to improve iTunes Radio and the assumption is they are going after the whole company etc

  • Sigivald

    Like Gruber, I don’t see the value proposition in any obvious way.

    Apple doesn’t need to buy Beats to sell good headphones (if they want to get into that market), though the Beats design does resonate pretty well with Apple Design Values. Not for no $3B+, though.

    The streaming licenses presumably (per Gruber again) aren’t transferable because the licensers aren’t stupid. Apple certainly doesn’t need Beats’ subscriber base or infrastructure.

    So I don’t even know what.

    (If Apple wanted to do headphones beyond the earbuds it does now, I’d expect an in-house design, honestly. Possibly a range of designs for clean-response audiophiles and the Beats market of “way too much bass”.

    I’d buy a set of Sony studio monitors for $80 before I’d buy a Beats anything, myself … but I’m not the Beats market.)

    • Don’t buy Sony’s $80 headphones. I’ve had two pairs break on me.

      Arguably, I was an idiot for buying the second pair, but I thought maybe it was just me.

  • SDR97

    “I feel certain Apple has thought this through from soup to nuts and will turn this acquisition into an asset whose value exceeds the purchase price.”

    That’s exactly the problem for me. I don’t feel confident, at all, that Apple has thought this through, if it’s really true, and if it actually happens it will weaken my faith in Tim Cook considerably. I don’t really have anything against Beats headphones (I don’t consider myself an audiophile) and I’m mildly intrigued by the Beats music service, though not enough to pay for it. But I just don’t see how on earth this deal makes sense at this price.

    Tim Cook is a functionary, not a visionary. If he’s trying to buy somebody else’s aesthetic vision to replace what was lost with Jobs, then the savvy business side of him should realize he is overpaying wildly.

    But perhaps it really is an April Fool’s hangover. That was my first thought on seeing the headlines.