According to several news reports, Apple is in talks to buy Beats Electronics for $3.2 billion. Created by rapper Dr. Dre and music producer Jimmy Lovine, Beats creates high-end headphones and a streaming music service for music lovers everywhere. But is this a good purchase for Apple?
Although iTunes is still the largest music store worldwide, it has faced increased competition from companies like Beats, Spotify or Pandora who provide streaming music for a low fee or no fee at all. An article from CNN Money quoted Piper Jaffray analyst Gene Munster, “We are struggling to see the rationale behind this move. Beats would of course bring a world class brand in music to Apple, but Apple already has a world class brand and has never acquired a brand for a brand’s sake.”
Part of the concern stems from the question, “Why Beats?” It’s not like Apple couldn’t afford to buy a company like Pandora, with a market value of less than $5 billion. Even though the move to acquire Beats would technically be Apple’s largest acquisition, Apple’s cash cushion doesn’t particularly put a spending cap on purchases. Just like research analyst Munster said, Apple has never acquired a brand for a brand’s sake, leading me to believe Apple likely has some sort of plan. It’s not like the company isn’t aware of Beats’ competitors such as Pandora or Spotify, and although it could afford to purchase those companies, they chose Beats. Would they consider making their largest acquisition if it was just a waste of money?
The acquisition would place Apple in two markets: high-end headphones and subscription music. Many of us can attest to the fact that Apple needs some help in the headphones department. Their newest model of headphones are “do-able,” but still behind many of their competitors. In contrast, Beats claims it has 51% share of the $1 billion premium headphone market.
Spotify offers students a membership for $4.99 a month, which allows them to download music from the application onto their mobile device for offline enjoyment, look up playlists, follow artists and much more. The regular price is $9.99 a month. Apple’s iTunes charges users $0.99 per song, and although they created iTunes radio, its adoption has been sluggish. Apple needed some help in the music department, and this might be exactly where they’re heading with the acquisition.
Beats offers a family plan on AT&T which allows up to five accounts to access Beats Music for $14.99 a month on up to ten devices. In 2011, Beats announced a partnership with Chrysler to introduce Beats technology into automobiles. Although both of these moves aren’t huge, they will nonetheless put Apple in uncharted waters.
My skepticism comes in with the reported purchase price of $3.2 billion. Apple moving to acquire Beats might not be a bad idea, but is the price right? Nowadays, however, if companies like Snapchat deny a $3 billion purchase price (because they think they’re worth more), is $3.2 billion for Beats that ludicrous? Obviously the general sentiment as of now is negative, but that might not be everyone’s opinion. Hopefully we will see within the next couple weeks whether this acquisition is actually going to happen.