Making Sense of Apple's Beats Acquisition

Whuuuut? $3.2 billion for headphones. That Apple didnt create itself? I mean can they tie your shoes, take your pulse, manage your stock portfolio?

Yeah, ok, they're very cool and Apple is most emphatically into cool. They are, arguably, the best at what they do and Apple certainly thinks of itself as such.

But they are not the functional equivalent of brain surgery, which is kinda how Apple has always positioned its new products. Genius Bar, etc.

There are plenty of explanations for how and why this acquisition is 'strategic,' though the twinning of the words strategic and acquisition is usually shorthand for overpayment because you have to show your customers and investors you're doing something. But Apple was supposed to be above and beyond the sort of activity for which mere mortals are known.

It's also oddly reminiscent of Google's 'smart thermostat' purchase. Apple playing copycat to the Goog? Ouch.

To the extent there is a 'there' there, this is consistent with Apple's moves towards a less iconoclastic and more partnership oriented approach to development as the recent Nike deal suggests. It must be hard for the faithful to believe that the cool kids must lower themselves to consort with the commoners, but there was a time when Microsoft looked invincible. As did Sears. And the Dutch tulip business. Time does have a way of marching on. JL

Tim Bradshaw reports in the Financial Times:

With growth of the iPad slowing and iPod sales dwindling, Mr Cook is under pressure to build out Apple’s portfolio and reduce its reliance on the iPhone.
When Tim Cook said last week that Apple was “on the prowl” for acquisitions, few observers would have expected that it was readying a $3.2bn bid for Beats Electronics.More than any other move that Mr Cook has made since becoming Apple’s full-time chief executive in August 2011, the imminent purchase of the hip headphone maker and music app marks the biggest break with Apple’s past.

Some Apple watchers were surprised by the deal, questioning the sound quality of Beats’ headphones and the logic of buying a streaming service when it could build or licence its own.

“Buying Beats is a good sign that Apple is pretty much out of ideas and unable to come up with an anti-Spotify strategy,” tweeted Om Malik, veteran tech writer turned venture-capital investor, damning Beats’ products as “bad headphones and a junk-service from music promoters”.

Ben Bajarin, a Silicon Valley analyst with Creative Strategies, said he did not believe that Beats had unique intellectual property in its music playback or streaming service.
“If Apple wanted to build some flashy headphones with audio compression and bass boosting, they could have done it themselves for much cheaper,” he said. “They have a high growth segment but there’s no guarantee that it will last.”

Neither iTunes Radio, Apple’s internet radio service launched in 2013, nor Beats Music, released earlier this year, has yet succeeded in unseating their competitors Pandora and Spotify as the leaders of the fast-growing streaming music market.

Beats’ two-year partnership with HTC, which ended in 2013, failed to revive the smartphone maker’s flagging sales. HTC’s market share in the US halved between 2010 and 2013, and the Taiwanese company posted its first annual loss last year as the partnership dissolved.

However, with growth of the iPad slowing and iPod sales dwindling, Mr Cook is under pressure to build out Apple’s portfolio and reduce its reliance on the iPhone.
Mr Cook is widely seen as a shrewd but less impetuous leader than Steve Jobs, his predecessor. As he looks to a future of wearable computing, Mr Cook has already prepared the ground for Apple to become more of a fashion brand, with the recruitment of Angela Ahrendts from Burberry to lead its retail strategy and former Yves Saint Laurent chief Paul Deneve to work on “special projects”, widely believed to be related to its rumoured “iWatch”.

While Apple’s multicoloured iPhones, in-house line of cases and redesigned white “earpod” headphones show that it already has a feel for the importance of accessories and personalisation, Beats’ offers a much larger array of designs.

“The headphones are going bonkers, despite every audiophile in the world castigating them for their bass-heavy frequency response – turns out music is a fashion item and everybody wants to be fashionable,” wrote music-industry pundit Bob Lefsetz in a post pondering a possible tie-up last week. “Tim Cook shows that he is willing to go against Steve Jobs’ wishes, that Apple is now truly his company.”

With Dr Dre, the hip-hop superstar, Jimmy Iovine, a long-serving music industry impresario, and the rest of Beats’ management team, Apple gets more than a set of headphones and a music app. Beats brings the urban cool, Hollywood culture and marketing savvy that has made its pricey products loved by a younger demographic that does not always warm to the iPhone’s sleek minimalism.
“The argument against the iPhone is that kids don’t want the phone mom and dad have,” says Gadi Amit, president of New Deal Design, a design agency in San Francisco that has worked with tech companies such as Google and Fitbit.
Beats Electronics’ founding six years ago was inspired by Apple’s iPod, Mr Iovine has said, in its marriage of technology with popular culture – but also frustration at the poor-quality headphones that came bundled with Apple’s MP3 player and iPhone.

The headphones are going bonkers, despite every audiophile in the world castigating them for their bass-heavy frequency response – turns out music is a fashion item and everybody wants to be fashionable - Bob Lefsetz

Years before, Mr Jobs demonstrated an early version of iTunes to Mr Iovine before it launched. The Apple founder lectured the record label chief about the music industry’s inability to create such a simple yet innovative service, according to his biographer Walter Isaccson. Now, it is Apple’s turn to seek assistance from Mr Iovine.
Mr Bajarin speculates that Mr Iovine’s stature in the music industry may mean he can tap exclusive content rights for a streaming service that even Apple would be unable to obtain.
Several times over the past year, Mr Cook has made clear to investors that he is not philosophically opposed to big, bold dealmaking in the way that his predecessor Steve Jobs was.
Earlier this year, he told the Wall Street Journal that “we have no problem spending 10 figures for the right company”, adding: “The money is also not burning a hole in our pocket.”

Indeed, Richard Lane, analyst at Moody’s, says that Apple may not be able to pull off many more such acquisitions, in spite of its $150bn cash pile.

Almost 90 per cent of Apple’s cash is offshore and it has committed the vast majority of its domestic cash and likely future cash flows to more than $60bn in dividends and share buybacks over the next two years, Mr Lane says.
“Tech companies have proven justifiably loathe to pay 30 per cent to Uncle Sam in order to bring the cash back” from abroad, Mr Lane says. Given it has already borrowed $29bn in the last year, “there is going to come a point where the ability to access the capital markets without having a negative rating consequence could come into play”, Mr Lane cautions.
For Apple investors still reeling from the Beats news, that might come as more of a reassurance than a concern.