11 May 2014

Apple acquires Beats for $3.2 billion

Beats by Dr. Dre, designed by Apple in California
In a rather adventurous move, Apple appears to have acquired Beats Electronics, the company co-founded by Dr. Dre in 2008 that in just six short years has sewn up the entire high end consumer headphones market. In January, Beats also launched Beats Music, a streaming music service that’s similar to Spotify. At this point, you are probably wondering the same question as me: Why? Why did Apple acquire Beats? (For a reported sum of $3.2 billion, no less!) Let’s try and work it out.
Is it all about the headphones?

The simplest explanation for Apple acquiring Beats is that Dr. Dre’s company is selling a lot of headphones roughly $1 billion worth in 2013 and the profit margin is estimated to be huge (headphones, especially those made by Beats, are relatively cheap to produce). Apple already sells a lot of Beats headphones through its online and meatspace stores so why not buy the company and keep the profit margins for itself?
Is it all about the Beats Music?

Another option is that Apple, faced with lower than expected revenues for iTunes Match and iTunes Radio, and no streaming music service of its own, sees Beats Music as an easy way to compete with the likes of Spotify. Apple has always been the behemoth in digital music delivery, a position that was undoubtedly a factor in the early success of the iPod and iPhone. With new, platform agnostic services like Spotify, there is one less reason to buy an Apple device. Apple could be quite excited at the possibility of integrating Beats Music into iTunes, or turning it into some kind of iOS  exclusive service.

Beats Solo, headphones by Dr Dre etc
Some more Beats headphones. You have to hand it to them, they do look pretty sharp.

But… $3.2 billion?

At this point, we should highlight the fact that Apple is one of the least acquisitive big-name tech companies in the world. While companies like Microsoft and Google readily throw around billions of dollars to pick up new technologies and products, Apple’s largest acquisition to date was a paltry $400 million for NeXT in 1996. Almost without exception, Apple only acquires underlying technologies and IP, rather than complete, commercialized products. Spending $3.2 billion on Beats would be a huge shift in strategy for Apple.

Beats headphones
Some Monster Cable Beats headphones

Now, to be fair, with over $150 billion in the bank, Apple can afford to experiment a little. In fact, with investors and analysts leaning on Apple to release a new iPhone or iPad like product, that’s almost certainly what the company is doing. Acquiring a successful headphones brand isn’t quite the same as creating a whole new device type, but hey, at least it’s doing something (and it certainly doesn’t hurt that the profit margin on the headphones is huge).

Because neither Apple nor Beats have issued an official statement, it isn’t entirely clear what this acquisition means for either company moving forward. Dre himself appeared to confirm the acquisition, though, by saying he’s the “first billionaire in hip-hop” in a video last night (that link is not safe for work).

For me, the biggest question is how Apple handles the branding and marketing of the Beats products: Will we see Beats by Apple? Beats by Apple & Dre? Beats by Dre, designed by Apple in California? Given the orgiastic popularity for Beats headphones, I would be surprised if Apple changed anything but at the same time, probably the only brand with more consumer appeal than Beats is Apple.

The acquisition of Beats also opens up another interesting question: If Apple is finally willing to spend its money on big-ticket acquisitions, what company or product might it acquire next? Laptop bags? Phone cases? Michael Kors wallets with built-in iPhone sleeves? With more than $150 billion in the bank, Apple could buy almost any company under the sun. It’s a brave new world, folks.

Courtesy Extremetech

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