Why Apple may buy Beats

Apple may soon acquire Beats Electronics, one of the leading producers of headphones, in a deal which could be valued at as much as 3.2 billion USD, according to various reports by the media. If the deal goes ahead it will be the largest acquisition ever made by Apple.

In September last year, Carlyle Group made a 500 million USD investment in Beats, valuing the company at 1 billion. If the purchase price by Apple is 3.2 billion USD as rumoured then Carlyle has made a very good deal, as Apple for some reason values the company at three times what it was worth just nine months ago.

Beats Electronics was founded in 2006 as a branding project to create value from the rap artist and producer Dr. Dre’s existing audience and was marketed as such. The company has not been leading innovation but followed well trodden paths into noise-cancelling and portable Bluetooth speakers, with varying degrees of success. Clearly, the market leaders and innovators in this industry are Bose and Sennheiser, and companies like Beats are followers.

Why would Apple want this company? It has no track record of innovation, patents, or other intellectual property. Its core products are handset peripherals. The only real value for Apple would be if the acquisition of Beats would give them access to a new market that they cannot easily break into through Beats new and really unproven streaming service. It will be interesting to see if this holds true. I doubt it.

Music streaming is already dominated by YouTube and Spotify. When Beats Electronics launched its subscription service in January, it seemed more like a validation of Spotify’s business model than a threat. Spotify has 10 million paying subscribers, and an additional 30 million people listen to the ads supported version for free.

Below is a video from Financial Times, analysing the potential deal.

Death of download

2 comments

  1. Hi Professor, very interesting blog entry. I was also thinking about the reasons why would Apple want to acquire Beats. Many analysts believe it is due to the new Beats Streaming App in order to switch for digital downloads to streaming. On top of all that, I believe Apple wants or should use Beats as a channel that would allow Apple to innovate again, it is true that Beats is not an innovative company (their headphones sound awful and overpriced) but it could help Apple have a competitive edge in the new best thing; ‘Wearable Techs’.
    Beats controls over 60% of the US premium headphones market and the brand is widely popular with the age group from 10-30 (This is a big market). People who are dynamic, trendy, always on the move and can make the best out of wearable techs. The termination of the whole Nike Fuel band team (apple’s closest ally) makes me more convinced of this scenario. Headphones are always in/on/over our ears, whether we are commuting, traveling, watching a movie, or working out. Moreover Headphones sit on the head; they are light, and get fixed in the ears and provide the best POV. Thus making it the most convenient place to add a camera (apple’s answer to google glass), to add sensors, HUD displays, augmented or virtual reality (the answer to Facebook’s acquisition to Oculus). I have a hunch that it will be a cash only acquisition in order to show the always nagging Apple investors that they are re-investing the cash. Oh well, as you mentioned before, their S-curve is flattening maybe they are simply trying their luck before they flatten like a flounder fish.

  2. That is a good point, but going heavily into wearable techs is a market where the prices are lower than on the products Apple currently sells, so they would enter a mass market that they are not currently in. I think it would make more sense if they tried to disrupt the market for TV sets or systems for cars, which would be higher priced products.

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