The Apple-Beats Deal: What, Why & How?

By | May 30, 2014
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In what was Tim Cook’s first major corporate takeover deal, Apple announced its formal acquisition of Beats Electronic on May 28. In what follows, readers will be brought up to scratch with some of the nitty-gritty of this deal.

After purchasing NeXT and getting back co-founder Steve Jobs onboard (way back in 1997) Apple had not really spent big money on any major acquisitions. That was until the day before yesterday though – when it splurged $ 3 billion to buy Beats Electronic. We would here look at all the aspects related to the high-profile Apple-Beats deal, which had been in the news for several weeks:

 

  1. What does Beats do? – Beats is not only a high-end headset maker, contrary to what many consider it to be. The company has two divisions – Beats Electronic and Beats Music. The former is into making high-end speakers, headphones and accessories. The latter, on the other hand, offers seamless music-streaming services. Apple has bought them both.
  2. How much is the deal worth? – Out of the overall $3 billion worth of the acquisition, Apple is paying $2.6 billion upfront. The rest of the amount will be paid out in the form of stocks later. While these figures are barely a fraction of Apple’s total cash reserves – they are more than Beats’ average annual earnings.
  3. A long-standing corporate relationship – The deal might have finalized only yesterday – but Apple and Beats were reportedly in sync with each other for nearly a decade. Jimmy Iovine, the CEO and founder of Beats had visited Apple (along with several other companies) at the turn of the century, when digital music was beginning to make a mark in the worldwide markets. Apple has a long history in offering classic blends of technology and sophistication in their products (think, the iPod), and that had impressed Iovine a great deal.
  4. How will Apple benefit from the deal? – No one comes even close to the total number of music file downloads from iTunes, the store has nearly 50 million listeners for its free radio service, and most music-related iOS mobile apps are wildly popular. So, why did Apple need to acquire Beats? Eddy Cue, the chief of iTunes store, pinpoints the customized playlist option that Beats offers as the key reason. For all the enormity of Apple’s song collections, it could not provide a customized album-listening experience to people till date. Beats will fill up this requirement.
  5. Is this Apple’s first acquisition for a long time? – In terms of the volume of money changing hands, it is. However, Apple has been actively acquiring companies in the recent past – with as many as 27 firms bought in the 2013-14 fiscal year alone. According to CEO Tim Cook, acquiring Beats was an addition to a strategy that Apple has been following for some time now. In fact, he termed the Apple-Beats deal as a journey ‘from dating to marriage’!
  6. What will happen to Beats’ headphone business? – This is not yet completely clear till now. One thing is for certain though – Apple does not have any plans to pull the plug on the production of Beats headphones in the foreseeable future. Within a relatively short time span (half a decade or so) Beats has managed to capture nearly 61% of the market, and it does not make any sense in stopping this almost-certain source of steady revenue. Of course, it would be a mistake to assume that Apple has acquired Beats for only its headset business. The Apple earpads are horribly bad, but they hardly make a dent in the company’s overall prosperity.
  7. Hasn’t the Apple-Beats deal come a bit earlier than expected? – It has. Initial reports and rumors suggested the deal would be announced formally at the World Wide Developers’ Conference (WWDC), that kicks off on the 2nd of June. Professional software makers and mobile application developers feel that Apple brought forward the deal date by a few days, simply because the company has a lot other things on its roster at the WWDC. Interestingly, the final acquisition value ($3 billion) is about $200 million lower than what had been estimated at first.
  8. What happens now to the founders of Beats? – Iovine and Dr. Dre (the co-founders of Beats) have maintained that they always wanted to work WITH Apple. Thanks to this acquisition – it seems that they will now be working FOR the company. Dre and Jimmy will have to commute from LA to San Francisco and back frequently, since Beats will be continuing its operations as a standalone company.
  9. Taking the fight to Spotify – While Apple theoretically, of course, can launch music-streaming services – Tim Cook has ruled out the implementation of any such plans. Instead, with the support of Beats Music, Apple Inc. would find it easier to break into the market segment dominated by Spotify till date. Interestingly, this was not one of the motives that Cook or any other Apple executives stated. All that they harped on was how eager they were to work with the ‘incredible’ people of Beats.
  10. Will the deal be profitable in the long-run? – Unless something drastically goes wrong, Beats should start adding to Apple’s already considerable revenue figures from October or November this year. The headphone company recorded a mighty impressive 30% hike (in the first quarter of 2014) over its $1.1 billion earnings last year. Over time, the percentage of Beats’ contribution to Apple’s revenue is expected to increase.
  11. Were the Beats co-founders always interested in the music industry? – According to Doug Morris, the CEO of Sony Music, this wasn’t the case. Jimmy Iovine was the one who was interested in making high-end headphones, while all that Dr. Dre wanted to do was open a sneakers-manufacturing company! If Iovine had not managed to convince Dr. Dre for starting Beats, there would have been no deal!
  12. The shaky ground of digital music industry at present – Although the total music downloads from iTunes recently crossed 36 billion, a closer look reveals cracks. Eddy Cue has already highlighted the rapidly dwindling number of music records being launched at the online store. The number of new music-related mobile apps at the store has gone down slightly too. In such a scenario, the curation-oriented business model that Beats follows is likely to serve as a channel for revival of digital music. If things go as per plans, a free version of Beats might also be on its way pretty soon.

Jimmy Iovine had already tried to collaborate with HTC to revolutionize the face of mobile music, but that strategy fell flat on its face. Undaunted, he and Dr. Dre has now got into a deal with Apple, that would make digital music qualitatively better and technologically more nuanced than ever before. There’s no point in speculating whether Steve Jobs (not particularly known for his spending habits) would also have gone for this acquisition. The Apple-Beats deal is confirmed, and if the surge in the valuation of Apple’s shares after the announcement is any indication, it might prove to be a really smart move.

 

Hussain Fakhruddin
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Hussain Fakhruddin

Hussain Fakhruddin is the founder/CEO of Teknowledge mobile apps company. He heads a large team of app developers, and has overseen the creation of nearly 600 applications. Apart from app development, his interests include reading, traveling and online blogging.
Hussain Fakhruddin
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