Apple (NASDAQ: AAPL) is in the process of finalizing a $3.2 billion deal for Beats Electronics, in what would be its biggest deal ever, according to multiple reports. The overriding question analysts have at this point is: Why? The answer is not entirely clear, but Apple could be inking the deal to get access not only to Beats' sleek headphones but also its fledgling streaming music service on the cheap.
According to reports from the Financial Times, the New York Times, Bloomberg and the Wall Street Journal, Apple could announce the deal as early as next week, though the reports cautioned the deal is not yet final. Apple and Beats, co-founded by rapper Dr. Dre, declined to comment, according to the reports. However, according to The Verge, actor Tyrese Gibson posted a video on his Facebook page in which he was seen presumably celebrating with Dre, and in which he reiterated the $3.2 billion figure and urged Forbes to change its list of the world's richest people because Dre has now joined the "billionaire boys club."
For Apple, an acquisition of Beats would represent a departure from a long-time strategy of acquiring mostly small technology companies for their talent and underlying technology to incorporate into Apple's future products. On Apple's most recent earnings conference call in late April, Apple CEO Tim Cook said that Apple had acquired 24 companies in the last 18 months.
"We are expanding Apple's products and services into new categories, and we are not going to underinvest in this business," Cook said.
Yet acquiring Beats would seem to be out of step with Apple's focus on selling what it deems the best products, since the Beats headphones, while popular, are seen by audiophiles as not the best headphones on the market. Similarly, the Beats Music streaming music service was only started in January and is a miniscule competitor right now to the likes of Spotify, Pandora and Rdio.
Creative Strategies analyst Ben Bajarin told the New York Times that Apple is likely thinking about a wider music strategy with the purchase. "This would have to fit into a much longer, more innovative strategy around perhaps the hardware and the service," he said.
Re/code, citing unnamed industry sources, said Beats' electronics sales of headphones and speakers are more than $1 billion per year, but that the streaming music service likely has only around 200,000 users. AT&T Mobility (NYSE: T) in January announced it would offer the Beats Music streaming service at a discount to its family plan customers. AT&T also pays to market the service.
The streaming music service is likely what is driving Apple to make the deal, analysts said. "They are buying into the future and the future is going to be streaming and subscription," Jon Irwin, the former president of rival music service Rhapsody, told Bloomberg." Revenue from streaming and subscription is growing. Files and downloads are shrinking. Everyone has to engage in streaming and subscription."
In September 2013 Apple launched its own streaming service via iTunes Radio. However, the free, ad-supported service, which is similar in many ways to Pandora, gives users limited control over the songs they can hear. Users can remove the ads if they pay for Apple's iTunes Match service, which costs $25 per year, but they still have to buy individual songs for full price through iTunes.
A March Billboard report, which cited unnamed sources, said that Apple was pondering a new on-demand streaming music service to compete with Spotify and Beats amid declining sales from the iTunes store.
Spotify was last valued at $4 billion and has reportedly been pondering an initial public offering, Re/code notes, so it might have been too expensive for Apple, even though Apple has around $150 billion in cash on its balance sheet. As BTIG analyst Walter Piecyk pointed out, the reported $3.2 billion purchase price is less than 2 percent of Apple's cash and less than 10 percent of its annual free cash flow.
Beats Music features a catalog of more than 20 million fully licensed songs from all the major labels, including Universal Music Group, Sony Music Entertainment and Warner Music Group, as well as all independent labels. The service offers unlimited access to curated music (both streaming and downloaded for offline listening) of the songs, albums and playlists. In addition to personalization technology, Beats Music uses human experts to curate hand-picked songs while streaming.
This would not be the first time Beats has partnered with a mobile hardware company. HTC bought a majority stake in Beats in 2011 for $300 million only to later sell it all back in September 2013. In all, HTC got $415 million from selling its stake after making the $300 million investment. HTC recently announced a deal with speaker maker Harman Kardon to put the company's audio technology in its One M8 smartphone.
- see this FT article (sub. req.)
- see this NYT article
- see this Bloomberg article
- see this WSJ article (sub. req.)
- see this 9to5Mac article
- see this The Verge article
- see these three separate articles from Re/code
- see this BTIG post
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