HTC's move to buy a controlling interest in Dr. Dre's Beats Electronics is a big bet that music still matters on smartphones. The device maker is trying to differentiate itself from a crowded Android field, but it's unclear if HTC's maximum purchase price of $309 million is worth it. In fact, HTC's pitch that it can become a lifestyle brand may just turn out to be delusional.
In a statement, HTC said its partnership with Beats Electronics will bring "high performance sound" to its phones. The companies---Beats will continue to be run independently---will work to "create superior mobile audio experiences for consumers."
HTC's presentation indicates that HTC wants to tap into Beats' marketing zeitgeist. Umm, ok. The upshot is that HTC wants to be a lifestyle brand---much like Apple or even Tiffany. HTC chief marketing officer John Wang and CFO Winston Jung talked about connects with the entertainment industry and a broader customer base. Judging from the slide to the right, HTC wants to be a luxury brand of sorts. HTC actually made reference to Tiffany keys in its presentation!
This deal represents a $300 million case of Apple envy. Hasn't the mobile audio battle been won already? Isn't music a commodity? Dr. Dre brings a lot of credibility---as does music label luminaries such as Jimmy Iovine. The question of the day is whether this Beats gambit will work. Short answer: Hell no. Apple has already moved away from the music infatuation. Sure, iTunes dominates and is the largest music retailer, but let's face it Apple's future is the App Store. You could argue that video is more important to Apple on the mobile front.
Through that lens, HTC really looks like it is spending potentially more than $300 million or so on yesterday's war.
HTC seems to realize that there may be a little head scratching over the Beats deal. Its press release makes no mention of the price tag for this Beats partnership. On its investor relations site, HTC details the following:
- Maximum price is $309 million. Of that sum, HTC hands over $300 million today and $9 million possible when the deal closes.
- Beats stays independent.
- 4 board members come from HTC and 3 appointed by Beats' original owners.
HTC's goal to become a lifestyle brand may be valid in some parallel universe, but there's an opportunity cost related to blowing a wad of cash on appealing to audiophiles. For instance, HTC spent $300 million on S3 to acquire patents that can be used to fend off Apple. HTC should keep buying patents.
Perhaps HTC's Beats Electronics deal makes sense since it accelerates the company's "entry into the youth and accessories markets globally," but the money could have been better spent elsewhere.