Apple's potential $3.2 billion purchase of Beats Music could signify a few strategic shifts and possibly indicate the company is going to have to take a portfolio approach and buy some innovation.
"We'll spend what we think is a fair price." — Tim Cook.
The Financial Times reported that Apple is in negotiations to buy Beats, which was co-founded by Dr. Dre and Interscope Geffin A&M Chairman Jimmy Iovine. With the move Apple may be paying up for a streaming music service, hip products and a brand. If this move sounds familiar that's because HTC bought a stake in Beats only to unload it to The Carlyle Group in September.
Here's what Apple CEO Tim Cook said about acquisitions on the company's earnings conference call last month:
"From an acquisition point of view, we have done 24 in 18 months. That shows that we're on the prowl, I suppose you could say. We look for companies that have great people and great technology and that fit culturally, and we don't have a rule that says we can't spend a lot, or whatever.
We'll spend what we think is a fair price. What's important to us is that strategically it makes sense, and that it winds up adding value to our shareholders over the long haul.
We are not in a race to spend the most or acquire the most. We're in a race to make the world's best products, that really enrich people's lives. And so to the tune that acquisitions can help us do that, and they've done that and continue to do that, then we will acquire. And so you can bet that you will continue to see acquisitions, and some of which we'll try to keep quiet, and some of which seems to be impossible to keep quiet."
What can we learn from those comments? Here are some thoughts:
- Apple will go shopping because it has to and has the balance sheet for it. With Beats, Apple gets a brand that strategically fits, but how will it be absorbed. Apple gets streaming music, cool headsets and some cred that may help iTunes. Should Apple buy Beats the next focus revolves around what else the company would buy. Pebble? Nuance Communications? How about BlackBerry's QNX unit?
- Cook has more financial focus. Apple has fended off Carl Icahn, bought back shares, floated debt and is now going shopping. Before Cook, Apple had almost a depression mentality with cash hoarding. Cook will bring returns to shareholders. The big question is how this financial focus plays with strategy and product innovation.
- Apple may have to buy its innovation. Beats Music brings a streaming music service to Apple's table, but it's shocking how long the company avoided subscriptions. Like other large companies with cash — Google, Facebook, Cisco and Oracle to name a few — acquisitions can be a form of R&D if acquisitions are integrated well. Often companies are scorched before they get the merger and acquisition game down well. Will Beats scorch Apple like it did HTC?
- The company has the laws of large numbers working against it. Apple can produce organic growth — hello iPhone and iPad — but to move the needle the company may have to look more like the Borg from Star Trek. Can Apple assimilate?
- And finally cloud computing is changing the game on Apple. Yes, Apple is about hardware and software, but its cloud and services efforts have been spotty. Apple may have to acquire expertise on those key fronts.