What a Beats purchase would tell us about Apple

What a Beats purchase would tell us about Apple

Summary: Apple is reportedly going to buy Dr. Dre's Beats Music. Here's what a $3.2 billion purchase would tell us about Apple's strategy, innovation and willingness to use its balance sheet as a weapon.

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TOPICS: Hardware, Apple
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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.

Previously: Apple rumored to buy Beats to jumpstart its streaming music ambitions

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.

Topics: Hardware, Apple

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69 comments
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  • Bose would be better.

    Bose would be a better purchase, it just fits the style of Apple, not Beats.
    Pollo Pazzo
    • Sensible

      I read this and thought, you know what, that's absolutely right. Bose has that same sort of 'consumer excellence' vibe that Apple goes for. Product designs would slot right in.
      luke mayson
      • iBeat

        I think it is not about design but about the name. Apple can already do the design if they wanted. If you wanted to build a head phone with an iPod built in what would you call it, iHead. It just does not sound right and is really open for a lot jokes. iBeat, now that sounds right. It may sill be open to some jokes but not as bad as iHead. For iBeat, it is just a bonus that it is tied to a popular brand to begin with.
        MichaelInMA
      • Apple is not for audiophiles

        Bose is audio quality and Apple doesn't want Bose.

        If they did then they would buy them. Bose is privately held and making money hand over fist for it's owner. They only sell $2.8 billion per year so they are hardly disruptive in the marketplace.
        RAV555
        • What I mean by....

          Audiophiles hate Apple is quite simple. All audiophiles detest the iPod. And while they recognise the convenience of the iPod and probably have a few tunes on their iPhones, folks who spin vinyl do not own iPods.

          So Bose and Apple would be a very complicated mix and probably not worth Apple's consideration. Bose is also a "exclusive" brand. It is certainly well recognised but not wildy popular. Dre's Beats do not stack up to any Bose head phone but Bose are also not fashionable like Beats are.
          RAV555
      • But beats attracts the same type of customer

        People who don't know any better and are willing to pay a premium for their ignorance.
        blarelli
    • What Bose doesn't bring

      Bose may be a good fit marketing wise, but Apple doesn't need Beat's headphones -- it needs its streaming media service. Beat's 20 million song streamable portfolio is what Apple's after.
      marlin_s
      • You are kidding?? Right??

        Apple has more than 10 times the music Beats has .... and most of the streaming music in Beats is garbage.

        I bet this is nothing but a rumor started by Beats in hopes that somebody is dumb enough to try purchasing them. Beats is a company with mediocre products.
        wackoae
        • I guess you didn't read the article.

          Apple is in negotiations now is what was printed. Also a quote from Tim Cook. Apples wants this business because streaming is the fastest growing area of the music business and Apple has no streaming service. Streaming subscriptions were up 50% in 2013 to 1.1 billion while downloads are down 2% (which was the first annual decline since Itunes release in 2003. Also Apple is interested in wearable computing and internet headphones listening to Apple streamed tunes. This is a tremendous revenue stream and there open to all devices Android or Apple.
          Orlbuckeye76
          • Did you read the article?

            This is just a rumor, Cook has said nothing about acquiring Beats. As for a streaming service iTunes Radio is now the #3 streaming service in the US with millions more users than Beats music.

            http://www.macrumors.com/2014/03/11/itunes-radio-third-most-popular-us-music-service/
            rbgaynor
          • thats just because of iTunes accounts

            If you have an iTunes account you automatically have iTunes radio, that's why it seems iTunes radio has more active subscriptions but the truth of the matter is Beats has 80% of all music they have the best streaming service hands-down
            Dyllon Richards
      • I'm amazed at the whacky things I read here?

        Yep. iTunes has no music to choose from and iTunes Radio only has 30 different songs.
        Bruizer
        • It's amazing because it's nonsense.

          I guess when the Editor in Chief writes an article, there’s nobody to check it and throw it back as a muddled heap of thoughts.

          The tile of the article is …

          “What a Beats purchase would tell us about Apple”

          … but then the content is simply your existing prejudices used without further justification.

          Then followed by long quote of Tim Cooks comments, you claim to deduce things which are not deducible from what he said.

          The first paragraph jumps in with

          “…indicate the company is going to have to take a portfolio approach and buy some innovation”

          Now it tells us that the company has chosen on this occasion to buy a company that includes some innovation. But how does it tell us that “..the company is going to have to…” ?

          It doesn’t

          What a Beats purchase would tell us about Apple is that the management feels that such an acquisition was a strategically advantageous move, considering all of the factors, and note that the price only represents something around 3 times revenue. Not particularly high.

          Apple have always bought companies, generally for technology. As have Microsoft. As have Google. So why is this one telling us something that the others haven’t?

          There is then a long quote from Tim Cook’s earnings report followed by

          “What can we learn from those comments? Here are some thoughts:”

          So I’m expecting the bullets to be deducible from what Tim said.

          1 - “Apple will go shopping because it has to and has the balance sheet for it.”

          No. Tim never said anything about having to go shopping.

          3 - “Apple may have to buy its innovation.”

          No. Tim still never said anything about having to.

          4 - “The company has the laws of large numbers working against it.”

          No. Again this isn’t deducible from Tim’s comments.

          5 - “And finally cloud computing is changing the game on Apple.”

          No. Nothing Tim said was event remotely about the cloud changing the game.

          Incidentally, depite Fred Wilson’s recent quote about Apple having “nothing in the cloud” and your references to its “…cloud and services efforts have been spotty…”, Apple’s financial return from the cloud is second to none.

          I would refer you to Horace Dediu’s article and graph on Friday and would repeat his question to Fred…

          http://www.asymco.com/2014/05/09/measuring-not-getting-the-cloud/

          "If there are comparable details for companies which do get the cloud, I'll be happy to tally the comparison so we can calibrate this failure."

          Really this article is a muddled mess.

          If this is really the work of ZDNet's Editor in Chief, then I would deduce that the organisation is near bankrupt, that creditors should be tightening the lines of credit, and that staff should be looking for other jobs.
          Henry 3 Dogg
      • The Bose market is the same as the Apple market.

        The Beats market is not.
        Userama
        • Now your thinking like a savvy business owner

          Kudos for seeing the REAL picture.
          GotThumbs
        • Not from my point of view

          I love Bose products but I hate Apple's.

          If Apple buys Bose, I stop buying Bose! Period.
          lepoete73
          • Sorry.

            I forgot to allow for the IHAA (I Hate Anything Apple) factor.
            Userama
          • And proud of it

            I'm a proud IHAA member!
            lepoete73
          • IHAM

            At least Apple is finally pushing back the damage from the lost generation of computing caused by the dominance and total incompetence of Microsoft.

            IHAMWGR
            Henry 3 Dogg
          • Bose isn't anything special either

            Big step up from beats, but still far overpriced.Very marketable brand thanks to builtin bass boost and muddy boomy bass.
            NotMSUser