Last year when Apple (AAPL, Financial) announced its plans to acquire AuthenTec, it had created quite a stir among industry analysts. Many started expecting some huge changes from the phone maker, and finally with the fingerprint sensor in the iPhone 5S all the blocks of the puzzle fell into place. Apple’s every acquisition move is backed by some strong reason and that’s exactly what has got the analysts excited again. The legendary gadget-guru is now eying Beats Electronics and if this works out it’s going to be the biggest acquisition in the company’s history.
Good Deal or Bad Deal?
The Cupertino mammoth is going to part with a whopping $3.2 billion to get its hands on Beats. While some industry experts and almost everyone at Apple is very excited about the deal, there are few who are forced to ask the question whether it’s a good deal or not. Till date the biggest acquisition made by the company was worth $400 million under Steve Jobs’ leadership while purchasing NeXT in 1997, followed by AuthenTec at $356 million in 2012.
In comparison to these numbers, the digits of the Beats deal are way above, attracting much discussion about the feasibility of the deal and whether it will be able to add adequate value to the offerings. However, affordability is surely not an issue for the company, considering the huge cash pile of $160 billion in its Balance Sheet. The main reason for the debate is actually not the deal size but the choice of the target for that amount.
Beats’ core businesses comprise of its headphones segment and the music services, however, the music subscription service is relatively new and has around 0.5 million subscribers only. In comparison other music subscription services such as Spotify and Pandora (P, Financial) are much ahead with 4 million and 250 million subscribers respectively. From the numbers it’s pretty clear Beats is a significantly smaller player. Then why is Apple not targeting to acquire Spotify or Pandora? Even at its current state Pandora will cost something not more than $6 billion, a sum that Apple can easily accommodate. Surely it will end up spending twice, but it also will also end up with 500 times more subscribers.
This brings us to the question what is Apple looking at in Beats? May be it’s not the music business after all. Apple already has its iTunes Radio and the company is definitely not buying Beats for its brand value in music subscription services. iTunes Radio is already a big enough brand. May be it’s the hardware business and Beats’ expertise in audio that Apple is eying. So, whether it’s a good deal or a bad one can be better understood only by taking a look at how Beats fits into Apple’s strategy.
How Beats Fits In To Apple’s Game
Apple is at a very crucial juncture as it sees dropping market share for both iPhone and iPad. Even iTunes, iTunes Radio and iPod are witnessing sluggish growth and the overall trend doesn’t seem to be satisfying at all. The tech giant is looking to dive into new product segments and this is where I believe Beats comes in. Not only this, Beats has the potential to provide a boost to Apple’s present business segments as well.
Apple wants to make its presence felt in the music space and perceives mobile-music as a lucrative opportunity. Though it produces fantastic devices, its headphones always miss the mark by a whisker. On the other hand, Beats headphones are generations ahead of Apple. Here, Beats can add the required value and this also can make a huge difference. A better headphone will surely improve the user experience significantly and can provide the mush needed push to the sluggish sales.
Next, Beats can turn out to be a huge value contributor for Apple TV and the highly awaited iWatch. Apple has been working hard to provide the next generation audio-visual experience in the living-room and with Beats audio expertise, the company can finally deliver what it claims. Even with the iWatch the company is experimenting a lot. The gadget is being designed with a special focus on the user’s health aspect and will be coming with heart-rate monitor. With this Apple will venture into the world of wearable devices and tech analysts believe the company is also cooking something to do with audio in iWatch.
Again, it’s not just the audio-hardware business, but also the music service that can add value. I think the company can actually help Apple sell more music. Beats uses an algorithm that helps in understanding the listener’s mood and accordingly plays songs, resulting in a desirable playlist. Though iTunes Radio is working fine, listener-to-buyer conversion is extremely low. Statistically, less than 3% of the listeners end up buying music from Apple. In this situation a better playlist can be expected to boost sales.
Departing Thoughts
Honestly speaking I don’t see any reason for concern in the deal. Instead I fell the deal makes complete sense. Consumer electronics space is highly dynamic and fast changing in nature. Apple, Google (GOOG, Financial), Samsung (SSNLF, Financial), Nokia (NOK, Financial) and many others together have developed the space and now the consumers are demanding new innovative products. The need of the hour is to think out of the box and try to find synergies. The deal is almost confirmed and it’s highly likely that we will find Beats’ impact in the next iPhone as well.
