News broke last week that Apple is honing in on a $3.2 billion dollar acquisition of Beats, the luxury headphone maker with a new music streaming service.
TechMedia pundits have had a field day with the acquisition rumor (which seems to have been confirmed by Beats owner and spokesperson Dr. Dre), noting that Apple is quite infamous for its timid acquisition strategy and that this will not only be its largest ever but that it also seems to be a peculiar fit.
There’s no doubt that, on the surface, this acquisition seems strange. Can’t Apple do better than acquiring an also-ran headphone manufacturer who has thrived off of a celebrity brand? If they are after Beats’ new streaming service, can’t they grab Spotify, the well-entrenched market leader, for the same, or perhaps even a smaller, price tag?
As some articles have pointed out, Beats does not seem to have any great technology. Their headphones are not necessarily known for the highest fidelity and there is no special IP that Apple would be acquiring. Apple’s engineering can undoubtedly surpass Beats’ product quality in both design and sound technology if they want to enter the headphone market, perhaps in preparation for the ‘wearables’ trend that is starting to simmer. Likewise, the Beats music service, while quickly growing, is far from the market leader and seems to have no secret sauce from which Apple can benefit or couldn’t develop on its own for far less than the price tag of the acquisition.
So what gives?
What Beats does appear to have is simple:
- A strong, and rapidly growing, revenue base in an otherwise commoditized consumer market
- A premium brand that demands a luxury price and must be throwing off very strong margins
- A young, but growing, complementary revenue stream in software
- A brand with a cult-like following that has built strong loyalty
- A product that makes a fashion statement as much as it provides a utility
- A TechMedia service (streaming music) that is growing based on the brand loyalty
Yeah, that basically sounds like Apple’s business – luxury products that gather a cult-like following to drive high revenue growth and margins while providing direct access to consumers that will leverage a new, budding media consumption service powered by software. iPod, anyone? How about the iPhone? Or the iPad?
So what could Tim Cook be thinking?
Perhaps Tim sees a complementary business. Both brands value elegant design and luxury. Both are marketing machines with strong brand loyalty. Both build premium products with strong margins. Both integrate their hardware products with software to create a closed ecosystem. Beats happens to have strong, if not dominant, market share in the headphone space; some reports claim greater than 51%.
Isn’t it possible that unlike other TechMedia acquisitions (like Facebook’s acquisition of WhatsApp), this one just simply makes business sense vs. being a stab-in-the-dark media darling? Perhaps with the strong revenues ($1.5 billion) and high margins, this acquisition is even accretive in a relatively short period of time.
If Tim can figure out how to retain Dr. Dre so that Beats doesn’t lose its luster, this acquisition just might turn into a coup — and that’s without even mentioning that headphones just might turn into Apple’s first big push into the wearables space.
I can’t help but wonder how the Beats Store at Amazon will change if Apple’s in charge…