When the Financial Times broke the news yesterday that Apple was in talks to acquire Beats Electronics for $3.2 billion – what would be Apple’s largest deal ever – at least one analyst wondered why they would want to bother.
While there has been no word from either Apple or Beats Electronics about the deal, the Financial Times, The New York Times, The Wall Street Journal and Bloomberg have seemingly confirmed that a deal is in the works, with only one citing any sources–anonymous or otherwise–for their information.
And Hip-Hop pioneer Dr. Dre, co-owner of Beats Electronics with music producing legend Jimmy Iovine, also seemingly confirmed the deal yesterday in a very NSFW YouTube video. In the video, a drunk Dr. Dre and his friends crow about the deal without actually specifically naming Apple. In it Dr. Dre calls himself “the first Hip-Hop billionaire from the West Coast.”
While many industry observers think the deal is just the thing Apple needs to give itself “street cred” and shore up its ailing iTunes business, at least one analyst– Piper Jaffray’s Gene Munster–remains skeptical.
“We are struggling to see the rationale behind this move,” Munster wrote in a note to clients late Thursday, according to CNNMoney. “Beats would of course bring a world class brand in music to Apple, but Apple already has a world class brand and has never acquired a brand for a brand’s sake (i.e., there are no non-Apple sub-brands under the company umbrella). Separately, we are not aware of any intellectual property within Beats that would drive the acquisition justification beyond the brand.”
Still, Munster’s opinion seems to be in the minority.
A number of industry observers suggested that Apple might be interested in Beats in order to up its “cool” factor with young people, as streaming music services like Spotify, Pandora and Rdio have become increasingly popular. The acquisition also would give a built-in streaming music service that is very popular.
“For Apple, the streaming music service that Beats recently launched may be the most attractive part of the deal. Apple revolutionized digital music with the iPod and iTunes, but the company has yet to find a new formula to challenge Spotify, the streaming music darling of the moment,” notes Time.
According to Re/Code, the best way to make sense of the deal is to think of it as a two separate deals
“In one, Apple gets an electronics maker that has trained lots of people to spend money on headphones with high price tags, even though some audiophiles don’t think highly of them. Industry sources peg Beats’ electronics sales at more than $1 billion a year,” the web site notes. “Marrying that business with Apple’s established design and product operation, overseen by Jonathan Ive, could give Apple a new series of product lines and/or new channels to push out new products like the rumored iWatch.”
The other deal, Re/Code says, and the likely more attractive one for Apple, is the long-term potential of Beats Music, the subscription streaming service.
“Apple helped reorder the music business when it launched its iTunes music store in 2003 and began selling digital songs for a dollar apiece,” Re/Code says. “Over the years, Apple’s lock on the digital music market helped propel its sales of hardware like iPods and iPhones, since it was easier for people who had built music collections with Apple to keep using its products instead of rivals.”
Or maybe, as Time speculates, “One possible explanation for Apple’s interest in Beats might be the booming ‘wearable computing’ space. After all, Beats’ signature product is the high-bass headphone unit. If Apple can incorporate the Beats product into its wearable computing system — think Internet connected headphones — then the deal could pose a threat to Google, Facebook, and other companies that are forging ahead on smart glasses and watches.”