Why Apple Is Acquiring Beats At A Price Tag of $3.2 Billion
The Financial Times (FT) has reported that Apple is on the verge of possibly acquiring two lucrative and new businesses; by purchasing Beats Electronics and possibly as well taking in Beats Music as part of the package of Beats Electronics acquisition. Beats was founded by one of the best rappers in HipHop industry Dr. Dre alongside the Interscope Geffen A&M Records chairman, Jimmy Lovine. The first headphones production by Beats was in 2008 and was branded, “Beats by Dr. Dre.”, At this time, Beats products were exclusively manufactured by Monster Cable. However, this deal ended in 2012, and Beats started manufacturing its own products.
FT says that Apple and Beats are currently working on some few financial matters, should they see eye to eye soon, Apple would be announcing its acquisition of Beats Electronics sometimes next week. This announcement would effectively be Apple’s largest acquisition in its history.
Outside of Beats, the other largest and most recent acquisition is when Apple acquired PrimeSense with a price tag of $350 million; still not a huge sum compared to the company’s business strength. However in Apple’s recent earnings call, the company’s CEO, Tim Cook said that they are ready to spend big on acquisition if the deal made sound economic sense to them. So Beats Electronics must make a very sound economic sense to Apple for this acquisition to be happening, and we possibly could see more high profiled acquisition like this by Apple in the coming days, if indeed Apple is making a culture change.
We expect Apple to retain the Beats brand in selling their audio accessories and possibly even use that brand to sell other devices. Beats is a well established and popular brand commanding many customer loyalties across the globe. Even though Apple still has a great appeal with its earbuds on its devices, the headphones have grown more popular over the few past years. Despite the fact that audiophiles do not like Beat’s headphones, Beats has still managed to capture a considerable market share. The market share that Beats commands is a very lucrative, especially considering that Beats headphones fetch higher prices compared to its competition. This served as a great motivator for Apple to buy Beats.
Another possible motivator for this acquisition is the music streaming service available to Beats users from Beats Music. The genesis of which came started in July 2012, when Beats Electronics acquired Mog, a music streaming services. But later Mog services were shut down and relaunched in January 2014, as Beats Music. Although Beats Music is still new in the business, Apple is currently more interested in the Beats headphone business rather than the music streaming services.
If precedence is anything to go by, back in 2009 Apple acquired Lala music services and proceeded to shut it down. So whether Beats Music will have the same fate or not is still quite unclear. Recently Apple has had a growing problem with its music downloads services; the music industry is shifting towards streaming, as opposed to music downloads. According to a report tabled by the Recording Industry Association of America in 2013, music streaming segment grew by 39% year-over-year compared to music downloads that grew by 1.1% in 2013 compared to 2012.
It would be wise for for Apple to change to music streaming instead of music downloads, otherwise companies like Spotify and other music streaming services will eat up Apple’s market share when it comes to music. Considering that, perhaps there could be a future for Beats Music in Apple after all.