In Defence of a Beats Acquistion

Yesterday, News broke that Apple was in discussion to acquire Beats Electronics, vendor of premium headphones & a streaming subscription music service.

Here are my compiled thoughts on why this acquisition is positive. Most of what is written here are opinions I wrote shortly after the news broke yesterday, and after reading lots of opinions on the matter since, my thoughts haven’t really changed.

1. Beats revenue growth is fantastic, in a market that Apple essentially hasn’t entered.

No one has anything but estimates, but even the lowest figure for 2013 revenue at Beats was more than a Billion dollars. This represents massive growth in a short period from only a few hundred million a couple of years earlier. Everyone is aware that Beats headphones are very high margin products, in fact thats what its detractors often bring up as a negative. High Revenue growth for a company with a high margin product sounds like a very good investment, and something that is worth a higher than average market multiple. Its important to note that Apple isn’t really in the same market as Beats either, whether we are talking about premium headphones or multi platform subscription music.

2. The Beats Business would be far more profitable operating under Apples wing.

The Beats business would achieve even higher margins operating under Apple than it does now – it would no longer require distribution, legal, accounting & financial departments – and its manufacturing operations and supplier agreements are likely to get much better deals as part of Apple. Beats sits so nicely into Apples operations that the company is simply worth more to Apple than to almost anyone else.

3. The Beats brand is valuable.

Beats is THE choice for the vast majority of consumers who want a premium pair of headphones. Despite what Audiophiles will say about its products, the overriding factors for most premium headphone purchasers are Brand & Design.

4. Beats headphones & streaming products are good. Apple kind of sucks at music sometimes.

Apple undoubtedly had huge hits with the iTunes music store and of course the iPod, but lately it has sucked at new music innovations (no one can deny how bad the iPod HiFI & Ping music social networks were before being rightly killed). It has also failed to launch a streaming music product years after it was obvious consumers were moving in this direction, as a result iTunes music revenues are now in decline. Beats on the other hand has arguably the best streaming music product out there, with its curated approach for users. Apple also didn’t enter the growing premium headphones market – which is now what retailers call a “destination” product, rather than a “peripheral”. in other words people seek out and go to stores to buy premium headphones, they don’t simply buy them only when buying a new smartphone or iPod. Beats on the other hand has taken a lead in this market.

5. Beats is (probably) the most profitable Android Phone Accessory vendor.

Beats headphones (and portable speakers) are very popular with music fans who are Android owners, not just iPhone owners. Being that they have such high gross margins, its quite likely that if Apple bought beats it would also happen to become the most profitable vendor of Android premium headphones. Other than premium headphones, are there any other high margin android accessories that ship in large numbers? maybe phone cases, but is there one dominant case maker I’m not sure. Regardless, this is one way for Apple to monetise Android users. If someone buys a samsung galaxy and buys a pair of Beats headphones to use with it, Apple would likely make more profit than Samsung.

6. Beats Music Streaming App gives Apple an instant beachhead in expanding iTunes revenue to Android users.

While the Beats Headphone business gives Apple some hardware revenue from Android users, The Beats streaming music App provides Apple with an instant beachhead into Android to sell music. The potential to sell a billion android users streaming music, downloaded music (& potentially video content in the future) is just as big an opportunity to build iTunes revenue as the billion windows users were 10 years ago when Apple launched iTunes for windows.

7. Beats Music possibly gives Apple streaming music agreements with all the major labels.

Apple doesn’t have a subscription music product. something is holding that product up. it presumably isn’t technology, so it likely is contractual negotiations with labels. If acquiring Beats provides a quick resolution to that hurdle then its just another reason to do it. Again this is another reason why Beats might be more valuable to Apple than to other potential suitors who either have their own subscription services already or simply have no need or desire to have one.

8. Beats provides additional high margins products with a potentially good attach rate – perfect for Apple Retail.

With Angela now in the loop and ready to shake up retail, adding a desirable Prremium High margin product to showcase to and attract store visitors is a win.

9. Jimmy Iovine & Dr Dre would be good additions to Apple.

They know music. They know youth. (Apples executive & board bio page is 95% middle aged white guys, probably not the type to be on the cutting edge of youth culture).

10. Critics of the Beats business model sound EXACTLY like critics of the Apple business model.

“All Beats is is clever marketing and overpriced inferior products!” Sound familiar?