Turn up the Beats! 3 reasons why Apple’s acquisition sounds right. And 3 why it does not.

Another day, another interesting (?) acquisition in the tech space. Why is Apple (supposedly) willing to spend some 3 billion of its hard earned cash on overpriced headphones and Hip-Hop artists? Let’s start, as usual, with a couple of numbers.

Beats

• 1.5 billion in revenues in 2013
• 20 million songs available on its music streaming service, the quite cleverly and originally named Beats Music
• 120$ a year to have the privilege to listen to Justin Bieber without being interrupted by ads
• 200 000 paying subscribers (contrast with Spotify’s 10 million… )
• 11 headphones models and 3 bluetooth speakers
• 64% of overpric- ehm, “luxury” headphones (>100$) sold in 2012 were Beats

Apple

• 90% of Apple’s cash is offshore
• $130 billion in dividends and share buybacks promised in the next two years
• $150 billion cash stockpile
• $3.2 billion the offer price for Beats
• 75% of revenues come from iPhone and iPad
• 45 billion revenue last quarter
• 800 million customer accounts

Those numbers should cover it. Let’s do some thinking now.

As I see it, there are three possible reasoning for Apple to be buying Beats.

1. Swagger. Beats is apparently cool with the kids. I wouldn’t know, I am definitely not part of the demographic (the cool part, I am definitely a kid) and I do not particularly like Hip-hop. Anyways, as evidenced by strong sales, and by the fact that if you walk around town you will have seen at least one person sporting a pair of Beats, folks love these earphones. This could serve to reinvigorate Apple’s appeal with the young crowd, who does not necessarily want to have the same mobile as their parents.
2. Streaming. For the first quarter ever, digital downloads have declined. As the FT recently titled, we are maybe on the verge of the death of the download. On the other hand, the rise of “the Stream” is apparently unstoppable. Have you used iTunes radio? Yes? You are part of the 8% of the (US) population who has elected Apple as their provider of choice.  iTunes radio is definitely a lot bigger than Beats music, however Beats has a cooler app, designed by hipsters for hipsters. And how can Apple not like that? Plus it’s innovative, in the sense that there is no free ad supported version and that all playlists are curated by real humans, not by dumb computers.
3. Connections. In the form of Dr. Dre and Mr. Iovine, veterans in the music industry, who bring contacts, network and know how probably not possessed by anybody at Apple.

Sounds reasonable right? To me personally, not really, Here’s why.

1. Let’s face, the Beats headphones are not that good. Admittedly, if you love you bass down low, you are going to have a field day with the Beats, in any other case, you are probably going to hate them. They are not especially comfortable, they tremble is drowned, and most of all they are ridiculously overpriced. Even Apple headphones in comparison look dirt cheap. And the big A could probably have designed great headphones without Dr. Dre advise. (better than those things they ship with iPhones nowadays…)
2. Is the streaming really that valuable? After all, it’s only 200 000 customers. To be fair, I have not tried the app (for two reasons: I don’t have 10$ and they don’t have Vocaloid music on there) but from various reviews posted online it doesn’t appear to be a particularly innovative concept not paying scheme. It’s gimmicky and playlists are not dynamic. Meaning they don’t change, they stay the same. Therefore you need to trust the curators have done a great job selecting the songs! I also have some qualms about streaming. Unlike movies, which you tend to only watch ones (with some exceptions -cough-start wars-cough-), you listen to music a lot more. I have listened to my favorite songs, which I am not going to name here for fear of sounding ridiculous, for more than 300 times. Having to find your favourites every time, and searching for them it’s a lot more cumbersome. Plus, and this might only be me, I am too much of a control freak to not have my music on my SD card at all time. Finally streaming doesn’t work on the subway, or when you have limited data. I don’t see the “download” death coming about anytime soon. Maybe if we all had 4g unlimited data, then I would reach a different conclusion. But then we would all be flying on dragons and watching unicorns running free in the grass.
3. Do people at Apple really have no music industry contacts? Are Dr. Dre and his acolytes that valuable to justify a 3.2B price? I doubt that.

Which brings me back to the only key issue here, as with any M&A deal: valuation. With a price that is almost triple that of the most recent post money valuation, this deal will definitely put some wide smiles on Carlyle people’s faces, but I really do not see it being justified in a company who has 1.5billion in revenue but does not disclose whether it makes a profit or not.

At the end, I fear the only reason Apple is acquiring Beats is because they have become to big to be innovative, and to boring to risk something new. With incremental and marginal improvements on their product lines, and the only upcoming “surprises” in the pipeline being a iWatch and a “real” Apple TV (not the streaming box), it looks to me like one of my favourite companies has lost its hedge. Do not get me wrong, I am typing these on a Mac, and I would not be parted with it even under death threats, but I frankly believe Apple has become more a luxury brand rather than a technology one. And this acquisition only serves to reinforce my belief.