Why the Apple-Beats deal makes no sense

beats ipad

Apple’s rumoured bid for Beats is completely outside the company’s normal acquisition strategy

The tech world has been caught on the hop this morning after it was reported that Apple was close to making a $3.2bn deal to buy high-price headphone maker Beats.

Few would have predicted that such a deal was going to happen – until now at least – and now that the rumour mill is in full swing, people are clamouring to find the reasoning behind it.

They may be looking for some time, too.

“We have the technology…”

The primary products offered by Beats are its fashionable/expensive headphones and its relatively new, subscription-based music service.

It is plausible to believe that Apple wants in on both of those markets.

They already make two flavours of in-ear headphones, but they’re not the kind of products that would be seen as a player in the booming market of “luxury” accessories.

Apple has also been a notable omission from the subscription-based music streaming market – though its iTunes Radio product suggests it’s making baby steps in that direction.

But if it wanted to compete in the space that Beats occupies, it already has everything it needs to do so in-house.

As already mentioned, Apple already makes headphones. It makes all manner of speakers to work with its various devices. It even dabbled (ill-fatedly) in the standalone music speaker market way back when.

If it wanted to make some iCans, it could probably do so from the scraps in Johnny Ive’s bottom drawer.

Equally, it has everything all the pieces in place to launch a music subscription service – but just hasn’t (yet). Given the way iTunes Radio is structured, you can assume this is because Apple is worried about a streaming service eating into the revenue from its established pay-per-song store.

Beats Music is a nice product by all accounts – it looks well, and has some unique features that could give it an edge over the likes of Spotify. But it’s hardly revolutionary in its approach – nor does its reportedly small customer base make it a worthy acquisition target for a relative giant like Apple.

But even if Apple did need to make an acquisition to make a play in one or both of those areas…

This is not the ‘Apple Way’

While Facebook and Google have splashed out billions of dollars in some high-profile acquisitions of late, Apple has maintained a quiet – and prudent – buying strategy.

(This is despite the company having cash reserves that would make the finance minister of a mid-sized country weep)

For many years now, Apple’s approach to acquisitions has been simple. It buys small companies that are working in niche areas and pieces them together with what it already has to create something new.

Just look at some of its purchases of the past 12 months.

It has bought four small companies – Locationary, HopStop, Embark and BroadMap – to bolster its much-maligned Maps application.

What it did not do, was go out and buy a big-name firm like TomTom or Garmin, despite having more than enough money to do both.

It has bought three component firms – Passif Semiconductor, PrimeSense and LuxVue Technology – the products of which could all play a part in the rumoured iWatch. It did not, however, buy its way directly into the smartwatch market by acquiring a firm like FitBit or Pebble.

In fact, looking through a list of their acquisitions dating back to 1988, it’s hard to find an example of Apple buying its way into any market.

There are a lot of valid reasons why Apple takes this granular approach in favour of a Google-style buying spree – for a start it makes it easier for them to tailor products and services internally, without having to deal with the cultural problems created by subsuming big firms and their staff.

It also helps them avoid paying the kind of premium involved in acquiring higher profile operators – while simultaneously reducing the chance of having to engage in a bidding war with another tech giant.

This makes the reported $3.2bn price-tag Apple is supposedly planning to pay for Beats even harder to understand.

An investment by the Carlyle Group in September 2013 valued the headphone-maker at around $1bn – even if it’s since been subject to a bidding war, it’s hard to see how a more-than-300% premium for the firm can be justified.

Especially when the strongest thing it has to offer is its brand.

‘Beats’ beats better brands

If there is any area where Apple and Beats are comparable, it’s through their respective brands.

Both companies sell premium products and both understand the importance of the design – and branding – of products.

Both have also built a perception of quality among customers – rightly or wrongly – and both have amassed a strong, loyal user-base despite the availability of cheaper rivals.

According to Forbes’ Anthony Wing Kosner, Beats’ brand is just what Apple needs to help solve its “cool problem”.

Many would argue that, for all of its issues, Apple does not need to work on its “coolness”; certainly not to the extent of Google or Microsoft.

But that’s not the main fault in Kosner’s logic – the issue is that Apple only does one brand: Apple.

Refer back to that acquisitions list, and you’ll see that the company never retains the branding of a business it acquires. The only exception to this is Siri, which is now used as the name of a feature on the operating system that powers some Apple devices.

Is it likely to expect Apple to maintain Beats as a standalone brand after acquisition? Or will we see Apple Beats? Beats by Apple? Perhaps an iPad with that crappy ‘Beats Audio’ logo on the back, a la HTC?

Probably not.

But what if it a deal is done?

It’s possible that this rumour is being spread as part of some wider game.

Maybe someone wants to boost Beats’ reputation in order to help with some more fundraising – or a completely separate set of acquisition talks.

Or maybe someone is playing games with Apple’s share price, which unsurprisingly fell on the back of the rumoured purchase.

However, a lot of reputable outlets have confirmed that talks are at an advanced stage, so the prospect of it actually happening cannot be ruled out.

If this is the case, there are two possible reasons:

On the one hand, it would suggest that Apple has panicked. It is making an uncharacteristic bid for an unsuitable company in order to keep up with the big spenders at Google, Facebook and Microsoft.

More realistically, however, is the possibility that Apple is doing what Google did with Motorola – flipping a company and shaking down some assets in the process.

In August 2011, Google announced it had bought Motorola Mobility for $12.5bn. In January 2014, it said it would sell the same company to Lenovo for $2.9bn. On paper, that looks like a $9.6bn loss.

The reality of the deal was a bit more nuanced, however.

During its two year ownership of Motorola, Google sold its set-top box business for $2.35bn.

When it sold on to Lenovo, it kept almost all of Motorola’s patents (widely considered to be some of the best in the mobile market) along with its R&D arm.

So in reality, Google spent $7.25bn on a bank of patents that should prove to be extremely lucrative over time – as well as beneficial in the context of ongoing legal battles.

Remember that a consortium including Apple, Microsoft and Sony spent $4.5bn on an arguably lesser patent portfolio (which is now being used to sue Android phone makers) and Google’s manoeuvre does not seem so dumb any more.

So maybe Beats has something – a patent, a feature or a licensing agreement – that Apple wants; and maybe buying the company outright is the only way to get it.

Apple could sign the deal, strip out what it wants and eventually sell on what’s left (key to which is that brand) for a few dollars less.

$3.2bn still seems like a lot to pay, though.

Add a Comment

Your email address will not be published. Required fields are marked *