By Graham K. Rogers

The end of the week was livened up a little when a report in the usually reliable Financial Times suggested that Apple was ready to acquire Beats Electronics, makers of Dr Dre headphones which are popular with teens, but less so among discerning music enthusiasts. While Apple has a history of buying companies that it can use, the particular market and the reported price of some $3.2 billion set off much speculation.

Background

In the last financial report (Q2 2014), Tim Cook, who had suddenly become the darling of Wall Street with record profits and a couple of scalps in his belt was asked about acquisitions. There were a number of soundbites, but in his summary, Mark Rogowsky wrote, "Apple is "on the prowl" for acquisition candidates. There is no rule that Apple can't spend a lot but it's important that it strategically makes sense."

Adding to that, Rajat Agrawal pointed out (like many) that Apple had "Acquired 24 companies in the past 18 months." Slightly separate was the comment from Cook that "We are expanding Apple's products and services into new categories and we are not going to under invest in this business" (Rene Ritchie).

Apple does not usually confirm (or even deny) rumours, but I would have expected some comment if the stories were not true, however an article on The Next web by Nick Summers included a video posted on Facebook that showed Tyrese Gibson with Dr Dre who seemed to confirm that the deal was signed, although there are no official confirmations. That will please the lawyers, no doubt. A number of comments in the video are quite interesting, including "They will have to update the Forbes list" (presumably of the world's richest).

Later that video was removed, and some see this as a sort of confirmation that the deal is real. A copy of the video is still available on YouTube.

Speculation on Reasons

• A move into a market: Apple already has its own earbuds and certainly has the technical abilities to make headphones should it wish. Currently, the sale of Dr Dre products follows the norm in that they are available in the Apple stores like many third party products: that includes the Apple Online store. Although the latest Dr Dre phones have been successful, there seems to be no compelling reason that the product itself would make the purchase of Beats worthwhile.

• Acquisition of technology may also be a non-starter. There have been comments about the output of the headphones which might not satisfy the complete spectrum of audiophiles. This quality question would also push it further from an Apple need to acquire. In addition, there is nothing really innovative about coils and magnets. Apple already makes products that use the technology.

• Cachet: someone might buy a famous name (say, Harrods) to make people think better of them, but the name Apple already has a certain meaning to it in terms of product range and quality. Acquiring Beats would do little here except perhaps for a minority of teenagers.

• The grass is greener. What does Beats have that Apple does not? A number of comments have been made concerning the new music service, Beats Music, suggesting that this is the key and Apple needs it to shore up its iTunes offerings. Apple executives Tim Cook and Eddy Cue have previously met with Iovine to discuss streaming music services (Mark Gurman, 9to5 Mac).

  Christian Zibreg also comments, ". . . there's no doubt that Apple has missed the boat when it comes to on-demand music-streaming services akin to Spotify and the like." A chart of such services that I found in a Tweet from Horace Dediu indicates that Beats Music is small fry (at least for now).

Chart of Streaming Services - Horace Dediu

• The deal includes someone of value. There are precedents for this being behind the decision: for example, when Apple bought NeXT, it also bought Steve Jobs. As part of the deal, it could be that Beats co-founder Jimmy Iovine comes aboard, but there is also Robert Brunner and as Om Malik reminds us, the "Outside agency [that runs Beats Design] is Robert Brunner's Ammunition Group and Brunner hired Jony Ive"

Comments

It is worth reading through the whole of the article by Om Malik and not just the excerpts that I cherry-picked. He is firm in the belief that the acquisition is more about music streaming than trendy headphones and cites a number of areas in which Apple is weak, notably "its inability to come to grips with the cloud" partly because its DNA is in hardware.

On MacObserver, Bryan Chaffin, whose article I read before the comments of Om Malik, is nonplussed. While he may be right about there being no need for the headphones, his suggestion that iTunes Radio is a good competitor so the music streaming service is also not needed, may need revision.

Likewise, John Gruber reports on the article in the FT by Matthew Garrahan and Tim Bradshaw, adding "Nothing from Beats looks like Apple. Not the brand, not the hardware. If this report is true, and Apple keeps the brand, how does that work?" He closes with a confused, "I don't get it." I must admit I don't: at least not yet.

More background and some history is available in an item on the alleged deal from Mikey Campbell, who writes, "The Beats management team would report to Apple CEO Tim Cook" which is an odd move, and he also adds the comments of Iovine, that "I was always trying to push Steve into subscription. And he wasn't keen on it right away."

Electronista points out that "the deal would be by far the largest-ever acquisition by Apple. Coincidentally, the report's alleged price for Beats -- more than three times higher than its valuation -- is the exact same amount paid by Google for Nest." In an unusually extended article (unusual for Electronista who are more often straight to the point), there are some comments on the dubious reporting by the Financial Times: "clearly written by two people who aren't familiar with Apple." This report also comments on the financing, with Apple in the middle of share buybacks and paying out dividends: the cash is being depleted.

Suggesting that it is still not yet a signed deal, Jack Purcher on Patently Apple reports that those in the know, "cautioned that some details had yet to be agreed and talks could still fall apart." He also comments on the size of the deal, writing, "A deal on the scale being discussed would represent a radical departure for Tim Cook" and that "under the late Steve Jobs, Apple was reluctant to pursue high-profile acquisitions."

There are winners and losers. HTC did own some of Beats but sold it at a loss, Romain Dillet reports on TechCrunch as part of a broad look at the rumor. He tells us, "In 2011, HTC bought 50.1 percent of Beats for $309 million. Later, the company sold back its stake in two chunks. The first stake resulted in a $4.8 million net loss, the second one generated $85 million in profit." That 50.1% would now be worth $1.6 billion.

But the winner is (apparently) the Carlyle Group, according to Ryan Dezember on Wall Street Journal. Carlyle "paid about $500 million for just under 50%" of Beats, but the $3.2 billion deal would give Carlyle "upward of $1.5 billion, or about $1 billion profit."

Late Additions

While the rest of us are scratching our heads about this rumoured acquisition, John Biggs on Tech Crunch thinks it makes real sense in terms of the success of its hardware sales and because "Beats is a marketing miracle." I think that Apple has also had some minor successes in marketing over the years, so what difference that would make, I am not sure. He is: ". . . know that this merger makes perfect sense, even if we can't see why just yet." Well, it is true that Apple rarely gambles (especially with the size of the figures here).

A useful addition to the list in an indirect way is a complete rundown of Apple acquisitions from Tyler Durden on ZeroHedge who also includes a useful commentary on how it looks from the finance side.

Taking a similar tack to me and to Ben Lovejoy, Neil Hughes of AppleInsider examines the comments of the pundits and the confusion that has appeared in the reports online.

Final Comment

But I do know that Apple does not gamble.

Sources

• On Streaming: Apple, Beats & Spotify (Om Malik)

• Rumor: Apple interested in acquiring Beats Electronics? (Electronista)

• Apple Q2 Earnings Live: Surprise! Better EPS, Stock Split, Bigger Dividend As iPhone Soars (Mark Rogowsky, Forbes)

• Apple made 24 acquisitions in last 18 months and other takeaways from Q2 earnings call (Rajat Agrawal, BGR)

• Apple announces Q2 2014 earnings: 43.7 million iPhones, 16.3 million iPads, 4.1 million Macs sold (Rene Ritchie, iMore)

• Did Dr. Dre just confirm that Apple is buying Beats for $3.2 billion? (Nick Summers, TNW)

• Apple in final talks to acquire Beats Electronics for $3.2b, deal could be announced next week (Mark Gurman 9to5 Mac)

• Apple Reportedly in Talks to Buy Beats, Please Let it Be False (Bryan Chaffin The MacObserver)

• The Financial Times: 'Apple in Talks to Buy Beats Electronics for $3.2B' (John Gruber, Daring Fireball)

• Apple reportedly nearing $3.2B acquisition of Beats Electronics (Mikey Campbell, AppleInsider)

• Apple Could be on the Verge of Acquiring Beats Electronics (Jack Purcher, Patently Apple)

• Apple In Talks To Acquire Beats For $3.2 Billion, Says FT (Romain Dillet, Tech Crunch)

• Apple's Beats Deal is Music to Carlyle's Ears (Ryan Dezember, WSJ)

• Opinion: What is Apple's thinking in spending $3.2B on buying Beats? (Ben Lovejoy, 9to5 Mac)

• Why Apple Wants Beats (John Biggs, Tech Crunch)

• A Complete History Of Apple's Corporate Acquisitions (Tyler Durden, ZeroHedge)

• Apple's rumored Beats buyout baffles pundits & analysts alike (Neil Hughes, AppleInsider)

  
  

  Graham K. Rogers teaches at the Faculty of Engineering, Mahidol University in Thailand where he is also Assistant Dean. He wrote in the Bangkok Post, Database supplement on IT subjects. For the last seven years of Database he wrote a column on Apple and Macs. He is now continuing that in the Bangkok Post supplement, Life.