AMITIAE - Friday 9 May 2014
Apple's Rumoured Acquisition of Beats Music: Speculation, Comments and Sources (Updated)
By Graham K. Rogers
BackgroundI sifted through a large number of news items on this reported deal and there are several questions; with some long-time Apple observers quite troubled by the idea. Although the FT seemed to be in the lead with the story by Matthew Garrahan and Tim Bradshaw, Om Malik points out that Reuters were discussing this "back in March 2013." As a point, while the FT article is behind a paywall, CNBC made the text available: the Internet is a leaky sieve.
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).
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 ReasonsThe biggest question concerning such a purchase, is Why? Apple most certainly does buy companies and there are usually specific reasons for this. Unlike some companies that have picked up and dropped phone companies, there is never any haste to Apple's decisions. The main reasons for any purchase normally, are
Chart of Streaming Services - Horace Dediu
CommentsSome wondered if the article in the FT was speculative: an attempt to push the shares of Beats Music up (e.g. Electronista). Had that been so, I would have expected Apple to have come out right away and said so. It would perhaps be in Beats' interest to stay silent on the matter, although that did not stop Dr Dre and friends making comments in that video
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 AdditionsAlso producing a summary that could be summed up with the single word, "Why?" Ben Lovejoy on 9to5 Mac outlines the areas of Beats' excellence and wonders how any of this could fit with what Apple has or does.
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 CommentI am with John Gruber on this: "I don't get it."
But I do know that Apple does not gamble.
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