After the recent news reports of Apple Inc. to acquire Beats Electronics for $3.2 billion, one might wonder if this deal is intended to substitute coming out with “the next best thing.” In light of the string of tech deals this year it isn’t clear if this is just another high priced acquisition or a truly strategic buy. At the very least, one can only hope the deal will help to replace the underwhelming, white headphones packaged with each iPod.
Beats Electronics was founded in 2006 by music industry leader Jimmy Iovine and Dr. Dre. The company is a maker of high-end headphones and has recently released a subscription service for music-streaming. Additionally, they had annuals sales of $1.2 billion last year, according to news reports. It’s doubtless they have high profit margins, so $3.2 billion may be a bargain price.
If completed, this would be Apple’s largest acquisition to date. As we all know, historically they’ve relied on internal innovation to move the company forward. It is difficult to say whether this is a total departure from past strategy. Gene Munster, an analyst at Piper Jaffray, was recently quoted saying, “We are struggling to see the rationale behind this move,” further adding that Apple “has never acquired a brand for a brand’s sake.” If this is true, then what’s the strategic value of this deal?
First off, without Beats, Apple had over $170 billion in net sales this past year – a daunting number in comparison to Beats’ revenues – and it is unlikely this acquisition will do much to magnify that. However, with countless loyal users, it isn’t a stretch to expect a rapid growth in sales for Beats headphones, if promoted with other Apple products. Moreover, the new music-streaming subscription service by Beats could help to revitalize falling iTunes sales and recreate iTunes Radio entirely. Thus, it would appear that Beats complements Apple products well.
A strategic buy, though, does more than just complement existing products. A key strategic value for this deal is giving Apple a foot in the door to a new market: headphones – something the standard, white iPod headphones never accomplished. This is an entry that also fits in line with their past success of mixing technology with culture while maintaining superior quality and beautiful design. It’s not necessarily a game-changer, but it’s an attractive fit.