Apple (AAPL) is one of the largest and most well-known companies in the world. Apple also happens to have three times as much cash on-hand ($158 billion) as the United States government. One of the most common complaints of Apple share-holders is that the company does not do enough with its enormous piles of cash. However, Apple recently announced that it would acquire Beats for $3 billion ($2.6 billion in cash and $400 million in stock). This announcement has been everywhere in recent Apple stock news. $3 billion is almost an incomprehensible sum of money to most of the world, but this represents not even 2% of their cash on hand. While the acquisition has been highly publicized, it is important to note that Apple has acquired over 27 companies in just the past year but they have not spoken significantly about them. However, even if this purchase was less than 2% of Apple’s cash, there still needed to be solid logic behind the acquisition. The world is exploding with commentary on the purchase and everyone seems to have an opinion, so let’s take a look at some of the most persuasive arguments.
Reasons to buy:
The Beats Brand
Perhaps the simplest explanation for why this purchase makes sense is that Beats are just cool. Beats headphones have exploded in the past few years and it’s easy to see people on the street wearing them as a fashion piece in most major cities. Dr. Dre, the co-founder at Beats and world-renowned rapper, has leveraged his personal reputation to make Beats so popular. In fact, a recent survey conducted by Statista1 showed that more than 46% of all teens surveyed preferred Beats headphones to others. Only 25% said they preferred Apple’s and no other brand scored above 10%. Beats are a well-known brand and a profitable business that Apple clearly does not want to miss out on.
Beats Music Subscription Service
Tim Cook has stated that the deal “is all about music, and we’ve always viewed that music was key to society and culture. Music’s always been at the heart of Apple. It’s deep in our DNA.” It is believed that he is referring to the Beats Music Subscription service as opposed to the Beats headphones business. Beats Music, a service similar to Spotify, is reported to have 250,000 paying subscribers. Cook also stated:
“We get a subscription music service that we believe is the first subscription service that really got it right. They had the insight early on to know how important human curation is. That technology by itself wasn’t enough — that it was the marriage of the two that would really be great and produce a feeling in people that we want to produce.”
Historically, Apple has been hesitant to enter the music subscription service arena because Apple leadership, like Steve Jobs, believed that people preferred to own tracks than to rent them. However, as the digital music industry begins to lean towards subscription based services, Apple can no longer afford to sit on the side-line and watch, and Beats Music could be their first move into the field.
Another key factor in the purchase was Beats co-founder Jimmy Iovine. Iovine is a powerhouse in the music industry and has been working with Apple on different ventures for the past 10 years. He helped forge the first iTunes Music Store and has apparently been talking to Apple about Beats since its early stages. Iovine will not move to Cupertino but will rather stay in Los Angeles as a full time employee where he will most likely work to bridge the gap between Silicon Valley and the entertainment industry in LA.
Reasons not to buy:
Beats Headphones are not good.
There is no other way of putting it: Beats headphones are not good headphones. They are often described as too bass-heavy or just glorified disposable headphones. They are rather expensive and with the same amount of money most reviewers agree that there are other headphones that are both more stylish and better sounding. But of course, people buy Beats headphones for the branding…which leads to the next point.
The Apple brand is the best in the world, far better than Beats.
Apple’s headphones are not good either, but this is clearly not because they cannot build better headphones. If they desired, Apple could have built great headphones for far cheaper without Beats and put the Apple logo on them. While the Beats brand is wildly popular and well-known, the Apple brand is even more so. Apple products are timeless and classy; Beats headphones are a fad. Apple has worked so hard to create this image and to market all of their products on it, so why incorporate a different brand with different goals and characteristics?
Beats Music is unremarkable
Again, if Apple desired, they would have easily built an in-house music subscription service with superior technology than that of Beats Music. Tim Cook claims that Beats is the first service to do it right because of their human curated playlists, but this does not explain why Apple bought Beats. Beats does not own patents on this method and Apple could easily integrate it into their own service. Even if Beats gives Apple a head start on this venture, is it really a $3 billion head start on a product that Apple almost already has with iTunes radio?
$3 Billion is too much
Perhaps there is plenty of reason to buy Beats, but $3 billion is too expensive. No matter how you put it, this price seems too steep to make a case for. With $3 billion Apple could have bought many other companies that would have brought new patents, innovations, and visions to Apple: Beats does none of this.
As for how this will affect Apple stock, no one can know for sure. However, I Know First’s Apple stock algorithmic prediction is the best idea you can get.