A big surprise to many in the industry occurred earlier in the month when news surfaced that Apple was going to buy Beats Electronics.
Questions swirled around the acquisition: What would happen to Jimmy Iovine, Dr. Dre and Trent Reznor, all executives of Beats? Would they become Apple employees? How would they fit in that culture? What about that dollar amount; does the valuation make sense? And which piece of Beats is Apple after? If Beats by Dre headphones are so maligned for their quality, why would Apple, known for being a pinnacle of design, want to add an inferior piece of equipment to their product line? Or do they just want the Beats Music streaming service that launched earlier in the year?
And given the infamous video of Dr. Dre and Tyrese leaking the news, many of these questions were posed from the perspective of "What could Apple be thinking?"
Apple was most certainly thinking about the nature of this purchase and how it would propel them forward. My thoughts:
- Jimmy Iovine, Dr. Dre and Trent Reznor are all seasoned executives with insights into the music business developed over long careers. Their first-hand knowledge of both consumer electronics and streaming services—to saying nothing of music itself—will be a tremendous asset to Apple.
- The valuation? Yes, the $3.2 billion price tag being talked about is very high: whole record companies used to get sold for amounts like that. However, consider that Apple has $159 Billion in the bank and that Beats had $1 Billion in revenue in 2013, and one can get some perspective on the purchase price.
- Quality? It should come as no surprise that Beats by Dre headphones are not considered audiophile products. However, they have cornered the market on style and who's to say that Apple can't create an audiophile version at a higher price point? And if the kids who aren't buying music actually are buying headphones, doesn't purchasing a leading headphone manufacturer make sense?
- As for the streaming service, Beats Music: Apple has never been a strong competitor in this space, and rather than trying to build a service themselves, purchasing one on the rise makes perfect sense. As I wrote at the beginning of the year, competition among streaming services will be key as they continue to refine their offerings and as consumers sign up in higher and higher numbers. Apple saw an opportunity with this purchase and took it. It was a bold, yet smart move to insure they get into the business now without any risk that they might fall further behind.
- Something else to consider is that download sales are dropping. Apple virtually single-handedly created the download business by inventing the iPod and forcing the major labels to accept $0.99 per track pricing. If that revenue stream is drying up, and with consumers using their mobile phone to access music, Apple's strategy can now switch to one in which those consumers would use their iPhone to utilize Apple's own streaming service.
Apple has always been a very conservative company, one that has always considered its options and only rolled out a product when it was ready. While there might've been missteps along the way, there have been few. A purchase of this size would not have been entered into lightly, but all of the decision-making seems to be sound. Lately, Apple has just been a phone company; this purchase can make them dominant again, not just in the music space but also in the consumer electronics space.
