MorningWord 5/12/14: Beats by Dre, Sold by Apple, Designed in Compton, California

by Dan May 12, 2014 9:22 am • Commentary

I can’t remember the last time a rumored acquisition of a private company has garnered as much attention as the supposed Apple bid for Beats.  Traditional and social media outlets have exploded in debate as to the merits of the potential deal and what Apple actually wants most (headphones, streaming music, and/or dialed in music execs)?  I have to assume that Apple has a plan, but is it the sort of plan that its shareholder base will understand? And what is it the start of?

If it is about headphones, I think it is safe to say this will be a disappointment.  I have bought all 7 iPhones. I have and never will buy Beats headphones. Most people are perfectly happy with the white earbuds.  While I have never paid $300 for beats, I have probably bought $300 worth of extra earbuds throughout the years as they are sort of a disposable item. The Beats market is real, but it will not appeal to the majority of iPhone buyers. But Apple, if you really wanted to do something innovative on the earphone front, how about making a set that does not take a minute to untangle when I take them out of my pocket? Even with that little slider thing. And get off my lawn!


Apple watcher Sammy the Walrus of the AppleOrchard blog posed this question on the streaming front:

Would Apple replace the iTunes brand with Beats? Is it possible for a declining consumer electronics brand (iTunes) to turn around and regain its strength? Maybe the only way for Apple to regain its grip on music is to update its branding from iTunes to Beats (among other things).  In such a case, a $3 billion price tag doesn’t seem as crazy.

Others have said that the deal is largely predicated on bringing in Beats founders Dr. Dre and more importantly music industry stalwart Jimmy Iovine (whom Steve Jobs was very fond of) for the next digital music industry revolution that Apple hopes to be at the forefront of.  If this is the case, and assuming that Apple would not keep the Beats brand for the hardware, this is a fairly expensive way to hire people.  Apple appeared to be on a flashy hire kick even before this, most recently tapping Burberry’s former CEO Angela Ahrendts to head up their retail operations. But how would very non-traditional types fit into the New Apple, which by most accounts has become a bit more corporate under Tim Cook’s watch?


And lastly, streaming.  Was Steve Jobs wrong on whether consumers want to own vs rent their music?  He was correct 5 or 10 years ago, but the popularity of services like Pandora and Spotify prove him wrong today.  Now Apple faces a familiar problem in that they are caught flat-footed on a long developing trend (think large screen smartphones, small screen iPads and no social media strategy/presence to speak of).

If Apple were to spend $3.2 billion (or $5b) for Beats, it really wouldn’t matter from a financial standpoint. I have to assume they have a plan, and not just throwing stuff up against the wall to see what sticks. But I would argue that given what appears to be overwhelmingly negative sentiment from the financial media and the Twitter-sphere, the company would be setting themselves up for ridicule if the deal does not go off without a hitch, the service never catches on, the company misunderstands long standing customers, and their newly minted billionaire execs don’t play nice.  All of this comes months before iPhone 6 launch, which could be the make or break moment for Tim Cook’s tenure as CEO.  If the new phones are evolutionary, and do not help bridge the market share gap with Android, Cook will be on short time, and the hodge-podge of defensive acquisitions would not make me feel better as a shareholder.  I would much prefer a bolder, more trans-formative strategy that incorporates, payments, health monitoring, wearables, social media and the internet of things.