Why Apple may buy Beats

by Jörgen Eriksson on May 14, 2014

Apple may soon acquire Beats Electronics, one of the leading producers of headphones, in a deal which could be valued at as much as 3.2 billion USD, according to various reports by the media. If the deal goes ahead it will be the largest acquisition ever made by Apple.

In September last year, Carlyle Group made a 500 million USD investment in Beats, valuing the company at 1 billion. If the purchase price by Apple is 3.2 billion USD as rumoured then Carlyle has made a very good deal, as Apple for some reason values the company at three times what it was worth just nine months ago.

Beats Electronics was founded in 2006 as a branding project to create value from the rap artist and producer Dr. Dre’s existing audience and was marketed as such. The company has not been leading innovation but followed well trodden paths into noise-cancelling and portable Bluetooth speakers, with varying degrees of success. Clearly, the market leaders and innovators in this industry are Bose and Sennheiser, and companies like Beats are followers.

Why would Apple want this company? It has no track record of innovation, patents, or other intellectual property. Its core products are handset peripherals. The only real value for Apple would be if the acquisition of Beats would give them access to a new market that they cannot easily break into through Beats new and really unproven streaming service. It will be interesting to see if this holds true. I doubt it.

Music streaming is already dominated by YouTube and Spotify. When Beats Electronics launched its subscription service in January, it seemed more like a validation of Spotify’s business model than a threat. Spotify has 10 million paying subscribers, and an additional 30 million people listen to the ads supported version for free.

Below is a video from Financial Times, analysing the potential deal.

Death of download

About Jörgen Eriksson :

Jörgen Eriksson is the founder of Bearing and is the Chairman of the firm since it was created. He has successfully expanded Bearing into covering projects on four continents. He is also Adjunct Professor of Innovation Management at the International University of Monaco and at Universitat Politècnica de Catalunya in Barcelona and he is an active member of the Founders Alliance organisation.

Working with consulting engagements across Bearings practices, he has over the past fifteen years participated in and supervised a large number of client projects, from innovation system development and place development and branding, to merger and acquisition assignments and leading edge research and business development activities for key clients.

His new book, Branding for Hooligans, will be published in 2015. It is about how innovation and branding are key survival factors in our modern times of hyper competitive markets.

Prior to Bearing, he was Director of Europe, Middle East, and Africa for Trema Treasury Management, a technology and consulting services provider, supplying financial software solutions for the global financial industry, Clients included The European Central Bank, Citibank, SEB, South African reserve Bank, Deutsche Bank, Abu Dhabi Investment Authority (ADIA), as well as many other large financial institutions and Fortune 500 companies.

Early in his career Eriksson was educated at the Stockholm School of Economics, where he studied economics, financial economics and philosophy. He then worked in Scandinavian investment banks and also for the Swedish Institute of National Defense Research.

You can contact Jörgen on e-mail jorgen.eriksson@bearing-consulting.com, connect on LinkedIn on http://fr.linkedin.com/pub/jörgen-eriksson/0/38/8a0/ and follow him on twitter on joreri508.

{ 2 comments… read them below or add one }

Rami Moughabghab May 20, 2014 at 13:54

Hi Professor, very interesting blog entry. I was also thinking about the reasons why would Apple want to acquire Beats. Many analysts believe it is due to the new Beats Streaming App in order to switch for digital downloads to streaming. On top of all that, I believe Apple wants or should use Beats as a channel that would allow Apple to innovate again, it is true that Beats is not an innovative company (their headphones sound awful and overpriced) but it could help Apple have a competitive edge in the new best thing; ‘Wearable Techs’.
Beats controls over 60% of the US premium headphones market and the brand is widely popular with the age group from 10-30 (This is a big market). People who are dynamic, trendy, always on the move and can make the best out of wearable techs. The termination of the whole Nike Fuel band team (apple’s closest ally) makes me more convinced of this scenario. Headphones are always in/on/over our ears, whether we are commuting, traveling, watching a movie, or working out. Moreover Headphones sit on the head; they are light, and get fixed in the ears and provide the best POV. Thus making it the most convenient place to add a camera (apple’s answer to google glass), to add sensors, HUD displays, augmented or virtual reality (the answer to Facebook’s acquisition to Oculus). I have a hunch that it will be a cash only acquisition in order to show the always nagging Apple investors that they are re-investing the cash. Oh well, as you mentioned before, their S-curve is flattening maybe they are simply trying their luck before they flatten like a flounder fish.

Jörgen Eriksson Jörgen Eriksson May 20, 2014 at 14:16

That is a good point, but going heavily into wearable techs is a market where the prices are lower than on the products Apple currently sells, so they would enter a mass market that they are not currently in. I think it would make more sense if they tried to disrupt the market for TV sets or systems for cars, which would be higher priced products.

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