Apple Tunes in Beats

Edited by Vani Rao

Buys Beats to revive its dwindling music business

Apple Inc. (NASDAQ: APPL) announced on Wednesday, May 28, 2014, that it will acquire audio products and equipment manufacturer Beats Electronics LLC for $3 billion. The manufacturer of premium-priced headphones and audio speakers had generated revenue of $1.1 billion in 2013. The Beats acquisition is the major deal after Apple’s PrimeSense acquisition in December 2013.

Source: WSA/Company reports
Source: WSA/Company reports

The deal overshadows Apple’s acquisition of NeXT Software Inc. in 1997, which turned the fortunes of the world’s most valuable company. Apple CEO Tim Cook expects the acquisition to help Apple bridge the link between Apple products and the current generation, making it the next “coolest” product.

As per the deal, Apple will pay $2.6 billion in cash and about $400 million in Apple stock, vested over an undisclosed time period. After the necessary regulatory approvals, the deal is expected to be sealed by the end of September 2014, coinciding with Apple’s fiscal and fourth quarter ending. Beats Co-founders Jimmy Iovine and Dr. Dre will join Apple for undisclosed roles in the company.

It’s All About Music

The iPhone manufacturer rode on the success of its portable music device iPod and its trademark iTunes media player. However, in the last few years, Apple has been plagued with declining sales revenue from its music business as the online music streaming service from Pandora Radio has been eating into its music download business, which was once dominated by Apple’s iTunes service.

Source: Statista
Source: Statista

In September 2013, Apple launched its free music-streaming service, iTunes Radio, to ward off competition from Pandora. However, Apple’s effort to contain Pandora has been a failure as the iTunes Radio accounts for only 8% share of the overall online-music streaming market share as compared to 31% held by Pandora.

By acquiring Beats, Apple will be able to leverage the services of Beats Music, a subscription-based online music streaming service owned by Beats Electronics. Beats Music, which is available only in the US, charges $10 per month as subscription charges and already has more than 250,000 active subscribers since its launch in January 2014.

Ownership Transition

Beats has a history of changes in the ownership of the company since its inception in 2008. In 2011, Taiwanese smartphone maker HTC held a majority share of 50.1% in Beats for $309 million. The company used the Beats brand to compete with other smartphone makers with superior audio system quality. However, HTC sold back half of its stake for $150 million in 2012 and the residual stake for $265 million in 2014.

During the fall of 2013, private equity firm The Carlyle Group LP (NASDAQ: CG) had invested $500 million for a 30% stake in Beats Electronics. However, Beats is believed to have received about double the investment from Carlyle Group. Apple is said to have paid out a premium of $1.8 billion for Beats Electronics at the current valuation. However, it seems that Apple would be the final destination for Beats as Co-founder Jimmy Iovine said, “I’ve always known in my heart that Beats belonged with Apple.”

The Beats acquisition will help CEO Tim Cook to guide Apple to new highs, as the company has not been able to steer away from the iPhone dominance in its total revenue post Steve Jobs. Apple’s market share in online sales of movies and TV shows rentals has declined to 55% during Q1 FY2014 from 75% in 2007. The company has ventured into the new Apple TV business, which is likely face hurdles from Netflix Inc. (NASDAQ: NFLX) and Comcast Corp. (NASDAQ: CMCSA). However, its new subscription-based business model would help revive its ailing music, online movies, and TV shows business model.

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