Apple – On the beat

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Beats signals the need to buy not build.

  • Apple is thought to be in advanced talks to buy Beats Audio for $3.2bn.
  • Beats Audio is a premium headphone maker with an estimated 51% share of the $1bn premium headphone market.
  • It also has recently launched a streaming music service that has some innovative functionality such as following artists, sharing of playlists as well as contextually and location curated music.
  • Beats also has a cool brand with the younger segment and is considered to be in touch with the music scene.
  • The biggest questions are:
    • What this acquisition will do for Apple?
    • What does it signify about Apple’s strategy and M&A going forward?
  • RFM research has found that Apple is extremely weak when it comes to its own Digital Life services. (see here)
  • Of all of the time that users spend on smartphones Apple Services cover only 35%.
  • This puts it a distant 4th behind Google at 66%, Microsoft at 71% and Yahoo! at 73%.
  • RFM calculates that around 50% of Google’s mobile revenues are coming from Apple devices as indication of how weak Apple’s services are.
  • I have long believed that this is the single biggest threat to Apple’s long-term profitability as it is these services that will increasingly become the differentiator for users.
  • Apple’s attempts to date to create its own services have been less than successful and acquiring Beats could be a sign that it is throwing in the towel on building its own services.
  • The music streaming service would fit neatly into iTunes and with the right muscle behind it could develop into a more worthy competitor to Spotify than it currently is.
  • It would also help Apple reconnect with younger users and inject some vigour into its brand which is no longer seen as super cool by the trend setters.
  • Whether Beats is worth $3.2bn is unclear at this point but the indication is that Apple will grow its way around the Digital Life Pie (see here) by acquisition rather than organic building.
  • Hence, I can see a scenario where Apple buys Yahoo!
  • This would complete Apple’s position in Digital Life but the cultural integration and the management of the two brands would have to be flawlessly executed.
  • This is unlikely to happen straight away as Yahoo! still really needs to get its house in order but an acquisition of Beats would set the stage for M&A that is much larger and more impactful.


6 thoughts on “Apple – On the beat

  1. This sounds very much like HTC needing a profitable exit from their investment in Beats and trying to flush out takeover interest. Tim Cook doesn’t believe in overpaying.

  2. Isn’t the focus on Apple-only-HW Apple’s biggest barrier for significant growth in services? Horizontal services like Spotify, Dropbox, etc. run on any client platform, while Apple’s services require Apple HW. The share of All-in-Apple customers is very small out of the whole iOS installed base. And even one is an all-in-Apple user, it is a small chance that her friends and family are too. This limits the social experiences on Apple services and plays for the horizontal vendors.

    Since Apple’s services are not real differentiators (except App Store), opening up services to competing client platforms could a move to consider. Although, the track record of HW companies in developing and running cross-platform services is not that great…

    • Thats the whole point. Apple makes all its moeny from hardware. It must develop services that are exclusive to its hardware in order to maintain differentiation. Thats how long term margins will stay high. If it does not do that Marhins are going to 10%.

  3. Apple buying Beats (if true) is bad enough but Yahoo!!!!! that really would be a truly gigantic of-the-chart mistake

    • Maybe..if it was badly executed…… the rationale is there….execution would be EVERYTHING….

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