I'm not going to rehash the details here. Much of what was rumored these past two weeks were proved true, except that the deal was for $200 million less - what really amounts to cup of coffee at Apple's headquarters. But the more pressing issue is of the ripple effects this deal may have to other media players, namely Sirius XM (NASDAQ:SIRI) and Pandora (NYSE:P).
Some insist that Apple is "buying more flair." But $3 billion is a hefty ransom to pay just to appear "cool." Some have also made the mistake in thinking that Apple is interested in Beats' high-end headphone business, which many industry participants don't regard as "great quality."
In a note to employees following the closing of the deal, Apple CEO Tim Cook made certain that everyone understood that it was Beats' music expertise that made this deal possible. Cook, in the statement, said:
"Music is such an important part of all of our lives and holds a special place within our hearts at Apple."
And in a separate statement, Tim Cook reminded everyone why Apple acquired Beats. While discussing the realm of music streaming and an ability to both monetize and reward artists, Cook said of Beats, "they're the only ones that got it right." And it is for this reason (among others) Sirius XM and Pandora should worry today.
Note, I have a $3.50 price target on Sirius shares. But I'm not opposed to changing that view at any moment. As information changes, it is prudent for one to change their mind. While I'm not going to alter this target just yet, being that it's only 6% away, there is other developments regarding Apple that will fundamentally impact Sirius' long-term prospect. And I'll get to them in a moment. For Pandora, the impact will be felt immediately.
When news broke of the pending deal between Apple and Beats, Mike Herring, Pandora's CFO dismissed any idea that Apple would pose a threat to his company. In brash fashion, Herring boasted about Pandora's plans to widen its lead in a $50 billion ad-supported radio industry, in which it has close to an 80% market share. This is on top of the company's 9% share in radio listening market. But so what. The more pressing question is about Pandora's ability to monetize its popularity.
After a decade in existence, Pandora still has not shown investors that it can make any money. Despite its lead, the company has been riddled with deteriorating profits. In fact, even though Pandora's revenue has steadily risen, there has also been a clear deceleration in active users. Even worse, artists, with whom Pandora has fought over payments, now has Apple to align themselves with.
Apple has offered to pay artists twice what Pandora pays, while also offering to share a portion of ad revenue. So contractually, an Apple/Beats union will eventually kill off Pandora. For Sirius, however, the impact will be felt much slowly. This is because, aside from the fact that Sirius makes money, Sirius offers more than just music. But Apple has also begun to address this.
Recall, back in March, Apple announced that it had added the NPR channel to iTunes Radio. With popular shows like "All Things Considered" and "The Diane Rehm Show," Apple was exploring more ways to diversify its offerings. Very few took that news seriously.
Well, on Wednesday, Apple also introduced a new ESPN station for iTunes Radio. The station will include original ESPN programs like SportsCenter All Night, SVP and Russillo, The Herd, and Mike & Mike. According to 9to5Mac, the ESPN station will also stream the World Cup, making it the first live sporting event to be streamed live through iTunes Radio. Note, Apple also added 42 local NPR stations. Isn't this the sort of thing Sirius prided itself on?
With Apple's cash and its obvious desire to become a media company that specializes in content, it's only a matter of time before Apple begins discussions with popular channels like CNBC, MSNBC, FOX News, Bloomberg and so on. And once the NFL, NBA, Major League Baseball and NASCAR enters the mix, it's game over for Sirius.
Disclosure: I am long AAPL.
Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.