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Tales From The Future (tftf). I picked my nickname because many advisors and investors claim they can predict the future of the (stock) markets and somehow pick the winners. I don't. I usually do not engage in short-term trading and myopic analysis (quarter by quarter, without looking at the big... More
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  • Apple X Beats -Three Important Points On Apple's (Likely) Biggest Acquisition 15 comments
    May 9, 2014 10:57 AM | about stocks: AAPL

    Let's assume for a moment that the deal between Apple and Beats is on:

    "Apple is said to be close to completing an acquisition of Beats Electronics, the headphone company and streaming music service created by Dr. Dre and Jimmy Iovine. According to the Financial Times, the deal could be announced as soon as next week if negotiations work out. "

    http://bit.ly/SGOx9C

    One important note to start with: Beats (according to Wikipedia ) just employs over 300 people, so there shouldn't be a major culture or integration shock involved. The deal (while unusally large for Apple's historic standards, Apple CEO Cook alluded to bigger deals recently*) is very different than GOOG buying Motorola or MSFT buying Nokia's phone division with thousands of employees joining the merged company and overlapping executive roles that need to be resolved on a unified org chart.

    There are three important take-aways I would like to discuss:

    1. Monetization and ROI Potential For Apple

    Apple is not wasting its huge money stash all of sudden: $3.2 billion is not that much when digging into details.

    Beats is not another Nest (Nest was bought by GOOG when revenue/market category and global expansion for Nest was still de minimis) or WhatsApp. Beats Electronics (the Beats hardware divison) is generating a lot of revenue already, the following report is from August 2013:

    "Beats Electronics on track for $1.4 billion revenue this year - report" - http://bit.ly/1m656pL

    Apple will have noticed its rapid ascent because they sell Beats headphones in their stores (both online and Apple Retail stores).

    As for the lack of audio quality some audiophiles argue over? Some people even argue Beats and its oversized headphones are a passing fad:

    Reviewers Agree: Beats Headphones Are Overpriced And Not That Great

    www.businessinsider.com/beats-headphones...

    Some Headphones Amplify Celebrities Over Sound

    www.nytimes.com/2013/02/21/technology/pe...

    Usually fads don't last for 5+ years with rising revenue, but there are certainly risks. Larger, high-end headphones could lose market share once again to smaller and less flashy designs.

    In addition, Apple could certainly improve the sound quality or simply ditch the lower-end Beats model lines starting around $100 - the higher-end Beats models sold at $250-$450 usually get better reviews.**

    In any case, Beats enjoys very high margins on their hardware (see the NY Times linked above for numbers) - an important plus they share with Apple's existing hardware line-up.

    2. Beats is more than just Beats Electronics

    In addition to hardware, Beats worked on services like automated (algorithm playlists) and human curation (DJ playlists) when suggesting/streaming music.

    Beats Music (formerly known as project "Daisy") especially puts a focus on the human side:

    Beats boss: Daisy streaming library will rival Spotify - Algorithms haven't nailed it

    www.techradar.com/news/internet/web/beat...

    Apple could also use the music content and streaming/licensing parts of Beats - but there's an important caveat: Most likely these contracts have to be re-negotiated if Beats is acquired by AAPL or another third-party (this remains an important open question when the deal closes).

    Apple would get another streaming service/solution against Spotify, Pandora and other competitors nibbling at iTunes' music revenue.

    At $3.2 billion, Beats is much cheaper than Pandora and Spotify (arguably also with fewer subscribers, Beats' renewed MOG service just got started in 2014. Pandora, Rdio, Spotify and others have a multi-year headstart in this area over Beats and iTunes Radio).

    Within Beats, Apple would also get the smaller Topspin unit recently acquired by Beats:

    Topspin's earliest and most lasting mission has been to help artists make a living by connecting them with their fans and helping them make money. (...) As the era of streaming matures, new ways to connect artists and fans will evolve inside these services, and Beats Music now has a proven platform and team in Topspin's ArtistLink to lead the industry in empowering artists in their service.

    topspinmedia.tumblr.com/post/78552386781...

    Topspin (if executed right) could be a re-launched effort replacing the failed former "Ping" music service from Apple.

    In conjunction with Apple's Siri, these services could become quite powerful (think concert tickets, mood/location-based music algos and artist merchandise...)

    3. Beats is a very powerful brand with young people and could be used as a segway into future Wearables

    I already mentioned Beats rising revenues - from zero back in 2008 when Beats started out to well over $1 billion in 2013. Beyond revenue numbers, Beats has considerable branding power and fashion "klout" with younger and culturally diverse buyer segments.

    With long-term potential for "head hardware" - see for example the recent "Glyph" project on Kickstarter...

    It only took four hours for the Glyph, a head-mounted "personal theater" from Avegant, to reach its $250,000 funding goal on Kickstarter.

    Unlike the Oculus Rift's focus on virtual reality, or Google Glass which forces a heads-up display into every facet of life, the Glyph is a media-centric device. For now, it offers a nice pair of high-end headphones with a headband that can transform into an immersive display.

    techcrunch.com/2014/01/22/glyphs-persona.../

    (click to enlarge)

    (please follow the techcrunch link to see how the Glyph works)

    ...the Beats acquisition could provide another entry into the wearables segment for Apple long-term.

    Finally, let's turn back time on another Apple music deal that made no sense at first (1999) for many outside observers and analysts:

    Remember that it made no sense for Apple to buy SoundJam MP, an MP3 player and media sync system, in 1999. The company made a basic desktop music player and was relatively unknown in the market. In fact, in 1999 it wasn't even certain that the MP3 would take off. Napster launched in June 1999 and died soon after. Why, then, would Apple want an arguably small-fry MP3 player app?

    On January 1, 2001, SoundJam MP turned into iTunes 1.0.

    In 2013, Beats owned 64% of the high-price headphone market.

    (...)

    techcrunch.com/2014/05/09/why-apple-want.../ ***

    For example, the Beats brand could allow Apple to offer/label its services on other platforms (Android, Windows Phone; Beats already has clients for these platforms) without diluting the Apple brand or confusing consumers.

    Let's wait and see how the Beats deal plays out. I will give Apple management the benefit of the doubt given their track record.

    On the other hand, a deal should also not the overrated: Assuming Beats could reach 2-3 billion in hardware revenue under Apple's wings, that's still just a little over 1% of Apple's total revenue (assuming AAPL is on track to generate about 200 billion in revenue/year, which looks likely to me given the larger iPhone 6 phone models presumably coming later in 2014).

    PS: Funnily enough, a Beats takeover by Apple was a music insider newsletter's April Fool's joke only a few weeks ago. Yesterday's news must have caught quite a few AAPL analysts and music industry observers off-guard...

    lefsetz.com/wordpress/index.php/archives.../

    _______

    * Apple CEO Tim Cook's quote in the WSJ back in February 2014:

    " We have no problem spending ten figures for the right company that's the right and that's in the best interest of Apple in the long-term. None. Zero."

    blogs.wsj.com/digits/2014/02/07/apple-st.../

    ** I agree that other high-end headphone brands like AKG, Grado, Shure or Sennheiser perform better on average - but the high-end Beats models are not that bad, at least not as bad as some people pretend them to be.

    Beats headphones are mainly intended for younger people more into bass-heavy music, they are less suited for classical and jazz etc.

    Apple is not famous for the quality of its own bundled headphones and earphones, there is room to improve sound quality for both brands. In any case, Beats would not be a step backwards from Apple's existing earphones.

    *** Below is a compilation of US marketshare for higher-end headphones:

    Source: online.wsj.com/news/articles/SB100014240...

    Disclosure: I am long AAPL.

    Stocks: AAPL
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  • Tales From The Future
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    Comments (7608) | Send Message
     
    Author’s reply » Time.com discusses the rumor with a focus on Spotify, worth reading:

     

    The Reason for Apple’s Massive $3 Billion Beats Deal? Spotify

     

    "“This is a reactive move — at best,” writes veteran tech journalist Om Malik. “Steve Jobs’ Apple would have pushed to make something better, but even he struggled to come to terms with the Internet and Internet thinking. That hasn’t changed.” (TIME’s Harry McCracken also poses some good questions about the deal.)

     

    Subscription services are growing faster than any other area of the music industry. Music subscription revenue increased by 50% to $1.1 billion in 2013, according to a report by IFPI, the global music industry association, cited by my colleague Eliana Dockterman. Downloads fell 2% last year, in the first annual decline since Apple launched the iTunes store in 2003.

     

    Spotify is valued at more than $4 billion, and the Swedish company is among the most high profile candidates likely to go public over the next few years. A Spotify IPO would likely blast the company’s market value into the stratosphere, so it would make sense for Apple to make a run at the company now."

     

    http://ti.me/1g42E35
    9 May 2014, 12:21 PM Reply Like
  • Tales From The Future
    , contributor
    Comments (7608) | Send Message
     
    Author’s reply » As quoted on Time.com, Om Malik doesn't like the deal at all. Read his take here:

     

    Someone wrote that Apple will get design help from Beats Audio. LOL. Beats design is done by an outside agency, started by ex-Apple peeps. (#) [Outside agency is Robert Brunner’s Ammunition Group and Brunner hired Jony Ive.]

     

    Google spends $3.2 billion to buy the future & data. Apple buys bad headphones & a junk-service from music promoters. Worse use of corp $$$s. (#)

     

    Buying BeatsAudio (aka a Baboon’sAss) is a good sign that Apple is pretty much out of ideas & unable to come up w/an anti-Spotify strategy. (#)

     

    http://bit.ly/1g4hWoH

     

    PS: I take the opposite view here. I think GOOG overpaid a lot for Nest, while Apple's rumored purchase price seems reasonable given Beats' sales numbers in 2013.
    9 May 2014, 01:25 PM Reply Like
  • Anyoption
    , contributor
    Comments (1367) | Send Message
     
    Very thorough and fun read. I agree that the price seems reasonable. It will be interesting to see what Apple does with it.
    9 May 2014, 02:04 PM Reply Like
  • Tales From The Future
    , contributor
    Comments (7608) | Send Message
     
    Author’s reply » Thanks.

     

    I tried to add quite a few links to cover many angles and give information (so hopefully it's useful even if readers don't agree with my conclusions).

     

    PS: If the deal doesn't go through, I expect Beats to go public soon. Same for Spotify and other competitors (IPO rumored for some time).
    9 May 2014, 02:13 PM Reply Like
  • Anyoption
    , contributor
    Comments (1367) | Send Message
     
    Very useful!
    10 May 2014, 01:55 PM Reply Like
  • Tales From The Future
    , contributor
    Comments (7608) | Send Message
     
    Author’s reply » Another interesting point: Cross-platform branding ans streaming vs owning music along those brand lines:

     

    "Apple needed to hedge their bets and get into streaming. But instead of building another bolt-on to iTunes as the company did with their underperforming radio service, Apple decided to speed their way to market by purchasing a hot new service that had a lot of buzz, but hadn’t scaled so much that it was prohibitively expensive. Beats is the most viable of all acquisition targets.

     

    While music purchases may be falling, it’s still a big business for Apple. So instead of creating another option in iTunes that would potentially cannibalize download sales, why not just buy a service and keep it separate? Streaming blows up: Apple wins. Streaming doesn’t pan out, well, they still have the iTunes store chugging along."

     

    http://bit.ly/1l9YC
    9 May 2014, 07:53 PM Reply Like
  • Tales From The Future
    , contributor
    Comments (7608) | Send Message
     
    Author’s reply » Finally, I would like to give Reuters credit for breaking the story (at least the people involved) back in March 2013:

     

    Exclusive: Apple's Cook, music mogul Iovine discuss new music service
    BY POORNIMA GUPTA AND RONALD GROVER
    SAN FRANCISCO/LOS ANGELES Wed Mar 6, 2013 2:15am EST

     

    http://reut.rs/1l1nGeT

     

    I remember reading it but didn't think about it too much at the time; when iTunes Radio launched soon after this report, I thought Apple had abandoned the discussions with Beats and went alone. The timing made sense to me, iTunes Radio was launched in June 2013:

     

    http://bit.ly/1l1nNa4
    10 May 2014, 04:19 AM Reply Like
  • Tales From The Future
    , contributor
    Comments (7608) | Send Message
     
    Author’s reply » Some updated subscriber numbers with Spotify leading the pack (but still a low conversion to paying subs):

     

    http://bit.ly/RUtG1n

     

    More numbers from rivals here:

     

    "Comparing against rivals is tricky, since they're not always as eager to boast about major milestones. However, it's clear that there's still a significant gap. Rdio, one of Spotify's best-known challengers, had 6 million paying listeners as of late 2013; Deezer had 5 million at that time. Whether or not Spotify can keep up its current pace is another matter. Part of the music provider's lead comes from launching in some regions ahead of its peers. While it's still one of the most widely available services, with access in 56 countries, opponents like Rdio are quickly expanding their reach -- it'll soon take more than broad coverage to stand out from the crowd."

     

    http://bit.ly/1k5s54l
    21 May 2014, 11:36 AM Reply Like
  • Tales From The Future
    , contributor
    Comments (7608) | Send Message
     
    Author’s reply » Update: The deal is now complete and I wasn't that wrong in my assumptions above. From the FT who broke the story in the first place:

     

    “We’ve known them a long time,” Mr Cook said. “We’ve gone from dating to going steady . . . now we’re getting married.”

     

    ...

     

    “We’ve got a streaming service that we believe is the first to get it right,” Mr Cook told the FT. “They had the insight that human curation was very important . . . we think they’ve done an A plus job.”

     

    Beats was superior to rival streaming services, he added. “Some of them are no more than a random set of songs put together.”

     

    ...

     

    Mr Cook said the Beats streaming service would eventually be launched in other markets. “When you combine what Beats has done and what Apple has done . . . what really sends us over the top is what the two companies could do together.”

     

    Mr Iovine said Beats Music would be enhanced and improved by the tie-up with Apple. “It’s only 20 per cent of what we want it to be. How do we get it to the quality we want? That’s Apple.”

     

    The deal has been hailed by the music industry because of the boost it gives to the streaming business model.

     

    ...

     

    http://on.ft.com/1gCjwxT

     

    The final deal was $3bn, a little less than the FT rumored. CEO Cook on the price in a different FT article (also note that Beats revenues in 2013 were a little less than rumored):

     

    "At a time when its Silicon Valley neighbours are throwing billions of dollars at start-ups with minimal revenues, such as WhatsApp Messenger, Oculus VR and Nest, Apple believes its $3bn purchase of Beats will soon boost its earnings, rather than drag on profits.

     

    ...

     

    Beats’ headphones generated $1.1bn in revenues last year and grew by another 30 per cent in the first quarter of 2014, he said. For now, most of those sales are in the US, while two-thirds of Apple’s business is overseas.
    “So there is a natural synergy there from a geographic point of view,” Mr Cook said, including taking its nascent music streaming service abroad.

     

    “There are of course all kinds of synergies in some of the product things that we can work on together . . . Over time we are hitting the gas.”

     

    http://on.ft.com/1gCkxpM

     

    PS: Finally, Beats will remain cross-platform, as I also predicted (in addition to a fast ROI):

     

    "Analysts have said Apple is overpaying for a music streaming service that has only 250,000 subscribers, but Mr Cook insists that the deal makes financial sense on the basis of sales of its premium-priced headphones alone."

     

    ...

     

    "But Beats will also see Apple break with a longstanding tradition that its own apps and services are available only on its iPhones, iPads and Macs. Beats Music will remain available for Google’s rival Android smartphone and Microsoft’s Windows Phone.

     

    “Yes we are going to be cross platform,” [with Beats Music] Mr Cook said. “We want everyone to enjoy music.”

     

    ...

     

    Mr Cook did not rule out using the Beats team to help build out its video service. “It’s not something we are talking about today,” he said. “Right now we are focused on music. But these guys bring us incredible skills. We have always wanted to pull the thread [in the TV market] to see where it takes us.”

     

    http://on.ft.com/1gCkxpM
    28 May 2014, 11:55 PM Reply Like
  • Tales From The Future
    , contributor
    Comments (7608) | Send Message
     
    Author’s reply » Finally, here's Cook's memo to employees about the deal:

     

    Cook goes through Apple’s focus on music throughout its history, how Apple and Beats will be structured upon the closing of the deal later this year, and why this acquisition is important.

     

    http://bit.ly/1gCnlDp

     

    ...and a longer interview with Recode about the deal:

     

    http://on.recode.net/1...

     

    It's interesting to see how much Cook is willing to share (compared to other smaller deals), perhaps to clear some confusion many on Wall St. Had about the deal.
    29 May 2014, 12:26 AM Reply Like
  • Tales From The Future
    , contributor
    Comments (7608) | Send Message
     
    Author’s reply » More details on the numbers from the WSJ:

     

    "Apple Inc. is paying slightly less than $500 million for the Beats Music streaming service, and more than $2.5 billion for Beats Electronics in its $3 billion deal, according to people familiar with the matter.

     

    The breakdown between the two portions of Beats Electronics LLC offers insight into Apple's thinking for the most expensive acquisition in its history.

     

    A person familiar with Beats said its 2013 sales totaled close to $1.3 billion—all from the electronics unit that sells headphones and other audio gear—and the company was profitable. Beats launched its streaming-music service in January."

     

    http://bit.ly/1mwOXYr
    29 May 2014, 07:33 PM Reply Like
  • Tales From The Future
    , contributor
    Comments (7608) | Send Message
     
    Author’s reply » Another good analysis of the Apple-Beats deal (ex post):

     

    In essence, Beats aims to become Uber of music by aggregating demand, connecting listeners to artists and empowering the artists to build thriving business on top of the platform. Much like Uber, which promises to end the era of poorly paid cab drivers. Or like Apple App Store, which connects users with app developers allowing them to build business on top of the platform.

     

    Pandora, Spotify, Play Music and Amazon that are all designed to sell music, will have very hard time to compete against a platform for building businesses on top of music. As Marshall Van Alstyne said in slightly underestimated way (pun intended):

     

    "Troy Carter, who discovered Gaga and was her manager till November 2013 being widely credited for much of her business strategy sums it up nicely in his interview to FastCompany:

     

    “It was more about building a platform on top of music—because music, we realized, sells everything but music.”
    Gaga-the-business-model is a poster child of the new economics of digital era. Mike Masnik of TechDirt calls it the economics of abundance brilliantly explaining it in just minute and a half video here: http://bit.ly/1hob9qr.
    (Note that Mike accurately predicted the rise of the new business models in music well before Gaga’s business success became known.)"

     

    ...

     

    “There is a strong argument that platforms beat products every time.”
    The acquisition makes very good sense for both Apple and Beats. Beats gets the opportunity to kickstart network effects of the platform by bringing huge base of Apple users together with their credit cards to artists. Apple at the same time will benefit by bundling the music platform with its idevices, where the company makes most of its profits and badly needs to rejuvenate growth."

     

    http://bit.ly/1hobaL4
    1 Jun 2014, 03:12 AM Reply Like
  • Tales From The Future
    , contributor
    Comments (7608) | Send Message
     
    Author’s reply » More details on Beats numbers:

     

    http://bit.ly/1nH6fav

     

    It's interesting to see the company faced a cash crunch in mid-2013;

     

    "OCTOBER 2013: BEATS FIND ITS WHITE KNIGHT: CARLYLE GROUP - A MASTER AT LEVERAGING COMPANIES: SECURES $300 Million IN PURCHASING FINANCING, PLUS HUNDREDS OF MILLIONS IN ADDITIONAL FINANCING TO PAY BEATS FOUNDERS THE CASH-OUT DIVIDEND THEY HAD SOUGHT"

     

    The full video interview (Recode 2014 conf) with Iovine and Apple's Cue is now also online:

     

    http://bit.ly/1nH6faw
    2 Jun 2014, 04:57 AM Reply Like
  • Tales From The Future
    , contributor
    Comments (7608) | Send Message
     
    Author’s reply » Addition about the streaming business. As I already outlined, both Spotify and Pandora are losing money at the moment:

     

    "As the chart above shows, Spotify continues to take losses and its loss widened from $60 million in 2011 to $77 million in 2012. Similarly, Pandora also took a net loss of $20 million in 2011 and $38 million in 2012. The main reason for the losses is the high royalty fees these companies have to pay to play songs."

     

    http://yhoo.it/1pCXKx0
    3 Jun 2014, 12:44 PM Reply Like
  • Tales From The Future
    , contributor
    Comments (7608) | Send Message
     
    Author’s reply » Tim Cook in his own words why AAPL bought Beats:

     

    http://read.bi/YGILrs
    13 Sep 2014, 03:07 PM Reply Like
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