Apple reportedly drawn to Beats' streaming service; sell-side has its doubts

|About: Apple Inc. (AAPL)|By:, SA News Editor

Bloomberg reports Apple (AAPL +1.3%) became interested in Beats after trying out its subscription streaming service, which has won praise for its personalization tech - it combines human curation with recommendation algorithms, and takes a user's mood/environment into account. The news service adds Apple plans to work with Beats to "improve the quality" of its headphones, which have a loyal following but also plenty of audiophile critics.

Billboard and the WSJ report Dr. Dre is set to join Jimmy Iovine (previous) as an Apple employee once the Beats deal goes down. Billboard adds the Beats co-founders could take the stage at Apple's June 2-6 WWDC developer conference.

Many on the sell-side aren't thrilled with the Beats reports. Uber-bull Gene Munster: "We are struggling to see the rationale behind this move. Beats would of course bring a world class brand in music to Apple, but Apple already has a world class brand." He speculates Apple's biggest motivation is adding Iovine to its ranks.

UBS' Steve Milunovich offers a more positive take: He thinks Apple might be paying less than 3x sales for a high-margin brand, and sees Beats' offerings strengthening Apple's streaming and wearables efforts. Milunovich also sees "philosophical compatibility" between Apple and Iovine.

BTIG's Walter Piecyk isn't a fan, but isn't too worried either. "$3 billion is less than 2% of the company’s cash and less than 10% its annual free cash flow ... we are more interested in further exploring our belief that rising upgrade rates in the [U.S.] could provide a nice tailwind for Apple in [2H14]."