Apple Is Acquiring A Fad - Not Quality - And That Is Troubling

| About: Apple Inc. (AAPL)


Apple is acquiring Beats for $3.2 billion.

A check of Beat's history shows it likely that it's mostly just slapping a celebrity name into an OEM product.

So Apple is buying a fad, not audio quality. Apple could have easily bought audio quality instead, so buying a fad is troubling.

The acquisition itself is not really material for Apple's prospects, but the decision behind it is troubling and seems to show Apple is on the wrong track.

In what might have been the first-ever acquisition confirmed through Facebook, Apple (NASDAQ:AAPL) decided to acquire Dr.Dre's Beats for $3.2 billion.

It should be said that whether Apple is overpaying for this acquisition is rather irrelevant, though it is true that Carlyle bought into Beats just last September at around a $1.06 billion valuation (taking into account that HTC sold out 25% for $265 million). So in less than one year Apple is paying 3 times more.

Beats is not some kind of empty shell, either, having dominated the U.S. market for high-end headphones, and booking about $1 billion in revenues in 2013.

So what's troubling about this acquisition?

What is so troubling is that in spite of Beats having dominated the market for high-end headphones, there's significant doubt regarding the audio quality of these headphones. Audiophile site after audiophile site says that apart from heavy bass, Beats sells because of branding, not because of audio quality.

Indeed, with just 30 employees back in 2010, it seems obvious that Beats took the OEM route to build its products. What this means is that Beats probably only customized the looks of generic audio products produced in China, while not providing much in the way of technical advances to justify a higher qualify breakthrough. So Beat's success, much like Skullcandy's (NASDAQ:SKUL), was just a matter of branding/fad.

Apple buying off this brand at this stage thus seems similar to when Zynga (NASDAQ:ZNGA) bought OMGPOP (makers of "Draw something"), or more recently, when Zynga bought NaturalMotion (makers of "Clumsy Ninja"). Both of these acquisitions meant Zynga bought into fads just as they were peaking. Apple's looks the same.

If Apple was serious about quality, Apple could have bought other players

For instance, Sennheiser is a reputed maker of quality headphones, and it had revenues of around $800 million in 2012, so not much different from Beats and with a wider presence around the world.

Sennheiser has a long list of patents in the space. Whereas Beats' patents are seemingly more along design cues. Beats actually brought a lawsuit against Yamaha, again, due to design cues. Perhaps Apple saw some kind of parallel with its own lawsuit against Samsung?

Also reinforcing this opinion, is the fact that the company Beats associated with, Monster, is known to place more emphasis on marketing than on pure technical quality. For instance, regarding headphones (Source: Wikipedia)

Monster created similar partnerships with Lady Gaga for the Heartbeats brand of headphones in 2009, PDiddy's Diddybeats in May 2010 and LeBron James later that year. In 2010, Monster began developing a series of products for the Chinese market that were co-branded with basketball player Yao Ming.

There are also other brands, like Audio Technica or V-Moda, which Apple could have bought for technical know-how and quality. For the kind of money Apple put forward, it could basically have bought true audio knowledge, instead of a brand which was slapped on OEM product. And that's what's at stake here. Up until now, Apple would have gone for true quality, not for faddish brands. But this time it did go for the fad, to the tune of $3.2 billion.

$3.2 billion is a rounding error for Apple, but the change in priorities is not. Apple faces tremendous risk if it starts to give more importance to branding and image, than to the underlying quality of its products. Already, it seems that much-cheaper smartphones can hold their own well against the iPhone, and have a similarly valuable ecosystem as well. The public, over time, does not really favor fads, so if Apple starts trying to find value in fads, the end result won't be pretty.


While spending $3.2 billion is meaningless for Apple, the logic behind such an acquisition is worrisome. Apple seems to be going with the Beats fad, instead of trying to acquire quality audio technology. Over time such path leads to bad outcomes, as Zynga so well illustrated.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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