Apple Inc. (AAPL) is in talks for acquiring Beats Electronics, the headphone maker which recently started music streaming services as well. The acquisition will be the largest ever made by Apple, costing a cool $3.2 billion, and a derailment from its historical reluctance to go for such high-profile acquisitions. The deal is expected to be finalized by next week, but is subject to some agreements and can still fall apart.
Beats Electronics was founded by record producer James Iovine and hip-hop artist Dr. Dre. The company is known for its high-quality headphones, as well as its latest foray into music streaming services. It charges $10 per month for unlimited access – for four users - to all songs available in the service, and competes with other streaming services such as Spotify and Pandora Media (P). Beats is valued at more than $1 billion, given the recent investment from Carlyle Group of $500 million.
With this acquisition, Apple will be leveraging on music services, the industry which it revolutionized through iTunes and iPods. The then CEO, Steve Jobs, was against the idea of music streaming, on the back of the belief that people do not want to rent their music. Given the changing industry dynamics, the market is moving toward a subscription and streaming-based model, and people no longer want to own their music. According to the Recording Industry Association of America, subscription and streaming accounted for 21% of music industry revenues in 2013. Though digital downloads and physical purchases surpass this number as of now, subscription and streaming are rising rapidly. According to Nielsen SoundScan, digital track sales declined 6% last year to 1.3 billion, and digital album sales remained flat at 118 million.
Last year, Apple introduced iTunes Radio, an advertisement-based music streaming service to rival Pandora. The iPhone maker is under the pressure to roll out new products. As of now, it has been relying on its flagship products like the iPhone and iPad, and no all-new product has been added to the lineup since 2010. Given the tough competition from Samsung Electronics Ltd. (SSNLF) in the smartphone space, coupled with other vendors flooding the market with cheap phones and tablets, the California-based company's market share is at risk.
The move to acquire Beats will be the first acquisition of its kind undertaken by Apple. The costliest acquisition of the company till now has been of NeXT Software Inc., for $400 million in 1997. Gene Munster, an analyst at Piper Jaffray, said that Apple “has never acquired a brand for a brand's sake.” As such, the rationale behind the move is uncertain. There is nothing that the company could not have done without having Beats in its portfolio. It could have worked on producing headphones itself, as well as on music streaming services. Last year, Apple acquired social media analytics company Topsy for an estimated price of $200 million. The motive behind the acquisition was unclear, but it is said that the company will use it for its iTunes Radio and iAd applications.
The acquisition may signal that Apple is out of ideas. Given the differences in leadership of Steve Jobs and Tim Cook, the latter is not going to shy from making such acquisitions. Apple has nearly $150 billion in cash, and as the competition concentrates, the company needs to make acquisitions instead of relying on its older products.