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I agree. This is a terrible decision by Apple on a number of levels and really goes to show that they'd rather overpay (for a fad, no less) than innovate. Sennheiser makes far better headphones but isn't a trendy name.
Google displayed the same kind of actions when they overpaid on some of their acquisitions. I agree. I'm not sure why Apple went and bought this company for so much. A lot of heads are shaking this morning.
Well, with some $160B in the kitty, maybe $3B doesn't seem like a lot to Apple. Personally I think that they are attempting to buy into streaming audio as the "next big thing". This article from NPR shows some possible motivations:
"The negotiations also are taking place as the music market increasingly tilts toward streaming and away from the downloads that once drove the success of Apple's digital music store, iTunes.
U.S. revenue from downloads — which iTunes dominates — dropped 1 percent to $2.8 billion in 2013, while streaming music revenue from the likes of Pandora and Spotify soared 39 percent to $1.4 billion, according to the Recording Industry Association of America.
While downloads still command 40 percent of the market, streaming revenue now accounts for 20 percent of total revenue, up from just 3 percent in 2007."
And this article from the New York Times adds some other background with respect to the financial aspect:
"Annual sales of Beats products, which also include speakers and other audio items, have been estimated at more than $1.5 billion. "
"The company’s headphones have fat profit margins. Headphone designers estimate the cost of making a fancy headset is as low as $14."
Assuming decent profit margins on the equipment (which, if you read the comments on the NPR article, is less than wonderful from an audio quality standpoint) and reasonable profit on the streaming, if the 1.5B gross sales figure is anywhere near accurate they should be able to make the deal work.
With respect to the quality issues prominently mentioned by the remarks in the NPR article, I agree that once you degrade audio to MP3 it doesn't really make much difference what else you do to it. I doubt that the music audience partial to Beats equipment is listening to classical music in any case.
Audiophiles world over let out a collective groan.
First, the musicians had to change their music to reduce the dynamic range to sound good for poorly compressed MP3s playing in ear buds. Now, they have to change it again to sound good for the equalization used in Beats.
For an industry that unleashed the horror called autotune for the singers, this is completing the cycle. Boomboxes are back, in an ear bud.
As the ears get insensitive to certain frequencies with the ear buds blasting all the time, perhaps Apple will "innovate" to make iBeats detect and automatically boost frequencies your ears are going deaf in.
Bose meets Nike.
Perhaps, Samsung will buy Bose now for $30B. At least they have patents on technology not how headphones should look like.
Seriously, it isn't an audio or streaming technology or brand acquisition. It is a wearable real estate acquisition.
Google has limited success convincing people to wear its glass, or Samsung its watch. Dre headphones already have a substantial penetration in wearable real estate plus it is considered cool to wear them with free marketing by celebrities wearing them as opposed to Google Glass or Samsung watches that are considered uber-nerdy.
I can't think of anything else that would let Apple get ahead in wearable penetration to launch their future technology in.
Free baseball caps with an Apple logo on them? Just kidding- you're probably right. Apple can pretty much take the upscale market for any of it's products for granted- it does need to pay attention to the younger folks who are into the latest/greatest/coolest.
If they could fit their technology in a baseball cap, they would. Or shoes if shock and vibration wasn't a problem. Eventually, it will have to get down to that level for wearables to take off in the mainstream. Embedding it in anything people are already wearing is far better than getting people to buy something to wear like Google and Samsung are trying to do which is not going to work outside of San Francisco.
Apple could have done their own cool design of headphones for this but then Samsung would have bought Beats and be more successful in penetration, so this is as much a defensive move as a tactical one in the wearables strategy.
I expect the next step in the evolution of wearables will be in belts once they get the flexible battery and electronics technology nailed down. Belts have the real estate, are fairly ubiquitous and have both fashion and utility value. Might also see technology embedded into wallets and hand bags soon.
You can be certain that not long after Bluetooth-in-belts takes off there will be a "research article" showing that male virility has (increased, or decreased, take your pick) by 14.067%.
A lot of money? Sure. But $3B is the new $50M in tech valuations. No one will take you seriously below that if you already have consumer penetration. I think they paid less than what they may have had to if Dr Dre was smarter or had better advisors. Samsung execs will be kicking themselves why they didn't think of it first but then they are used to it.
Given that this move into wearables is likely to be the most strategic move for Apple going forward that will determine its leadership in innovation for what it can do in wearables, it has a significant impact on the company and its future earnings.
Here is how I would break down the value of Beats to Apple:
Headphone design and technology: $0 Brand value: $.1B Current market penetration (neck real estate acquisition): $3B Unpaid celebrity endorsement: $.5B Music industry relationships for streaming: $.5B Keeping Samsung away from this market with no comparable rivals to acquire: $4B
Apple got a significant discount. Dr Dre wasn't smart enough.
Comments
"The negotiations also are taking place as the music market increasingly tilts toward streaming and away from the downloads that once drove the success of Apple's digital music store, iTunes.
U.S. revenue from downloads — which iTunes dominates — dropped 1 percent to $2.8 billion in 2013, while streaming music revenue from the likes of Pandora and Spotify soared 39 percent to $1.4 billion, according to the Recording Industry Association of America.
While downloads still command 40 percent of the market, streaming revenue now accounts for 20 percent of total revenue, up from just 3 percent in 2007."
And this article from the New York Times adds some other background with respect to the financial aspect:
"Annual sales of Beats products, which also include speakers and other audio items, have been estimated at more than $1.5 billion. "
"The company’s headphones have fat profit margins. Headphone designers estimate the cost of making a fancy headset is as low as $14."
Assuming decent profit margins on the equipment (which, if you read the comments on the NPR article, is less than wonderful from an audio quality standpoint) and reasonable profit on the streaming, if the 1.5B gross sales figure is anywhere near accurate they should be able to make the deal work.
With respect to the quality issues prominently mentioned by the remarks in the NPR article, I agree that once you degrade audio to MP3 it doesn't really make much difference what else you do to it. I doubt that the music audience partial to Beats equipment is listening to classical music in any case.
First, the musicians had to change their music to reduce the dynamic range to sound good for poorly compressed MP3s playing in ear buds. Now, they have to change it again to sound good for the equalization used in Beats.
For an industry that unleashed the horror called autotune for the singers, this is completing the cycle. Boomboxes are back, in an ear bud.
As the ears get insensitive to certain frequencies with the ear buds blasting all the time, perhaps Apple will "innovate" to make iBeats detect and automatically boost frequencies your ears are going deaf in.
Bose meets Nike.
Perhaps, Samsung will buy Bose now for $30B. At least they have patents on technology not how headphones should look like.
Google has limited success convincing people to wear its glass, or Samsung its watch. Dre headphones already have a substantial penetration in wearable real estate plus it is considered cool to wear them with free marketing by celebrities wearing them as opposed to Google Glass or Samsung watches that are considered uber-nerdy.
I can't think of anything else that would let Apple get ahead in wearable penetration to launch their future technology in.
Apple could have done their own cool design of headphones for this but then Samsung would have bought Beats and be more successful in penetration, so this is as much a defensive move as a tactical one in the wearables strategy.
I expect the next step in the evolution of wearables will be in belts once they get the flexible battery and electronics technology nailed down. Belts have the real estate, are fairly ubiquitous and have both fashion and utility value. Might also see technology embedded into wallets and hand bags soon.
Given that this move into wearables is likely to be the most strategic move for Apple going forward that will determine its leadership in innovation for what it can do in wearables, it has a significant impact on the company and its future earnings.
Here is how I would break down the value of Beats to Apple:
Headphone design and technology: $0
Brand value: $.1B
Current market penetration (neck real estate acquisition): $3B
Unpaid celebrity endorsement: $.5B
Music industry relationships for streaming: $.5B
Keeping Samsung away from this market with no comparable rivals to acquire: $4B
Apple got a significant discount. Dr Dre wasn't smart enough.