Why The Beats Deal Makes Perfect Sense For Apple

May 9 2014, 12:10pm CDT | by

For the most part today, the only comments I’ve seen from people analyzing the Beats-Apple deal are negative.

Here’s a piece by Jay Yarow saying why the deal makes no sense as an example.

Here’s why this way of thinking is wrong:

- Paying 3x sales for a business isn’t expensive.  That’s what Beats is selling on its headphones today.  And a lot of these are sold through Apple’s stores.  So now Apple will push them harder than ever.  What’s the payback on the deal then for Apple?  Three years? Maybe four.

- They’re getting the music subscription service as well.  So, if the deal makes sense just for the headphones, Apple’s also getting a music service with it as well.  I haven’t seen anyone say how much that service makes today.  Instead, I see a lot of snark that it’s not as popular a service as Spotify or Pandora.  Will Apple be able to leverage the service? I think so, for reasons I’ll outline below.  But they’re getting it essentially for free if you only pin the acquisition cost for the headphones business.

- The Beats headphones and music service will be Apple’s ticket for taking iTunes to the Android user base.  I think the real play for Apple with this deal is: how does this increase our addressable market for iTunes?  I think they’ll try and use it as their Trojan Horse into the Android community not using iTunes or iOS.  If this works, it’s worth the deal right there.  As one industry insider told me: “This makes a ton of sense to me for the headphones, since they don’t have to play in Google's ecosystem at all (as they would if their play was the music app) to be an important part of an Android user’s day.”

- Beats just became a wearable play.  I heard some commentator say today that Beats headphones don’t have any special sensors or technology in them.  That’s true.  But that’s what Apple’s working on.  Put the peanut butter and chocolate together and you’ve got yourself a winning combo.  Lots of folks just will never use Google Glass. They look goofy.  Apple’s Tim Cook famously said that the wrist is an area of great interest for Apple.  They’ll have their own Apple Band there.  But now, with this deal, they just got another valuable piece of real estate on your body for wearables: your ears.  From an industry insider: “Yes, I think this is the most valuable piece – take massive distribution of something that isn’t yet but absolutely could soon be an essential wearable.”

- Jimmy Iovine. Cool dude now in the Apple fold.

Good move, Apple.

Critics be damned.

[No positions]

 
 

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