360° Coverage : Did Tim Cook Pay $3 Billion For His Successor?

Did Tim Cook Pay $3 Billion For His Successor?

May 29 2014, 7:54am CDT | by

In  December 1996, then Apple CEO, Gil Amelio, paid $400 million to acquire Steve Jobs’ NeXT. Jobs’ second coming as CEO turned Apple into a powerhouse. And 18 years later, Tim Cook spent $3 billion — 2% of its cash — to acquire Jimmy Iovine’s Beats.

Will Iovine replace Cook like Jobs replaced Amelio? If so, is this deal could be a catalyst for Apple stock.

Apple announced May 28 that it would acquire Beats — an earphone maker and streaming music service provider — for $3 billion. Cook praised his handiwork, telling the New York Times, “We looked at the combination with Beats, and what we saw is a company that has incredible, rare talent.”

Beats’ co-founders Iovine and Dr. Dre will work for Apple. According to the Times they will report to Apple’s content chief, Eddie Cue, who reports to Cook. But with all the lavish praise of Iovine’s ability to inspire talent to write hits and to envision how the music industry will evolve, he evokes memories of Jobs’ creative genius.

After Jobs’ second coming, Apple made gigantic profit margins by selling consumer hardware at premium prices while outsourcing the manufacturing to China where its unit costs were lower than that of most rivals. Apple also created content ecosystems — in the form of iTunes and App stores the purpose of which was to drive consumers to buying that high-profit hardware.

But in the last several years, Apple’s single-track downloads have lost market momentum while music streaming has gained it. Pandora, Spotify and YouTube are popular places for consumers to enjoy music.

And Apple has not kept pace — its iTunes Radio service — which was intended to take share from Pandora — “has found minimal traction in the market,” notes the Times. So perhaps Beats Music — a subscriber service it introduced in January that now has 250,000 subscribers — will help Apple compete. But it certainly has a long way to go considering that Spotify has 10 million subscribers.

Unfortunately, if Pandora’s financial results are any indication, winning in the online streaming industry would be a Pyrrhic victory. Pandora Media’s revenues have grown 55% in the last year to $558 million — but it has lost $53 million in the process.

A better way for Apple to capitalize on this deal would be to sell more of Beats’ headphones that go for between $170 and $450 to replace or supplement Apple’s white earbuds. If Apple could convince millions of people to buy them and outsource their manufacturing to a place where the unit costs were lower — the profit potential would be significant though perhaps not enough to move the needle for Apple.

But these products and services do not really help Apple where it’s ailing. What Apple really needs is a visionary leader who can tap enormous new profit pools. And Tim Cook is not that person.

If Iovine can convince Apple’s board that he can do that — perhaps Cook can find comfort in the role where he used to excel — making Apple’s trains run on time while Iovine figures out where they should go.

Unless Tim Cook just bought his successor for $3 billion, my guess is that Iovine will not be satisfied reporting to McCue and will leave once he gets his money.

And that would be a disappointment for Apple shareholders.

 
 

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