Apple and Beats: the details of the deal

As reported last night, Apple has finally announced acquiring Beats after weeks of speculation - it looks like the news had indeed leaked too early for the confirmation to come any sooner.

Whilst the company has announced the price tag of the acquisition, $2.6 billion in cash and $400 million in stock vesting over time, it has tellingly not broken down the value placed upon the headphone manufacturing business of Beats Electronics and the newly launched streaming service Beats Music.

Beats Electronics after all has an annual revenue of over a billion dollars, whilst Beats Music - as stated by Jimmy Iovine at the re/code conference last night - has a quarter of a million subscribers.

Whilst the acquisition has been met with puzzlement amongst analysts - who are still wrapping their heads around the deal well over three weeks after the initial rumours - Tim Cook’s statement is all about the music. He said: “Music is such an important part of all of our lives and holds a special place within our hearts at Apple,”… “That’s why we have kept investing in music and are bringing together these extraordinary teams so we can continue to create the most innovative music products and services in the world.”

Some analysts have even gone as far as saying that this is the most expensive “aquihire” in history, that is, an acquisition with the sole objective of hiring a few key members of a team.

In this case, those team members are Dr Dre and Jimmy Iovine, who will be joining Apple. The Cupertino company is still the biggest player in music but it’s losing ground to the likes of Spotify and Pandora with downloads sales slipping in the US and Europe.

Eddy Cue - Apple’s senior vice president of Internet Software and Services - commented: “The addition of Beats will make our music lineup even better, from free streaming with iTunes Radio to a world-class subscription service in Beats, and of course buying music from the iTunes Store as customers have loved to do for years.”

The press release states that subject to regulatory approvals the deal should close in fiscal Q4, not the quickest process given that we’re only at the tail end of Q2 now.

As far as Apple’s investors are concerned the company’s stock hasn't taken a hit from the transaction with after-hours trading leaving it stable at +0.09%.

It is worth remembering that whilst this may be Apple’s biggest ever acquisition yet it is a drop in the bucket for a company that has a $537 billion market cap and around $160 billion in cash reserves around the world. If the association with Beats does increase the “cool” factor of the company with a younger demographic the $3 billion price tag may turn out to be a pretty good deal.

As for now, the only practical effect of the acquisition is the reduction of Beats Music’s subscription cost to $100 for a year instead of $120 and the extension of its free trial to 14 days instead of 7. Iovine during the re/code conference last night mentioned that the company had made a mistake by not offering in-app purchases at the very beginning.

Eddy Cue - speaking on stage with Iovine - remarked on the potential of putting together a brand like Apple that has 800 million iTunes accounts and tonnes of data on listening habits with Beats: “it’s on steroids with us together.”

Going forward, it’s anybody’s guess as to whether Apple will seek to incorporate its logo or name into Beats’ headphones or its streaming service.

Naysayers have said that this acquisition is the beginning of the end for Apple, the sign of a company that has lost its way, but we’ve seen people say the same thing about pretty much every major move Apple has made since Steve Jobs’ untimely death. Only time will tell if there is a plan behind this acquisition and how the company will go about implementing it.


(Andrea Leonelli)