Beats and Apple: Does such a marriage make sense?

Beats and Apple: Does such a marriage make sense?

Apple's rumored to be courting Beats Electronics with a $3.2 billion deal. Does such a deal make sense?

Rumors spread like wildfire on Thursday that Apple is negotiating to acquire Beats Electronics for $3.2 billion. I'm skeptical that the arrangement makes a lot of sense for Apple.

Beats is the brainchild of Dr. Dre and his long-time collaborator, record executive Jimmy Iovine. The company got its start back in 2008 with an arrangement with Monster Cable. Beats' first headphones featured noise cancellation technology and a bass-rich mix; the company used endorsements from musicians and celebrities to expand brand awareness.

Beats divorced itself from Monster following the conclusion of their contract in 2012. After a brief dalliance with mobile handset maker HTC, Beats negotiated an investment from equity firm The Carlyle Group. Carlyle plowed half a billion dollars into the company, valuing it at twice that.

Beats Electronics is a consumer electronics company on the rise, to be sure. Colorful, bass-heavy Beats headphones are recognizable, aspirational fashion statements. They're not cheap, either — some models top out at more than $400. The company's expanded its line with branded earphones and its "Pill" speakers. Beats also licenses its technology for use in HP computers and Chrysler, Dodge and Fiat automobiles.

Apple doesn't buy brands

But a strong brand seems like an unlikely reason for Apple to drop three times what a company is worth for the privilege of buying it. Apple doesn't buy brands, they buy technology.

From that standpoint, Beats' audio technology is wholly unremarkable. The on-board circuitry does some trickery with digital signal processing to expand bass and highs, but ask any audiophile — it's smoke and mirrors, not superior audio engineering. What's more, Beats has stirred dozens of manufacturers to produce similar products that are as good or better. The only thing that differentiates them is brand.

Beats Music, the company's streaming music service, is another part of the puzzle. Beats Music has garnered plenty of positive (and negative) reviews since its launch. No one outside of Beats Electronics knows exactly how many customers have actually signed up to pay $10 a month after their trial subscription runs its course.

But streaming music services are where it's at in music going forward. Digital music sales are in decline as services like Spotify, Rdio, Pandora and others appeal to more and more customers willing to pay a monthly subscription fee to listen to music, rather than downloading songs and albums a la carte.

Apple understands this, which is why in 2013 they launched iTunes Radio. The service is only available in the United States and Australia, though other countries are expected to come online this year. Beats Music is restricted only to the U.S., though it promises that more countries are coming soon.

If there's one thing Beats Music has going for it, it's that it reaches an audience that Apple has heretofore ignored: Android users. But again, developing an Android app and ecosystem — expanding iTunes into Android — doesn't seem like anything beyond Apple's technical acumen.

The only other angle that makes any sense at all is if Beats Music's streaming music rights are transferable. This doesn't seem likely. But if it is the case, it would give Apple a huge leg up against Spotify and other streaming music competitors.

Within Apple's reach

So again I scratch my head and wonder what, exactly, is the point.

If Apple does acquire Beats Electronics, it'll be the single biggest acquisition Apple's ever done by almost an order of magnitude. Even Apple's acquisition of NeXT, which heralded Steve Jobs' return to the fold, the creation of OS X and an almost complete reinvention of the company, was a relatively scant $400 million.

That's not to say it's impossible to imagine. Apple's sitting on a pile of cash larger than the economies of some countries, and Tim Cook is on record saying a billion-dollar acquisition isn't out of the question. The Wall Street Journal:

"...We have no problem spending ten figures for the right company that's the right and that's in the best interest of Apple in the long-term. None. Zero."

Is acquiring Beats Electronics in Apple's best interest? I don't think so, but I'm not on Apple's board of directors, either.

What do you think? Does an Apple/Beats deal make sense, or is this just Wall Street dreaming about what to do with Apple's cash hoard again? Let me know in the comments.

Peter Cohen

Managing Editor of iMore, Mac and gaming specialist and all-around technologist. Follow him on Twitter @flargh

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Beats and Apple: Does such a marriage make sense?

73 Comments

IMO, the Beats audio tech is garbage. Looking past that, all I can really see is the Beats Music tech/brand/app. Maybe they have some tech in place for the 320kbps audio they stream and Apple wants it? Not sure if that would really be something Apple would need to buy, and not just do on their own. Over all, I just honestly don't see it. Too much of what Beats does IMO seems to play to being cool, looking cool, etc, not really about quality, but perceived quality.

I agree! Got my teenage son a pair last year and we went through four warranty exchanges because of defects. They don't give warranty extensions on the garbage they send you as a replacement so we ended up with a final defective piece just before the 1 year warranty period ended. Now my son has mediocre sound coming from one speaker because it "cracks" with songs that have heavy bass. I think Apple is out of their minds to consider such garbage. The last portable speaker I purchased at the Apple store was the JBL flip, not the beats garbage.

I don't believe Beats is worth nowhere near $3.2B. Granted, Beats headphones are seen on many people under the age of 30. From most of thr reports and reviews I've read, Beats headphones are grossly overpriced for their sound quality. Streaming music & video is where things will continue to grow. I don't think buying Beats is a wise choice

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Beats is for stupid kids and Bose is for smart people who know true quality sound and want high quality products. Beats-NO Bose-Yes!!

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Well, I would argue that Bose's noise canceling technology is superb. When flying or riding a train I prefer my Bose Quietcomfort 15 over my Sennheiser, Beyer and B&W headphones. While all these are superior to Bose when it comes to sound, the Bose's clearly make up for that by reducing ambient noise. I would not use them at home though.

I agree with Beats.. it's horrible and it's for suckers who think they have bought the coolest brand i the market.

Bose - Nope. I have spent huge amount of $ over past several years and have tried several brands - Shure, Sennheiser, Sony, Beats ( got as a gift ) and several Bose models. Bose has been the only headphones that has brought me immense sensory pleasure and they're consistent across their line-up of in ear and around ear headphones. Bose is far far superior in terms of quality and the sound technology they have patented over several decades. You cannot compare a cr@p Beats with a much superior Bose.

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I've had the Bose QC15 for over a year and have been very happy with them. Got them specifically for iPod/iPhone since that's what I listen to the majority of my music on and got tired of using studio headphones like Sennhieser which always have a cord that feels too heavy for these small devices. I think they are over priced but they have been good and sound good and balanced. The noise cancelation is a plus but does require a battery which is a pain. I like the fact they have a removable cord so it's easily replaceable and helps if the cord gets caught on something. I use the remote all the time and works good. So overall I would dispute the "all hype" factor. They work good and sound good. Just over priced IMO.

I also have a pair of Bose 301s for over 20 years that are still going strong.

The Bose little wifi speakers always sound the best to me compared to other brands.

So I would say Bose is not hype as much as it is just over priced like the rest of the brands selling similar items.

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Bose's only redeeming product is the noise cancelling headphones. The rest of the product line is severely lacking. Beats Audio is crappy, and 95% of Bose is crappy. Both are just more willing to spend more money into marketing, and that is how they get the public to notice either brand.

That, and the incessant, free marketing that Beats get when celebrities wear the headphones that Beats gave out to them for free.

To be fair to Beats, as much as most of us hate them, they obviously are doing something right, for it to be in the conversation of a $3.2 billion acquisition. I bet when Dre was shooting his "Express Yourself" music video with his NWA crew, he never would've thought this day would come. A very proud moment for him, and you've got to applaud that. I just hope it would not happen.

If its true, it actually de-values Apple to me. On the hardware side: To buy a fad brand like Beats (assuming they use the brand name) would be done for marketing purposes to a younger crowd, not for advancing their product quality. And that is not Apple's style. If they were looking for a "brand" to present, it would make much more sense to partner with a more respected company that matches their high end feel, such as Bang and Olufsen, or even someone like Harman Kardon.

On the software, streaming audio side: I think it would be crazy to buy a service for that kind of money unless it provided something no other streaming service does... and Beats doesnt to my knowledge (granted I haven't tried it - nor do I care to).

This is weird.

Problem is those brands don't have nearly much appeal. Nobody's running out to buy the latest Bang and Olufsen headphones. Athletes and celebs don't wear them. Nobody wants to be the guy wearing Bang and Olufsen. They want to be like the Russell Wilson walking into the Super Bowl wearing Beats.

So true. It's harder to take quality hardware with no buzz and make it cool than to take a cool brand and inject quality hardware.

Beats Music, brand goodwill, and rising market presence in communities where Apple may not already be established. That's the value, I think, that Apple may see in the company. Plus, Apple already has something of a relationship with Beats via the Apple Store. If Apple thought that the company might get snagged by a competitor (not unrealistic given Beats' work with HTC and HP), then that might add a defensive angle to the purchase that helps make it more appealing to Apple's leadership. All pure speculation on my part, but FWIW, that's what would motivate me to make an offer for the company if I had a nice cushy office at One Infinite Loop. Which I don't, so so again, FWIW.

Well, fully agree, neither the headphones nor the subscription service, with an estimated 200k subscribers and no global reach, support that price at all. And there is no IP worth a damn either.

Still hope this rumor will die. My respect for Apple would certainly see a little dent. But then, maybe they have something we don't know about? Anyhow, it is small money for Apple, no disaster if it happens.

My personal conspiracy theory is still that it is only about securing the Beats name for Cue's band (after he found out that Beatles is taken).

I would be very disappointed in Apple: Beats is an unethical company: Dre and friends stabbed their Monster partners in the back.

Everyone knows how secretive Apple is and the #1 rule to killing any deal with Apple is to go public with it before Apple themselves make the announcement. Good luck to seeing this deal get flushed down the toilet. Some people just need to zip it. Check out the video - http://youtu.be/guMFKBXp544

Beats' brand is solid, but Apple hardly needs help on that front. The best streaming service in the world (which Beats is not) would not be worth $3 billion, unless they thought that Beats was the one that would strangle iTunes dead, which seems unlikely. Beats' headphone performance is okay -- not bad, but not great, but perhaps Apple sees some other applications in Beats' (over)emphasis on bass. There does not appear to be anything outstanding in a quick glance at Beats' patent chest:

https://www.google.com/?tbm=pts&hl=en#aq=f&aqi=&aql=&hl=en&q=%22Beats+El...

and, considering Apple only spent 2.5 billion setting up their Rockstar patent troll front, it seems unlikely that they were motivated to spend 3 billion on Beats' relatively meager patents.

This puzzles me, too.

"The best streaming service in the world (which Beats is not) would not be worth $3 billion"

Spotify's valuation is reportedly $4 billion, based on reports.

I should have said *should* not be worth 3 billion, but I guess markets throw crazy valuations on pre-significant-revenue companies :)

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Spotify is the best as long as you know the music you want to listen to. I don't think it's very good for discovering new music or providing curated playlists (it actually doesn't have curated playlists, but even their pandora-like offering isn't very good). Beats is much better in those areas.

I really think this is about all the topics people are covering, the streaming service, the brand for included headphones and I really think they want to push a stereo speaker system setup into the iphone like they did one the htc one. I have to admit that phone screams.

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Doesn't make sense to me. Beats headphones have an artificial sound and are way overpriced. Their streaming service was not for me. I didn't like it at all. It never seemed to be able to discover the types of music that I liked.

So why Apple would not only buy it but overpay for it is beyond me.

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Isn't the point of Beats to make digital music sound like how the artist intended? So is there a link between achieving that and the "Mastered for iTunes" work Apple has been doing?

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First off, on the valuation side of things, a company is worth whatever someone pays for it -- that is the beauty of free market economics, so while many of you scoff at the 3.2 Billion number --- until you breakout your checkbooks and write it for $1 more --- it's Apples for 3.2 Billion, if both companies agree to that number, then that is what it is worth.

Secondly, this is more than likely not about the hardware, the hardware is the icing on the cake and that by itself, I believe was 1 Billion in sales last year. This is more than likely about two other things....

A) Licensing--Beats has them, and Apple is desperate to get them and having problems doing so on the streaming side. So rather than dink around trying to secure licenses from the music companies, just but one that already has them. Clearly they want to be in the subscription streaming world, they are more than likely scared they are being left behind, this solves that problem with one fat check.

B) Now, they do not have to build a streaming service in house. But, the real reason here is---it puts them on Android. Apple can now make money on the Android phone ecosystem with one of the fastest growing segments in the mobile space --- subscription based music --- this will more than make up for lost revenues of purchased music on iTunes.

Bonus---Beats has human curators, which most consumers tend to enjoy, something Apple does not have with its radio.

Bonus Bonus---AT&T gives it away here in the US and bills it after 3 months right to your cell phone. Now they have a carrier based distribution system as well. 5 users, 10 Devices all you can eat for $15/mo --- great value!

I think is a great fit if they continue to pump capital into it. It may even look like a steal in just a few short years.

As Kafka, Gruber and Dalrymple pointed out correctly: streaming licenses are not transferable. Change of ownership = license gone. So, that solves no problem at all.

"it's smoke and mirrors, not superior audio "
People buying Beats aren't shopping or superior audio. That point is irrelevant. They want style.

I don't know if buying Beats makes sense for Apple especially if they want to lose the by Dre brand and stop selling headphones. The brand is the style. It's why women by YSL or Prada or Jimmy Choo. If reebok bought it and put Reebok on the same heel they aren't buying it. The name does matter. I think if you stip the Dre name from it becomes just another expensive headset and you'll lose significant users and then the purchase may not be good for apple.

people mention the streaming service and I will say i used it for the trial and the playlist prediction was the best i've used. I still not a big fan of streaming services but that's my issue. So i do think the curation has value.

But i think the real profit right now is in the products. It's a profitable company cause of the headphones and speakers. I'd be surprised if they aren't buying for the hardware. Porbable speakers, profitable headphones, you can put better speakers into phones and laptops, you can fold airplay into speakers. and if they don't butcher the brand keep the Beats fanbase. Granted I think Beats fans will Follow whatever is cool in hip-hop and it remains to be seen if Apple can be that brand.

Beats? For $3 Billion? WOW. I am not in Beats target demographic but I have tried them. They seem price heavy and for my ears I can buy better sounding headphones for significantly less dollars. I am very surprised to see Apple pursuing this. I would have expected Apple to "invent" a brand with a much broader music appeal. Beats seems closely allied with hip hop branding; I would have expected Apple to develop their own, more broad, audiophile branding. Beats would be the last headphone company I would expect Apple to buy. I'm not 100% sure we are not being punked in some way. Sennheiser; AKG, Grado, Klipsch would all make sense. Beats? What is the BoD smoking?

acquiring the music service makes sense, i don't know about the headphones. they are popular and stylish, but nothing Apple couldn't do on its own.

I'm with Peter on this one. I don't see the value. Investors do want Apple to reinvest some of its cash but not on just anything.

That said, much more than this was spent by Samsung to be "cool." Apple bought some cool for about a fourth of Samsung's "cool" spending. Because all I see is them buying a "cool" (which took years to make it that way) brand, connections, and whatever else may be associated with Beats. Apple may have never bought sub-brands before, but that doesn't mean it can't or shouldn't ever do this.

Personally, I don't care for the brand and it won't influence me in one way or the other. Apple didn't need it to sell phones or tablets. Maybe its for the earbuds..who knows?

It's not about the hardware, it's about the music.
The big question, if this happens, is will it remain cross platform.
Or does Apple shut it down on all others.

There has been speculation that Apple is really buying MOG service behind Beats, since Beats did acquired them. MOG had an excellent website and had lossless streaming technology. It helps that they also acquire better music licensing.

MOG truly was a great service, and for my money had the best queue management of any streaming app.

I'm currently auditioning replacements, and have active accounts with Spotify, Google Play, Rdio and Rhapsody. Not one of them has the efficient play queue management that MOG did on iOS. Only MOG has options for adding a song to the end of the queue or playing it next. You can't even SEE the play queue in Spotify, despite the fact they've been promising it for nearly 2 years.

MOG also had excellent autoplay once the queue ran out which I found to be better for discovery than competing offerings from the other services. Even if it did have an occasional tendency to end up at hip hop or R&B after a few hours, no matter where you started...

Nope doesn't make sense. Hmm maybe Tim Cook's first foible. There is no one else out there capable of improving iTunes is that what Apple is saying? Unless they make the Beats hardware a separate division. Maybe they will get Ives to turn them into something worth getting. Sounds like a load of crap to me.

Completely lame on Apple's part. Beats is junk. I can't believe Apple is going for this.

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Can't wait for the "Beats + Apple, marriage alive and well!" article. Or the "Yup, Apple jumped into its marriage with Beats too fast!" article a few months or years from now lol.

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Lovine's pitch to Steve Jobs, from an early 2013 excerpt (AllThingsD):"Iovine’s pitch: It took guys who know music and culture to sell high-end headphones to the mainstream. And it’s going to take the same skill set for music subscriptions, which have been around for about a decade but are only now getting some traction."
Steve Jobs thought he was right. So does Tim Cook so far it seems.

It's got to be because of Beats music streaming service. The Beats brand is strong regardless of whether their audio equipment is not the greatest, and the Beats music streaming service is probably in the best position based on their brand to eat into other streaming services customer base such as Spotify, Rdio, Pandora and so on. Apple have taken out a competitor in an area of their business that they want to dominate. Beats gives them the ability to sell their service into the non Apple market as well with ease.
With music sales dropping and streaming subscriptions increasing, Apple need to dominate this space the way the iTunes Store has dominated online music sales. I wouldn't be surprised if another acquisition in this space happens down the line.
The other factor I believe is quite a clever move from Apple is that people that are on the fence about buying an Apple Mac and end up sticking with Windows might look at Windows based notebooks that try to replicate the quality that you see in Macs and companies like HP include technologies from Beats in their high end models. The salesman at the computer store where my mother purchased her notebook talked her into an HP Envy model which included Beats audio.
So I think overall it's a fairly strategic move from Apple.

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Personally I think it has something to do with the curation side of Beats Music. It's better than the others due to their algorithms. It's more Pandora like which is a good thing.

Beats headphones are shit and they aren't buying a brand. I am not buying the $3.2B number though.

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While I respect your commentary Peter, you may be missing a few things here. I won't throw a rant like everyone else in the comments but I will give some extra insight. Do you know why Dr. Dre and Jimmy Iovine decided to start the Beats brand in the 1st place?

It came down to MAINSTREAM audio quality. The Mainstream consumer (NOT AUDIOPHILES!) earbuds or headphones that were currently being used had very bad quality. Beats designed mid-range headphones in an attempt to bolster the quality of a compressed MP3 file. <<-- THATS IT! Since the release of Beats hardware, they have urged and urged Apple PUBLICLY to include 24-bit audio, and less compression. With this said, they have a goal for even higher "mid-range" quality, but have had no cooperation wit other oem's and music services. So once again, Beats was designed to enhance the sound of a poor quality compressed music file, not to have the best audio quality you can buy. That was not their goal.

Go find a random person who is not an audiophile and I bet their headset in atrocious....As a matter of fact, open an iPhone 5s' box and use those headphones! Do you not see an opportunity for improvement there?

So lets talk about price. I own the Apple in-ear earbuds. They're $80 bucks. I actually have a pair of the in-ear Beats that came with my HTC Droid DNA a while back (valued at $99). It's not even close. So what I am saying is all of Beats audio hardware products are BETTER THAN ALL OF APPLES RIGHT NOW! So if you say Beat's are terrible, what do you currently think about Apple's?

Also, Beats Audio's sound quality is average or good for the mainstream consumer. I'm an engineer at the Cold Chamber in Houston, and we cringe when clients bring in Beats headphones and say they want to use those to record(major music artists do this). We are audiophiles, we can hear things that they can't hear, therefore it doesn't matter to the mainstream listener (or even artist)

EDIT: Even Apple's top teir products are mid-range. The top Macbook Pro is a midrange computer. If you evaluate Apple as a company when it comes to hardware products, they are exactly like Beats. The mainstream love the brand, they are ok with the quality of the hardware, even though it is not top of the line, it's mainstream. That's ok, thats not a bad thing.

It's not fair to compare a "relatively scant $400 million" to this purchase. You need to take into account cash in hand + inflation.

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Leave the sinking ship and join us at the Android party! We are having a lot of fun! This Apple world is just boring in comparison. Wake up!

LOL, Android the party? What are you smoking peasant? You obviously don't know what a real party is. Poor, poor fellow.

For some reason I believe Apple has an partnership with Pandora for iTunes Radio. Apple never believed in a subscription model for streaming music. So it would makes since to partner up with someone who has experience in that field. Plus remember Apple had trouble securing royalty deals, which held up the service for an year so why not partner with then struggling company (Pandora) who already has those deals in place. But iTunes Radio has been struggling which is why there are rumors of them splitting iTunes Radio from the music app so the service can be easier to find. This is where Beats come in to play. The Pandora streaming model is out dated compared to Google & Spotify. Plus Apple loves to own %100 end to end of all its services so why not buy Beats By Dre a company who has the best on demand streaming service. The headphones are bonus. With Jimmy Iovine on-board as an adviser to Apple, that's basically giving Apple unlimited access to the whole music industry. He's really that influential to the whole music industry. Apple will have the music business in their pocket with this deal

I really hope that we can get an a la carte downloading of iTunes music by subscription, and not just a streaming radio, I don't want to stream everyday on my 30 minute commute, or 30 minute runs after work, that's an hour of streaming, my data plan won't allow it.

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Nope. Here in Europe you don't see much people with this stuff. They use more traditional brands like BO or Sennheiser.

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Acquisitions are made for either the hardware or brand. And since everyone plainly agrees that this is definitely NOT about the hardware you can see that Apple must want the brand. Why? Because it can be borderline impossible to make a snoozer brand cool and even if you could, it could a long, long time. It's much quicker to start with a popular brand and in a matter of months you could start upgrading hardware. And superior engineering is a core competency for Apple. Beats is a cool brand that has been very successful despite quality problems. That kind of loyalty is hard to find and if Apple helps upgrade their hardware and customer service, look out. I've helped scope out acquisitions for companies before as a financial analyst and we looked for these type of combinations.

BTW, walk onto any college campus and what do you see tons of? iPhones and Beats

The biggest things beats has going for it is the people. They have a great team that is compiling and curating music, creating playlists that actually go together. They have real people in addition to algorithms. This is something that nobody else is doing. And Apple is all about hiring great people

Don't you all see? The only brand who makes wearables cool, is beats. You want to be seen with them. If you want street credit in the wearables market, there is only beats. Who thought, that people would go out with large white headphones on there head a few years ago? Nobody. But it happened. Even if you are not listening to music, you wear those large things on your neck. So they are the only ones who cracked the wearables market. And the sound quality is made excatly for phones and mp3s, for music down on the street. I guess, you will be very fascinated what apple and beats will accomplish.

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$3.2B for this garbage and top positions in Apple management? You would have to pay me to use Beats headphones. 3rd rate garbage for the Android crowd at best. Someone at Apple must be smoking some serious weed for having made this decision.

I agree I believe it's not worth the stated amount once they have had to consider past, recent and future consumers complaints they won't want to purchase just bc of his name and how kool anymore, now that we know the quality of the product. I feel they gotta be adding more quality after multiple tests compared to the latest version. Once they have made it sound better than the version out now, plus keep the appeal with same athletes endorsements it should take off but with our the consumers, and Dj's inputs.