MarketLine Blog

California Love undone? Apple delays purchase of Dr.Dre’s Beats Electronics

Apple’s Infinite Loop offices in Cupertino appear to be getting cold feet about their embrace of Santa Monica based Beats Electronics in this perplexing California focused buy-out potentially worth $3.2bn.

On the face of it, this has always looked like an odd choice of acquisition. Apple is not really in need of extra revenues, which have moved from $108bn in 2011 to $171bn in 2013. Beats Electronics makes headphones, earphones and speakers, as well as running the Beats Audio software technology and the Beats Music streaming service. Given the vast research and development capabilities of Apple, these are all product types that are either already being made by Apple or could easily be added to their portfolio. It may be that Apple has its eye on a particular Beats patent, but this would mean that former investor, HTC, had missed such an opportunity, which is possible but unlikely.

Whilst the Beats brand is not particularly well-known for good quality, especially in headphone manufacture, it has potentially captured a new generation that Apple may have missed following the almost inevitable phasing out of the iPod given the use of mobile phones as music devices. The Beats streaming service may therefore be tapping into that generation at the expense of iTunes, as have bigger streaming services such as Spotify. Buying a company for its brand remains in the realms of an odd move for Apple however, which has traditionally kept its own branding on consumer products or simply collaborated with other companies such as Nike. Purchasing Beats for its brand alone therefore appears closer to a desire to swallow up the competition, which although would match the operationally focussed strategies of current CEO Tim Cook, would not really match the Apple ethos of simply making the best products possible and outdoing the competition. For an in depth analysis of Apple under the leadership of Tim Cook, see our case study, Apple Inc – Life after Steve Jobs.

Interestingly, Apple has been reluctant to bring its vast cash reserves (the company maintained a cash and securities balance of $146.8bn at the end of FY2013) into the US in recent years. This reluctance relates to US tax rules about the repatriation of foreign monies. Unless a structure is being used to keep the Beats acquisition overseas, purchasing a US company for a figure in the region of $3.2bn would again appear strange for Apple.

Although most commentators see the streaming service as the main driver for the purchase, two wider opportunities may make more sense. Firstly, Apple recently signed a deal with the China Mobile Ltd network, allowing iPhones to be sold on the world’s largest carrier, with 763 million subscribers. Beats headphones are a counterfeit phenomenon in Asia and particularly in China, where CNN have reported large counterfeit production facilities. Linking the companies together in order to sell genuine Beats headphones to such a vast market may therefore have been too good an opportunity to miss for Apple. Secondly, the Apple CarPlay system is due to be available this year in selected vehicles, which will allow people to integrate more aspects of the iPhone into the driving experience. The Beats Audio sound system can already be found in some Chrysler vehicles. It may be that Apple feels that a combination of the Beats Audio sound system and iPhone technology will help the company outstrip the Open Automotive Alliance supported by the Android platform.

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