Apple – On the beat

Beats signals the need to buy not build.

• Apple is thought to be in advanced talks to buy Beats Audio for $3.2bn.
• Beats Audio is a premium headphone maker with an estimated 51% share of the $1bn premium headphone market.
• It also has recently launched a streaming music service that has some innovative functionality such as following artists, sharing of playlists as well as contextually and location curated music.
• Beats also has a cool brand with the younger segment and is considered to be in touch with the music scene.
• The biggest questions are:
  • What this acquisition will do for Apple?
  • What does it signify about Apple’s strategy and M&A going forward?
• RFM research has found that Apple is extremely weak when it comes to its own Digital Life services. (see here)
• Of all of the time that users spend on smartphones Apple Services cover only 35%.
• This puts it a distant 4^th behind Google at 66%, Microsoft at 71% and Yahoo! at 73%.
• RFM calculates that around 50% of Google’s mobile revenues are coming from Apple devices as indication of how weak Apple’s services are.
• I have long believed that this is the single biggest threat to Apple’s long-term profitability as it is these services that will increasingly become the differentiator for users.
• Apple’s attempts to date to create its own services have been less than successful and acquiring Beats could be a sign that it is throwing in the towel on building its own services.
• The music streaming service would fit neatly into iTunes and with the right muscle behind it could develop into a more worthy competitor to Spotify than it currently is.
• It would also help Apple reconnect with younger users and inject some vigour into its brand which is no longer seen as super cool by the trend setters.
• Whether Beats is worth $3.2bn is unclear at this point but the indication is that Apple will grow its way around the Digital Life Pie (see here) by acquisition rather than organic building.
• Hence, I can see a scenario where Apple buys Yahoo!
• This would complete Apple’s position in Digital Life but the cultural integration and the management of the two brands would have to be flawlessly executed.
• This is unlikely to happen straight away as Yahoo! still really needs to get its house in order but an acquisition of Beats would set the stage for M&A that is much larger and more impactful.