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Why Apple buying Beats makes sense

Why Apple buying Beats makes sense
Why Apple buying Beats makes sense
Photo by Noam Galai

Why does Apple buying Beats make sense? Ever since the news broke that Apple may buy Beats Electronics, Apple observers and fans have wondered why Apple would acquire the maker of high-end headphones according to a May 9 article in Apple Insider.

Apple is rumored to be spending about three billion dollars for Beats. The purchase of Beats shocks observers as much as the sum that Apple is rumored to be paying. Apple's purchase of Beats will be the most expensive acquisition that Apple has made to date by far--if the purchase finalizes.

While the deal between Beats and Apple has yet to finalize, one of the co-founders of Beats, the rapper Dr. Dre, appeared to confirm the deal recently when he briefly appeared in a YouTube video celebrating Beats' sale to Apple.

Apple's history has been to purchase small companies with new patents and technology that Apple can use in its current or future products. Apple bought AuthenTec for $350 million in 2012 and then used that company's technology to help develop “Touch ID” the fingerprint security system on iPhone 5s, for example.

But Beats is not a technology company in the vein of any technology companies that Apple has bought in the past. Beats Electronics is a high-end maker of headphones, earphones, speakers and accessories. In 2014 Beats launched the “Beats Music” app to compete with “Spotify” and other apps in the growing market of online music subscriptions.

So what assets does Beats have that motivates Apple to pay more than seven times what Apple has ever paid for a company? Apple Tim Cook gave Apple observers a hint when in “All Things D11” he said the standard for acquisitions is that the purchase “helps us make a great product” and the culture of the two companies is compatible. By this standard the possible purchase of Beats makes sense for the following reasons:

First, the culture fits. Apple is has been involved with music since Steve Jobs introduced the first iPod and Dr. Dre and Jimmy Iovine were involved with that project. Iovine was one of the first to suggest that record companies back Apple's iTunes project. Dr. Dre, a popular rapper with a sharp eye for discovering and guiding other artists, endorsed iTunes during Steve Jobs' presentation of it.

Second, if Apple finalizes a purchase of Beats, Dr. Dre and Jimmy Iovine will, in their roles at Apple, be able to bring the artists' vision to iTunes—along with their extensive contacts in the music industry. Apple has been rumored to be overhauling iTunes to better compete with online subscription services like Spotify and Beats.

Third, unlike other larger purchases by other tech companies (like Google's purchase of Nest Labs), Beats Electronics is profitable. Revenue for Beats last year was $1.2 billion and it is in a good position to grow further, according to analysts. To an extent Apple and Beats is somewhat integrated already with Apple already selling many of Beats' products in Apple stores.

Fourth, even though Beats launched the online music streaming subscription service “Beats Music” just a few months ago, “Beats Music” is already estimated have approximately 500,000 subscribers. Besides this streaming service giving Apple a toehold in the growing music streaming market, “Beats Music” also gives Apple a presence on Android and Windows phones—similar to the way iTunes software was developed to run on Windows.

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