The stories are abound this week. Apple to acquire Beats by Dre. Dre to become the first billionaire hip-hop Moghul. Overpriced valuation, right valuation, Apple is only interested in the hardware, Apple wants to augment its iTunes with a new service etc. Without delving deeper into the valuation or financial synergies – which I cannot comment upon since Beats is private, the strategy as to why Apple is acquiring Beats is quite clear to me. Its 2 fold – acquire an extremely popular hardware maker with capacity to scale while bringing in some much needed “youth” to its iTunes offering.
Beats by Dre is an extremely popular accessory. Some estimate the company to have anywhere from 51% to 64% in the high end headphones market. The company has focused on sound quality and design in order to lure customers and has made headphones an extension of their personality. Additionally, Beats exploited a gap in the market. When innovation focused on tablets, smartphones and wearables – a gap widened in the headphones accessory market driven by both the ubiquity of streaming music and streaming service offerings ala Spotify, Pandora et al.
The marketing strategy employed by beats ensures the accessory remains popular. Via exclusive offerings, social media / mobile channel store campaigns and celebrity endorsements – Beats by Dre is the dominant headphone in the market today. A combination of urgency, exclusivity and holistic customer engagement via various channels has allowed Beats to cement itself as the leading premium headphones maker. In comparison to other manufacturers like Bose – Beats not only has the capacity to scale, it also employs new product imagery and new events to drive product sales. The campaign by Beats for the upcoming World Cup is shrewd, calculated and inventive.
Secondly, Beats Music is an app that’s as personalized as the head phones that play your music. It allows for dynamic playlist creation based on moods and allows for intelligent music play. It’s a combination of Pandora and Spotify except it’s completely curated to your tastes. However, Beats music is reported to have been struggling with customers and iTunes is not. Its only natural for APPL to enhance their iTunes offering with curated playlists and personality while Beats Music will have the subscription from iTunes to really mount a competition to Spotify and others.
We all know APPL is sitting on cash (take a look at US based current assets) and it makes sense to augment their product offering on both digital and accessory fronts. Not only are they gaining entry into the premium headphones market but they’re doing so as the dominant player. Additionally, iTunes will get a much needed upgrade to current times with the integration of Beats Music. It’s a bold move and the right move for APPL, especially in the face of stock buy backs, the struggle to meet Wall St. expectations – especially when those earnings pressures have been driven by new product offerings. Tim Cook, an operations man knows that in lieu of “innovation saturation”, growth needs to come from elsewhere. Beats by Dre is the right move.