Reports that Apple is close to announcing a deal to acquire Beats Electronics for $3.2 billion — now seemingly (if drunkenly) confirmed by Beats co-founder Dr. Dre in a video that appeared briefly on actor Tyrese Gibson’s Facebook page before being deleted — have the tech and media worlds scratching their collective heads this morning as they try to figure out what the heck Tim Cook is thinking.
Three billion for a hardware company? When the rest of the tech world is hurriedly moving everything into the cloud? And you’re Apple so you already makes first-class hardware? What does Beats make that Apple couldn’t make just as well or better under its own brand?
Is it about Beats Music, the streaming music service? But why would Apple need to buy a music streaming service, especially so dearly, when it already has iTunes Radio? And even if it did, why Beats, which has had trouble finding its sea-legs? Why not Rdio, or Rhapsody? Or Spotify for that matter?
“We are struggling to see the rationale behind this move,” Piper Jaffray analyst Gene Munster wrote in a research note. “Beats would of course bring a world class brand in music toApple, but Apple already has a world class brand and has never acquired a brand for a brand’s sake.”
Munster isn’t alone. Shares of Apple were off more than $4.00 in early trading this morning, suggesting investors don’t see the rationale, either.
I think Munster has actually put his finger on at least one possible the rationale, however, without quite realizing it. In this case, Apple would be buying the Beats brand for the brand’s sake. Beats could become Apple’s Android brand.
Munster is right that Apple already has a first class brand but it’s one that is cut off from more than half the market. Apple can’t really start releasing Android-based products under its own brand without undercutting the whole point of the Apple brand. But it could release high-end Android products and services under the Beats brand.
Of all the potential acquisition targets out there, the Beats brand is the most compatible with Apple. Both have figured out how to sell commodity hardware at premium prices through a laser-focus on the user experience and by wrapping themselves in cool. Beats co-founder Jimmy Iovine was close with Steve Jobs and reportedly began talking with the Apple impresario about a subscription music service as early as 2004, so he knows the Apple culture.
Best of all, Beats already plays in the Android sandbox so Apple wouldn’t be conceding anything to Google by adopting its OS; it would simply be acquiring an ongoing Android business. And Beats would give Apple a high-end brand it could use to challenge Samsung on its own turf.
“We’re not anti-getting a big company,” told Wall Street Journal last month regarding his plans for Apple’s $151 billion cash hoard. He was simply against doing “something that’s not strategic.”
Acquiring a high-end brand to shoulder its way into the Android universe would qualify as a bold strategic move.