before they saw the flames. Even before the study came out, the rumor mill was awash with talk of Apple making purchases to blast the company coolness factor into overdrive.
So what product could possibly fill such need for a company and its stakeholders ? Well, Apple called for innovation, and Dr. Dre answered.
Beating the Heat
On May 29, Apple snapped up Beats Electronics LLC, the headphone and audio mastery empire Dre co-created with industry aficionado Jimmy Iovine, for a cool $3 billion.
It’s hard to argue the colorful, ostentatious earphones that sell for $300 a pop aren’t still one of the coolest ways to blow your dough, especially with a constant onslaught of celebrity endorsements (e.g. atop LeBron James’s noggin courtside at the 2008 Beijing Olympics or around Lady Gaga’s alabaster neck).
But was it a wise move, or will the purchase take a bigger bite out of Apple’s core with no guaranteed payoff? Iovine seems to think the former, in a quote released with the acquisition announcement.
“I’ve always known in my heart that Beats belonged with Apple,” said Jimmy Iovine. “The idea when we started the company was inspired by Apple’s unmatched ability to marry culture and technology. Apple’s deep commitment to music fans, artists, songwriters and the music industry is something special.”
But the company has been matched – by Google and other successful tech upstarts – which leaves current and future investors with a hanging question: Can Apple get its groove back?
Capitalizing on Cool
Aside from upping Apple’s Fonzie factor, there is actually a much more tangible reason for Apple’s investment. Though Beats is known primarily for headphones, it also maintains a music streaming service with as many as 250,000 subscribers and 20 million tracks, which was designed to contend with Pandora Media Inc(NYSE:P), Spotify (which is rumored to be planning an $8 billion IPO), and Apple’s iTunes Radio (until recently, that is).
Although the announcement of a possible marriage of between Beats and iTunes subscribers has had a ripple effect on the Internet radio domain, is it really worrying the big boys?
For execs with one of the biggest Internet radio pioneers, Pandora, the answer is no – they don’t expect it to rock the boat on their fairly steady traffic of 8.91% of total radio listeners.
“We did see a slight drop in users from that and since have recovered and continued to grow,” he said, of iTunes Radio at a recent investment conference.
In fact, he doesn’t think Beats, iTunes Radio or Spotify are direct competitors, meaning an iTunes-Beats alliance wouldn’t be much of a worry.
“The connected radio, the lean-back experience, the free, ad-supported part of music listening, that’s Pandora’s domain,” he said. “And we still have a dominant market share and by far the best product.”
The True Cost of Cool
Apple investors should have nothing to fear – to assure a continuing source of cool, Beats’ founders were also part of the package deal, and will become the newest executives added to Apple’s roster. As far as costs to Apple, the venture’s not so risky for a company flush from so much cash on reserve.
Though $3 billion may sound like a significant amount, it may be peanuts to Apple – just 2% of the $150 billion Apple has amassed over the years, according to Forbes.
Pandora investors shouldn’t be surprised to see the stock drop or slow a few points as Apple’s alliance comes to fruition, but with Pandora’s soaring fourth quarter profits and revenue growth of 52%, it may just be a blip on the Internet radio radar.
With Beats, Apple has gained a new foothold in the struggle to stand on the razor’s edge of innovation, but some critics say it simply cuts into Apple’s reputation, according to Bob Lefsetz in Variety.
“We no longer live in an Apple world. Apple dominated music because of the seamless interface of the iPod and iTunes, with the iTunes Store the glue holding it all together,” he writes. “It no longer has a market monopoly. As that dominance erodes, you must come up with a new dominant product, one that hopefully ties all your others together.”
Perhaps Beats will be that acquisition for Apple, but that all depends on consumer response, Apple’s perceived innovation and what LeBron decides to wrap around his ears this season.