AAPL - Apple Inc.

[Guest wellmont]

trendy, faddish, pricey, commodity? what's not to like?

[Sunrider]

... unless of course this is purely for the music streaming service ... but even then ... why? I thought they only started a little while ago and unless they have some sweet contracts with the labels that Apple wants to acquire, why would they bother buying them? Wouldn't think it can be customers they want to buy?

 

Any ideas?

[Guest wellmont]

So does this mean Andre Young (Dr. Dre.) will be a billionaire and buy the Clippers?

 

I don't think the clippers are for sale...

[Palantir]

This is odd. I'd prefer they spend the whole shebang and buy Tesla.

[Liberty]

If true, I won't prejudge this one. Best to wait to have more info, as this is not a company that I know much about. But what I see is:

 

People who have a good track record of designing consumer products that sell for high margins, which isn't as easy as it sounds.

 

People who have experience in products that are, in a way,  in the 'wearables' space (where fashion matters as much as the tech), a category that interests Apple (and everybody else since rumors came out that Apple was interested).

 

People who have the best connections in the music industry of anyone and decades-long track records of success in a tough biz (it's like having James Cameron in charge of your film project; it helps), and a Spotify-like product (while iTunes Radio is more like Pandora -- the combination of the two could be pretty killer in that space).

 

Apple sells a lot of Beats products in their stores, so they must have a pretty good idea of how well they do.

 

Apple is very parsimonious with acquisitions. They usually buy something when they either really like the team and/or see a way to plug a technology/capability into their much larger ecosystem, and thus it's worth a lot more to Apple than to anyone else (they bought PA Semi and within a few years they were at the cutting edge of mobile chip design, from almost a standing start.. That's no doubt worth billions, but PA Semi would never be worth that alone).

 

IMO they're seeing that a large chunk of the music industry is going with subscription/ad-based services and they want to be leaders in that too because, if they make a great service exclusive to iOS, it's one more way to sell iPhones and keep customers in the ecosystem.

 

No idea about valuation because I have no idea how much money they make, or the quality of their engineers and designers (truly A++ players can be worth a lot -- how much is Jony Ive worth?).

 

What I know is what will matter over time is how much the company is worth inside of Apple, not as a standalone, because it won't be (if this rumor is true), so it will have a very different installed customer base, market reach, and impact on other parts of the business (what % of sales spread over a few years must Beats increase to recoup 3.2bn? At Apple's scale this would be almost a tuck-in, just notable because they only do very small acquisitions usually).

 

Just my 2 cents. We'll see when we have more info.

[Palantir]

It may not be a full acquisition. It could be a licensing of the streaming service etc.

[Guest wellmont]

It may not be a full acquisition. It could be a licensing of the streaming service etc.

 

apple dominated computer music. they had years to come up with a streaming product. everybody knew that's where things were headed. it says something that they have nothing to show for it.

[Liberty]

apple dominated computer music. they had years to come up with a streaming product. everybody knew that's where things were headed. it says something that they have nothing to show for it.

 

Yeah, Apple isn't batting 1.000, shame on them...

 

They still do dominate the digital music industry, btw, and iTunes Radio and iTunes Match aren't nothing. They just don't dominate yet the new upcoming thing (which isn't very profitable yet).

 

What's wrong with acquisitions anyway? The ad business (Adsense/Doubleclick) was an acquisition for Google.

 

I'd rather see Apple fall behind in small aspects of their business - possibly because they keep all their best people working on iPhone and iOS and new products - than pull a Nokia or a RIM.

[loganc]

It may not be a full acquisition. It could be a licensing of the streaming service etc.

 

That would be the only way the deal could be worse, in my view.  When you boil it down, I think AAPL is buying the brand.  I can't imagine that their (i.e. "Beats") streaming concept or other product offerings could possibly warrant the price paid.  I don't understand this deal.  Obviously, it is small relative to the total value of the company and it probably won't matter if "Beats" ends up being a zero.  However, the deal speaks volumes to me about capital allocation, assuming they are paying for a brand.

[loganc]

 

What's wrong with acquisitions anyway? The ad business (Adsense/Doubleclick) was an acquisition for Google.

 

 

There is nothing wrong with AAPL doing deals.  However, can you see anything with the "Beats" deal that is even comparable to the aforementioned deals in terms of long term development?  In other words, how does the scale of AAPL really make this deal make sense in your view?

 

Thanks.

[Liberty]

However, the deal speaks volumes to me about capital allocation, assuming they are paying for a brand.

 

Brands are worth something, ask Coca-Cola or Procter & Gamble...

 

I think Beats is probably a lot more profitable than most of us would think. A recent NYT piece says they have about 1.5 billion in sales and that even some of their most expensive headphones have been estimated to cost about $14 to make. They sell earbuds for $100 and headphones go for multiple hundreds of dollars (imagine the margins on that). And then the streaming service, based on the music talent and connections at the company, could very possibly be top notch (I haven't tried it) and competitive with the very best. But maybe the NYT numbers are wrong, I don't know.

 

Too early to tell, but $3 billion could turn out to have been cheap in a few years, though we'll probably never know because Apple won't tell us if the Beats designers end up helping improve the iWatch line or whatever... And we won't know what impact on sales it could have if every iPhone comes with a pair of Beats earphones that would cost $100 if you bought them standalone while the competition comes with generic stuff, and if Beats streaming is only available on iOS and is better than the competition. We'll have to wait and see.

[Liberty]

 

What's wrong with acquisitions anyway? The ad business (Adsense/Doubleclick) was an acquisition for Google.

 

 

There is nothing wrong with AAPL doing deals.  However, can you see anything with the "Beats" deal that is even comparable to the aforementioned deals in terms of long term development?  In other words, how does the scale of AAPL really make this deal make sense in your view?

 

Thanks.

 

I don't think it's anywhere near what adsense was for Google in potential, obviously. I just used that example to show that there's no shame in getting stuff through acquisition rather than building it internally, even very important stuff (which Beats isn't for Apple).

 

But 3 billion for Apple is less than 1% of their market cap, so it's basically a small tuck-in for them, just beefing up their music/design offerings, not trying to massively change the company or build a new leg to the stool. Let's keep things in perspective.

 

I do think that some of the things I mentioned above could be very good for Apple, though. Helping further differentiate/improve the iOS/iPhone ecosystem is worth a lot of money.

[loganc]

My point is that AAPL has the best brand in the world.  Why do they need to pay 3.5B for this particular brand?

 

A recent NYT piece says they have about 1.5 billion in sales and that even some of their most expensive headphones have been estimated to cost about $14 to make.

 

This seems impossible for me to believe.  Why would Beats sell 50% of the equity at a 1B valuation to Carlyle in September 2013 if they were selling 1.5B of product?  It clearly can't be true that Beats had 1.5B of revenue. 

[Liberty]

My point is that AAPL has the best brand in the world.  Why do they need to pay 3.5B for this particular brand?

 

I don't think they're paying for just the brand. I'm just saying it's worth something too. Apple isn't selling $300 headphones (that's about half the price of an iPhone!). Maybe they could if they started making great headphones, but their resources are best used making other things (focus is important).

 

Actually, if there's someone who knows how profitable 'accessories' for consumer electronics are, it's Apple. They sell so much of that crap in their retail stores...

 

And the rumor number is 3.2, not 3.5.

 

This seems impossible for me to believe.  Why would Beats sell 50% of the equity at a 1B valuation to Carlyle in September 2013 if they were selling 1.5B of product?  It clearly can't be true that Beats had 1.5B of revenue.

 

No idea. NYT could be wrong.

 

But Carlyle most likely valued it as a standalone company and what it could earn on its own. Apple looked at it as what it would be worth inside the Apple machine. Those can be two very different things, just like PA Semi was worth a lot more inside Apple than as a standalone.

[loganc]

My point is that AAPL has the best brand in the world.  Why do they need to pay 3.5B for this particular brand?

 

I don't think they're paying for just the brand. I'm just saying it's worth something too. Apple isn't selling $300 headphones (that's about half the price of an iPhone!). Maybe they could if they started making great headphones, but their resources are best used making other things (focus is important).

 

Actually, if there's someone who knows how profitable 'accessories' for consumer electronics are, it's Apple. They sell so much of that crap in their retail stores...

 

And the rumor number is 3.2, not 3.5.

 

This seems impossible for me to believe.  Why would Beats sell 50% of the equity at a 1B valuation to Carlyle in September 2013 if they were selling 1.5B of product?  It clearly can't be true that Beats had 1.5B of revenue.

 

No idea. NYT could be wrong.

 

If you think paying 3.2B (sorry!) for a headphone business is a reasonable deal, then we will have to agree to disagree.

[Palantir]

Could also be a defensive acquisition about eliminating a potential threat...

[Liberty]

If you think paying 3.2B (sorry!) for a headphone business is a reasonable deal, then we will have to agree to disagree.

 

And you can be that sure about what it's worth to Apple because..?

 

I'd be curious to know if Beats makes more money than Nest. If I had to guess, I'd say probably by a pretty wide margin. A lot more people care about headphones and streaming music than thermostats...

[loganc]

And you can be that sure about what it's worth to Apple because..?

 

I don't know.  Where is your valuation of the deal? 

[ni-co]

The interesting question is: What would this deal do for Apple? As I said in the general thread, I don't think it's true, because it doesn't make any sense for them.

 

Hardware? Design? Streaming rights? High margin products? Brand? All the aspects that make Beats valuable are core competencies of AAPL, too. I don't get what Beats adds to their business apart from complexity. If I'm wrong and this is actually true I won't take it as a good sign. In my mind, this would hint to a diversification strategy I'm totally not on board with. An AAPL brand conglomerate could only work if you had a master capital allocator as CEO, which certainly is not the case.

 

Beats being hugely profitable couldn't be the reason for this deal in itself as this makes them very valuable to any potential buyer.

[Palantir]

Mindshare, this is a fast growing, popular brand. Maybe it also reveals gaps in apples armor.

[Liberty]

And you can be that sure about what it's worth to Apple because..?

 

I don't know.  Where is your valuation of the deal?

 

I said I didn't know. I'm waiting. I just pointed out some things I saw. It could be a waste of money, it could be great, it could be just one more bolt on we never hear about again. We'll see.

[Liberty]

The interesting question is: What would this deal do for Apple? As I said in the general thread, I don't think it's true, because it doesn't make any sense for them.

 

Hardware? Design? Streaming rights? High margin products? Brand? All the aspects that make Beats valuable are core competencies of AAPL, too. I don't get what Beats adds to their business apart from complexity. If I'm wrong and this is actually true I won't take it as a good sign. In my mind, this would hint to a diversification strategy I'm totally not on board with. An AAPL brand conglomerate could only work if you had a master capital allocator as CEO, which certainly is not the case.

 

Beats being hugely profitable couldn't be the reason for this deal in itself as this makes them very valuable to any potential buyer.

 

If apple was a 10bn company maybe, but this is barely material for them. Just beefing up music streaming and accessories and getting new talent, probably.

[mhdousa]

It's days like today when I really miss ValueInv's unbiased perspective...who will fill the void and link to 18 different random blog posts praising Apple.

[ni-co]

The interesting question is: What would this deal do for Apple? As I said in the general thread, I don't think it's true, because it doesn't make any sense for them.

 

Hardware? Design? Streaming rights? High margin products? Brand? All the aspects that make Beats valuable are core competencies of AAPL, too. I don't get what Beats adds to their business apart from complexity. If I'm wrong and this is actually true I won't take it as a good sign. In my mind, this would hint to a diversification strategy I'm totally not on board with. An AAPL brand conglomerate could only work if you had a master capital allocator as CEO, which certainly is not the case.

 

Beats being hugely profitable couldn't be the reason for this deal in itself as this makes them very valuable to any potential buyer.

 

If apple was a 10bn company maybe, but this is barely material for them. Just beefing up music streaming and accessories and getting new talent, probably.

 

I think you're right. I'm more and more convinced that it's not about the headphones, though. It's all about the software + streaming service and the talent behind it. In my mind, AAPL have to pay 3.2 bn for it - more or less by chance, because the company with its headphones seems to be so insanely profitable.

[Liberty]

I think you're right. I'm more and more convinced that it's not about the headphones, though. It's all about the software + streaming service and the talent behind it. In my mind, AAPL have to pay 3.2 bn for it - more or less by chance, because the company with its headphones seems to be so insanely profitable.

 

In the more than 1 year old Gizmodo piece linked in the other thread, there's this:

 

"The same year Beats Electronics dropped Monster, the company put up $519 million in sales (versus $298 the year before), capturing a commanding 64% of the "premium" headphone market ($100 and higher)."

 

According to Wikipedia, Beats dropped Monster in 2012.

 

So with those kinds of growth rates, they could be around 1 billion in sales now, maybe above (depends if they slowed down, sped up). At what margins? I don't know, but probably high.

 

But those numbers could be wrong...