AAPL - Apple Inc.

[Liberty]

it seems to have been worth about $1b last year and over $3b this year. Perhaps $300 headphones have been flying off the shelves?

 

You could say that. Most estimates of their revenues are around 1-1.5bn, so that's a lot of headphones. And who knows what their margins are, but they are probably very very high (one estimate I've seen is that there's $14 of materials in one of their headphone pairs). But what is the streaming service worth if you suddenly plug it into an installed base of many hundreds of millions of devices? And what is it worth if Iovine can get content deals for Apple TV?

 

Apple usually acquires for talent and technology that they can plug in their existing stuff (f.ex. PA Semi, or the recent mapping companies they bought). What's interesting about this case is they also got a brand. They must have felt that Beats was different enough from what they want to do with their main brand to be useful to them; you'll never convince an average person to spend a lot on headphones, but the kind of people who will do that happens to care that their favorite artists endorse them, just like the kind of people who spend $300 on sneakers cares that their favorite athletes endorse them. Once again, it's the difference between market share and profit share. If you can better target the profitable segment of the market and leave the rest to commodity players, that's a big plus. The music world isn't the same as the consumer electronics world, and Beats obviously gets that world better than most...

 

Another interesting aspect is that Beats appears to have mostly created its market from nothing. Audiophile-type stuff was usually a bunch of middle-aged men talking about how their open back Sennheisers are a bit more neutral than their Grados but they prefer the definition of the bass on their SR-60s. The hardest thing Beats had to do was convince so many (young) people to care about getting something better than the headphones that came with their phone, or whatever they found on the rack at Best Buy, and start caring enough about how they sound and look to pay up. A few years ago nobody would have bet on a headphone company doing that (many have been trying for decades). Yet within a few years, this young company went from nothing to selling over 60% of the above-$100 headphones (which is where the must be -- not in $10 earbuds).

[GregS]

Contra everything I've said:

 

http://lefsetz.com/wordpress/index.php/archives/2014/05/11/applebeats/

[Viking]

It is interesting to look at the news media's reaction to two deals that cost about $3 billion: Google's acquisition of Nest and Apple's (as yet unconfirmed) purchase of Beats. The press loved the Google deal (you pick the reason). The press hates the Apple acquisition of Beats (you pick the reason).

 

With these two deals, I see the opposite of what the general press is reporting. I think Google purchased a good company but they paid way,way too much given the expected earnings stream (looking out 5 to 7 years). Apple is purchasing a very good company at what looks like a very fair price and should see an immediate payback on its investment (over the same 5 to 7 years). Google gets patted on the back and Apple gets kicked in the ass. The good news in all this is small investors can do very well if they learn to not blindly believe everything they read in the press and learn to think independently.

 

Here is what I see with Beats:

1.) they dominate the high end headphone segment (a hardware category that is growing and that Apple does not play in)

2.) they have a well reviewed new music streaming service

3.) the beats brand is very strong (talk to any kid)

4.) their management team is top tier and very plugged in

5.) they had sales in 2013 of about $1.4 billion with lots of growth; given the margins on the headphones they sell it is not unreasonable to assume they earned $200 million. This would put the PE on this purchase at about 15x earnings. These estimates MUST be wrong because this is too cheap as the company is still growing very quickly.

 

The primary risk to Apple of buying beats is likely whether or not the cultures would be able to fit; one would have to assume Apple has looked at this and is not concerned.

 

Apple gets continuously slaughtered in the press for not spending its cash hoard on a large acquisition. Facebook purchases WhatsApp for $19 billion and the Press loves it and calls Zuckerberg a visionary. Apple does a small deal ($3 billion) with beats that looks to fit in many obvious ways and they get hammered on. Bizarre is the only word for it.

[Guest wellmont]

yet it was only worth a bit over $1b last year. so it tripled in value in a year? it seems aapl is not immune to piling in at the top, albeit with a small amount of capital. so far.

[Viking]

Wellmont I have read that same comment over and over the past few days and my answer is who cares? Maybe HTC was in a situation where they had to sell and it was a distressed sale. Regardless, we have incomplete information and it just doesn't matter.

 

What is important to me when I buy a company/stock today is where it is trading today and whether or not I want to but it at today's price. If the stock fits my criteria then I should buy it. One of my criteria is not to look at where it MIGHT have traded the previous year in a private transaction.

[fareastwarriors]

How come Apple doesn't just try to buy Pandora if they want to get into streaming business?

[Guest wellmont]

I think where it traded a year ago in a private transaction is 100% relevant. Prices have a way of rising quickly when the suitor has "deep pockets"....it's hard to see values tripling overnight. I asked the same thing about msft/skype. where was apple when HTC wanted to sell beats?

[Liberty]

Apple is held to impossible standards. Nothing they ever do is good enough. Even the old Apple under Steve Jobs couldn't meet the standards that Apple is being held to lately (can you imagine how people would bitch about the 6 years wait between the iPod and iPhone? About the iPhone selling only around 6 million units during its first 4 quarters on the market while RIM and Nokia had all the market share?).

 

The good news is that there's a disconnect between how well they execute as a consumer product company and how the market perceives them, so that's an opportunity (though the opportunity was higher at $380...).

 

How come Apple doesn't just try to buy Pandora if they want to get into streaming business?

 

They're already in the streaming business. They have iTunes Radio. They just seem to think that Beats has a better approach. And Beats is a lot less expensive than Pandora if you consider that Pandora would probably go for like 6-7 billion at least in a takeover and doesn't have a high-margin consumer product business that comes with it. Pandora also doesn't have good relations with the music industry (content producers really dislike Spotify and Pandora), which will matter a lot as long as they don't own the content that they stream.

 

Pandora is a lot bigger than Beats? Sure, but how big will Beats streaming be if it ships by default with every new iOS device and is installed on all the old ones in a software update and is part of an Apple marketing push?

 

Update: Found this:

 

[Viking]

Pandora's market cap today is about $5 billion; let's assume a buyout premium of 50%, which would put the purchase price at $7.5 billion. The company is losing money and given the economics of the business will likely continue to lose money moving forward. Pay $7.5 billion for the privilege of losing a couple hundred million every year moving forward? Doesn't make any sense to me.

 

Wellmont, we will all understand much more if this deal is actually completed, especially over the next year as we see how the company is integrated into Apple and what impact it has on the various businesses at Apple. There are many unknowns; yes, what happened last year is one piece of information. My point is how Google and Facebook get a free pass when it comes to acquisitions and Apple gets slammed.

[Viking]

Morgan Stanley is reporting iPhone 6 orders are 20% higher than 5s orders http://finance.yahoo.com/news/apples-iphone-6-orders-20-175149409.html

 

From the article:

 

"Forget Apple-Beats, which is fun, but really a sideshow for Apple.

 

Apple is still the iPhone company, and that's the only thing people really need to pay attention to.  The iPhone is 60% of Apple's sales, and much more of its profit. It's the number one thing that moves Apple's stock.

 

Morgan Stanley analyst Katy Huberty was just in Asia, and she's hearing that orders for the iPhone 6 are 20% higher than for the iPhone 5S, according to her supply chain sources.  She was only expecting a 12% bump in iPhone sales, so this would be a big boost for Apple."

[Palantir]

 

Pandora is a lot bigger than Beats? Sure, but how big will Beats streaming be if it ships by default with every new iOS device and is installed on all the old ones in a software update and is part of an Apple marketing push?

 

This is key. Apple owns the platform, so the application that it plugs on top of it will almost certainly become much bigger if it is executed well.

 

That is the key in technology, control the platform.....

[rkbabang]

Pandora's market cap today is about $5 billion; let's assume a buyout premium of 50%, which would put the purchase price at $7.5 billion. The company is losing money and given the economics of the business will likely continue to lose money moving forward. Pay $7.5 billion for the privilege of losing a couple hundred million every year moving forward? Doesn't make any sense to me.

 

Yes, but I bet the same people who don't get the Beats acquisition, would be praising Apple if they spent $7.5B on a money losing company like Pandora.  I don't get it.

[rkbabang]

Here's one for you all - is Beats any different than a fashion brand?

 

No different. It is a fashion brand. Very much so.  There is a large fashion-like component to many companies including Apple, Coke, & Nike.  You can get similar products that are just as good, (or at least almost as good) for much less money, making them a better value proposition. Yet people spend the extra money anyway just to get the fashionable brand. Since Beats sells a product you wear on your head, looks different than other headphones, and has a large marketing campaign including celebrity endorsements, it does have a large fashion component to it. 

 

If you did a taste test between two cola's and a teenager thought "Big-Bob's Super Cola" which comes in a generic looking black and white can tasted better than Coke, he'd probably still pay more to buy a can of Coke so he wouldn't be walking around with that white can in his hand looking like he drinks generic soda.  The same is true for being seen with a generic mp3 player (any brand other than iPod, even if it is just and good and cheaper) or an ugly set of headphones (even if they sound better and are cheaper than Beats).  Yes Beats is a "fashion" brand, but fashion matters.

 

[DCG]

I don't really understand the Beats acquisition.

 

 

I'm not an expert on headphones, but I'd think part of the reason a lot of people (especially teens) buy Beats because it's a brand other than Apple.

[Liberty]

I'm not an expert on headphones, but I'd think part of the reason a lot of people (especially teens) buy Beats because it's a brand other than Apple.

 

Scroll up a few posts and notice that Apple is the #2 headphone brand behind Beats for teens. I don't think that'll be a problem. Teens love iPhones and other Apple products.

 

I think it's because almost all other headphone brands are boring and don't focus on comfort and/or design that appeals to young people, or even older but design-conscious people (don't make you look like a 50-year old accountant). Many sound good, but most people - especially young - wouldn't be seen in public wearing them. Or they weren't even convinced that good headphones were worth paying for, which is another thing that Beats pioneered with a whole generation (a whole generation that was born in the 90s and 2000s and has always had iPods and Napster/Kazaa/iTunes and only ever heard music on earbuds on mobile devices, not on big stationary stereos, so mostly had no idea it wanted better sound). It's like shoes. Many might do the job, but they have no brand and bad design, so they won't sell with certain demographics.

 

These Sennheisers are in the $200-300 range, and they sound awesome:

 

http://en-de.sennheiser.com/images/713/all/square/6008/square_louped_hd_558_01_sq_sennheiser.png

 

These Sennheisers are over $400:

 

http://en-de.sennheiser.com/images/716/all/square/3055/square_louped_hd_600_01_sq_sennheiser.png

 

The Grado SR60i is a classic, sounds great:

 

http://www.gradolabs.com/products/f4ba8830232696b5f580bd531134b668.png

 

Here are $500 Sonys:

 

http://store.sony.com/SNYNA_27/pimg/pSNYNA-MDR1RNC_main_v786.png

 

Here are some Beats:

 

http://demandware.edgesuite.net/aajh_prd/on/demandware.static/Sites-beats-CA-Site/Sites-beats-master-catalog-CA/en_CA/v1399974913403/images/large/Large-1000x700-O/overear-studio-2-black-standard-quarter-right-retouch-O.png

[rkbabang]

I'm not an expert on headphones, but I'd think part of the reason a lot of people (especially teens) buy Beats because it's a brand other than Apple.

 

Scroll up a few posts and notice that Apple is the #2 headphone brand behind Beats for teens. I don't think that'll be a problem. Teens love iPhones and other Apple products.

 

I think it's because almost all other headphone brands are boring and don't focus on comfort and/or design that appeals to young people, or even older but design-conscious people (don't make you look like a 50-year old accountant). Many sound good, but most people - especially young - wouldn't be seen in public wearing them. Or they weren't even convinced that good headphones were worth paying for, which is another thing that Beats pioneered with a whole generation (a whole generation that was born in the 90s and 2000s and has always had iPods and Napster/Kazaa/iTunes and only ever heard music on earbuds on mobile devices, not on big stationary stereos, so mostly had no idea it wanted better sound). It's like shoes. Many might do the job, but they have no brand and bad design, so they won't sell with certain demographics.

 

These Sennheisers are in the $200-300 range, and they sound awesome:

 

http://en-de.sennheiser.com/images/713/all/square/6008/square_louped_hd_558_01_sq_sennheiser.png

 

These Sennheisers are over $400:

 

http://en-de.sennheiser.com/images/716/all/square/3055/square_louped_hd_600_01_sq_sennheiser.png

 

The Grado SR60i is a classic, sounds great:

 

http://www.gradolabs.com/products/f4ba8830232696b5f580bd531134b668.png

 

Here are $500 Sonys:

 

http://store.sony.com/SNYNA_27/pimg/pSNYNA-MDR1RNC_main_v786.png

 

Here are some Beats:

 

http://demandware.edgesuite.net/aajh_prd/on/demandware.static/Sites-beats-CA-Site/Sites-beats-master-catalog-CA/en_CA/v1399974913403/images/large/Large-1000x700-O/overear-studio-2-black-standard-quarter-right-retouch-O.png

 

What you didn't point out is that all of those other head phones are not only not as fashionable in black, but only come in black. Here are some more beats:

 

http://demandware.edgesuite.net/aajh_prd/on/demandware.static/Sites-beats-Site/Sites-beats-master-catalog-en/default/v1399974882660/images/large/1000x700-Standard/overear-studio-matte-black-standard-thrqrtright-O.png

http://demandware.edgesuite.net/aajh_prd/on/demandware.static/Sites-beats-Site/Sites-beats-master-catalog-en/default/v1399974882660/images/large/overear-studio-titanium-standard-thrqrtright-O.png

http://demandware.edgesuite.net/aajh_prd/on/demandware.static/Sites-beats-Site/Sites-beats-master-catalog-en/default/v1399974882660/images/large/Large-1000x700-O/overear-studio-2-white-standard-quarter-right-2-O.png

http://demandware.edgesuite.net/aajh_prd/on/demandware.static/Sites-beats-Site/Sites-beats-master-catalog-en/default/v1399974882660/images/large/Large-1000x700-O/overear-studio-2-red-standard-quarter-right-retouch-O.png

http://demandware.edgesuite.net/aajh_prd/on/demandware.static/Sites-beats-Site/Sites-beats-master-catalog-en/default/v1399974882660/images/large/1000x700-Standard/overear-studio-2-blue-standard-thrqrtright-O.png

http://demandware.edgesuite.net/aajh_prd/on/demandware.static/Sites-beats-Site/Sites-beats-master-catalog-en/default/v1399974882660/images/large/overear-studio-orange-standard-thrqrtright-O.png

http://demandware.edgesuite.net/aajh_prd/on/demandware.static/Sites-beats-Site/Sites-beats-master-catalog-en/default/v1399974882660/images/large/overear-studio-pink-standard-thrqrtright-O.png

[Viking]

Ben Thompson: Why Apple is buying Beats. http://stratechery.com/2014/apple-buying-beats/

[tiddman]

The truth is that you'd be hard pressed to find any differences between these headphones.  If you compared them side by side in the store with the same song you'd probably find some you liked more than others, but then might prefer a different brand for a different song.  Without a side by side comparison you'd probably be happy with any of them, in terms of sound quality, but that isn't really that important.

 

A brand isn't actually about quality, it's perceived quality and "the experience".  People have consistently chosen Pepsi to Coke in taste tests but Coke has a stronger brand.  Budweiser is undoubtedly one of the foulest tasting beers that is made but it has one of the strongest brands.  And it doesn't really matter why a brand is strong, because once it is established, it is self-perpetuating and has to be willfully destroyed.  Killing a brand is just as hard as creating it.

 

Take Wheaties for example, it was introduced 90 years ago and is nothing more than toasted wheat bran, something anyone could copy.  I am sure someone could create a molecule-for-molecule recreation of the cereal. But it has a strong and enduring brand that will probably be valuable for 90 more years and beyond.

 

The Beats By Dre brand has been established and is worldwide and has many things in common with Apple's brand; the bright colors, "coolness", a perception of quality art/music.  Remember some of the early Apple ads highlighted the white earbud cords because at the time they were distinctive?  Same idea here.

 

Beats By Dre reportedly had over $1 billion in revenues as of 2012.  I don't know what margins or profits are but I am guessing they are pretty good since this is a mass-produced commodity product sold for a premium.  Apple is paying $3.2 billion so probably something like 2x revenues for a profitable, global, complimentary brand. This sounds like a slam dunk to me and if Apple did this 9 more times and invested $32 billion in this fashion, shareholders should be very pleased.  This is very similar to Buffett taking idle cash earning 0% and investing it to return something like 8-10%.

[DCG]

if Apple did this 9 more times and invested $32 billion in this fashion, shareholders should be very pleased. 

 

 

I agree with all of your post but this part. What is surprising about this acquisition is that Apple doesn't really ever buy other brands. They've made acquisitions for technology, intellectual property, and for talent, but they don't usually buy other brands. I don't want Apple to become a collection of numerous different brands by buying several similar type of companies.

[rkbabang]

if Apple did this 9 more times and invested $32 billion in this fashion, shareholders should be very pleased. 

 

 

I agree with all of your post but this part. What is surprising about this acquisition is that Apple doesn't really ever buy other brands. They've made acquisitions for technology, intellectual property, and for talent, but they don't usually buy other brands. I don't want Apple to become a collection of numerous different brands by buying several similar type of companies.

 

I agree with everything you said.  It is a little surprising, only because Apple hasn't done this before.  Also I don't want to see them go on a brand buying spree either.  I'd be worried if they start buying clothing brands or restaurants, or even most technology brands.  If Apple were to try to buy HTC, BENQ, or Vizio, for example, I'd be worried.  I think in this case it makes sense, because Beats has a very Apple like brand in an area that it makes sense for Apple to be in, it is only a small acquisition (for a company of Apple's size), and it should be immediately accreditive to earnings.

 

[rkbabang]

One other private company that I'd love to see Apple acquire is Square.  I'm actually surprised that neither Apple nor Google has bought them out yet.

[tiddman]

Well Apple has also never been the world's largest technology company, nor have they had the "problem" of tens of billions of cash that they don't know what to do with. They need to figure out how to grow and what to do with their earnings and that may result in a change in strategy, in fact it should, because they may not want to follow the same strategy as when they were 1/10th the size they are now.

 

They can buy back stock but that is limited by the debt they have to issue to do so. They run the risk of "diworsification" or diluting their own brand but making accretive acquisitions doesn't sound like a bad idea to me. In this case they bought a consumer brand but in the future could buy non-consumer or non-branded businesses. What would concern me is if they started to pay outrageous amounts of money for "defensive" or speculative acquisitions like we see Facebook doing.  But investing cash for a solid cash-on-cash return sounds good to me.

 

I wonder if Dre's "Daisy" music service had anything to do with this deal, Apple probably has better offerings along these lines of its own but this could be a way for them to incrementally expand that business.

[VAL9000]

There is a rumor going around that Dre and Iovine cashed out of Beats so that Dre can release Detox without fearing adverse affects on the beats brand name if the reviews don't turn out well. I think it was 50¢ that said this in some interview.

 

I wish this were true.  Whenever anything of note happens in hip hop, somehow there's always a Detox rumor behind it.

 

[gfp]

This report shows Beats' subscriber numbers as being quite small as of March -

 

http://www.macrumors.com/2014/05/13/beats-music-subscribers/

[Liberty]

This report shows Beats' subscriber numbers as being quite small as of March -

 

http://www.macrumors.com/2014/05/13/beats-music-subscribers/

 

Yeah, still rather small. But it also launched just 4 months ago. I think what matters more is whether it's better than the competition. Everybody has the same 22 million songs or whatever, so the real differentiators are curation, interface, OS integration, brand, algorithms, exclusive content, etc.

 

In other news:

 

Apple boosted iPhone shipments in Japan to 36.6 percent of the market in the year ended March, up from 25.5 percent a year earlier, according to Tokyo-based MM Research Institute Ltd. The Cupertino, California-based smartphone maker shipped 14.43 million phones in Japan the past fiscal year, the researcher said.