Insider Analysis: Apple, Beats, Retail, and the Future of Entertainment

Assuming the rumor is true and Apple is indeed buying Beats, then reading between the lines becomes important for those of us who develop future outlooks for specific companies and product segments. There are pros and cons to every deal so in light of this rumor let’s examine them.

Fundamentals

Beats the Company, The Brand, and the Movement
There are important fundamentals to know about Beats. First, it was born from some of the most powerful people in the music industry. Second, it is extremely well regarded in the music industry and has a great deal of favor. I have a number of deep contacts in the entertainment industry and they all refer to it as a movement, as if Beats also represents Hollywood as a culture. Third, Beats has quadrupled its annual revenue since 2011 bringing in an estimated $1.4 billion in 2013 alone. Fourth, it has a globally recognized brand that is desired, respected, and sought after.

The Premium Over-Ear Category
At CES 2014, I heard my friend Steven Baker from NPD give an updated state of the union on US retail. With regard to the the over the ear headphone category he made some interesting observations. Over the ear headphones as a category were up 50% YoY while ASP nearly doubled. In the premium category, Beats has over 50% of the market share. But Steven made one other point I think is interesting. He stated every major retailer has labeled the over the ear headphone category as a destination within retail rather than a pure peripheral. Which means these products are a major reason consumers are coming into the store in the first place. They are not secondary items. TVs, PCs, game consoles etc., are all retail drivers. Over the ear headphones are now on this list. Which explains why so many big box consumer electronics stores have dedicated areas to them.

What Could it All Mean?

If what my entertainment industry contacts are saying is true then you could make a strong argument that by buying Beats, Apple has indirectly purchased the music industry. In fact, if you know anything about Jimmy Iovine and his connections in not just music, but movies, fashion, global culture, and powerful entertainment lawyers (remember lawyers actually run Hollywood), you can make a case Apple has indirectly bought the entertainment industry. I would assume Jimmy would come with the deal in some capacity whether as an advisor or possibly even an exec at Apple, but that is yet to confirmed. Just like the acquisition.

Apple has, and has always had, the favor of the music industry. Artists, labels, everyone in the ecosystem knows Apple has helped make them a lot of money and helped pull them out of a very scary situation when music went digital. I’ve also heard through many sources deep inside the music industry that execs have been pushing Apple to focus more heavily on a streaming service than just digital downloads. iTunes Radio is a good start but insiders say they want a more robust service with a better business model. With that in mind, it is interesting to speculate that, with the help of Jimmy, Apple could negotiate deals more favorable for an Apple service and perhaps even put pressure on Spotify, Pandora, and Rdio. If the music industry wanted to, they could kill those services. Right now those services pay them fees for the rights to stream music — but if something bigger and better for the labels came around for the long haul, I could imagine them standardizing around it and possibly killing everything else.

Bringing up the retail point I made earlier could be interesting to speculate. With this category of headphones being a major driver of store traffic, it is interesting to think about how Apple can use that to their advantage inside big box consumer electronics retailers to position their products even better at retail.

The Big Trend — Payment Plans

While I want to write more at length about this trend, I need to mention it to make a key point related to this possible acquisition of Beats. Something is around the corner that could entirely shake up the US retail segment for computing devices and in particular smartphones. Every telco analyst and insider I talk to keeps talking up payment plans (or installment plans some call them) as a major trend. What this will do is allow consumers to pay anything from very little to zero money up front and simply pay a monthly fee for hardware. This will allow consumers to get the latest and greatest tech for very little upfront and simply pay a monthly set rate. It is basically the leasing of hardware. Carriers are already acting as finance companies, doing the credit check and risk analysis, so it sets them up to be the aggregator for this model. It will start with just the smartphone but imagine if it grows to include bundles of other technology also. For example, a consumer could get a smartphone, tablet, and Beats headphones for $60 a month. They just add that to their monthly carrier bill and they walk out with the goodies. I have no doubt this is coming.

The key point, however, is this will only work with premium electronics. One of the reasons is due to the high resale value of premium goods on the secondary market. Apple has a high resale value so naturally their products are candidates for this. Premium bundles will sell and given the brand appeal of Beats it is a natural fit for these installments plans through the carrier channel.

Concerns

My biggest concern would be one of culture. Beats is a brand almost as big as Apple’s on its own. Its recognizable, global, and is a lifestyle/cultural brand. How Apple manages this will be key. Would Beats remain independently run or would Apple integrate it more deeply into their roadmap. If the latter then the cultural concern is more valid. Would their be a pride issue within Beats around the brand that could conflict with how Apple wants to manage it against their own? Would the high profile executives like Dr. Dre and Jimmy Iovine run into a cultural issue within Apple, if they do become more involved because of this deal.

The hardest part of any large company acquisition is often one of integration. This is why I made the point earlier that Apple is very careful to make sure cultures will integrate into Apple well. This is one variable to keep an eye on if this deal does happen.

Final Thoughts

While we still have no official confirmation of this deal it has been interesting to speculate. If it happens, I’ll use the above as some foundation to rationalize. If not, this has been a fun exercise. But what stood out to me on first hearing this rumor was the price tag. Apple typically does not buy companies at this size. Generally, they buy companies not many have heard of and for hundreds of millions of dollars — not billions. If this deal happens, and it is in the multiple billions of dollars, it will be interesting to see if this starts a new trend of Apple making larger purchases to give them certain marketplace advantages.

The other important thing to note about Apple acquisitions is they do very deep cultural due diligence to make sure the company is a good fit and not just a pure technology fit. Apple has a unique culture and all companies they acquire must slot into that culture. Meaning, if this deal does happen, then there is a cultural test the Beats team had to pass for it to make sense.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

4 thoughts on “Insider Analysis: Apple, Beats, Retail, and the Future of Entertainment”

  1. Very good article. I have read an awful lot of uninformed and/or off the cuff analysis. This piece, like most from the author, is well thought out and backed by knowledge, experience and industry/market acumen.

  2. Thought provoking, and a little bit scary…
    What will the blood leeching lawyers do? What will Apple try to do? Remember Icarus?

  3. This is a toughy, isn’t it? I’m kind of leaning toward less obvious reason, at either end of the spectrum. Either this is bigger than people think (think a whole division) or far more nuanced, taking advantage of the things you mention people like Iovine (one of my heros) brings to the table.

    Joe

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