Analyst: Apple’s Beats Purchase may be Defensive

| Apple Stock Watch

With Apple's confirmation that it is buying Beats Music, the question shifts from "if" to "why," and Wells Fargo analyst Maynard Um thinks that's still something of a mystery. Based on what we do know, Mr. Um thinks Apple's US$3 billion deal could be a defensive move, which would mark a change in company strategy.

Beats purchase has analysts wondering about Apple's game planBeats purchase has analysts wondering about Apple's game plan

Mr. Um told investors,

Apple is future focused and it's not what the two companies are doing today, but what they'll be doing in the future. While we believe Apple should get some benefit of the doubt because of its historical success, a music-related acquisition still seems, to us, more defensive.

Apple announced on Wednesday that it is buying Beats Music for $2.6 billion plus $400 million vested over time, and that company founders Jimmy Iovine and Dr. Dre will be employees reporting to Eddy Cue, Senior Vice President of Internet Software and Services. Beats is a two-pronged company with a streaming music service as well as a headphone and speaker business.

There isn't any word from Apple yet as to how it plans to meld Beats into its own offerings, leaving analysts to speculate as to what may be in store.

Mr. Um thinks if Apple made the purchase to get into the accessory market, the company is focusing too much on near term goals. Apple could also be looking at Beats as a new source for its ad revenue stream, although that isn't a perfect fit with the company's style.

"This would be more in line with our view of the future," Mr. Um said. "However, we believe Beats lacks the scale Apple would need and, frankly, driving apps for plain old in-app banner ads is not the differentiation and innovation we expect Apple to bring to this model."

That leaves Beats' music subscription service, which could fit with Apple's needs. That said, Mr. Um doesn't think Beats lacks the scale Apple needs, and doesn't justify the hefty price the company is paying.

If the focus isn't on Beats accessories or streaming music, it's possible Apple sees value in the company's intellectual property and talent.

"Iovine would bring music industry contacts and the design team could help with Internet of Things. But we believe the valuation for this reason is high," he said. "While unclear if Beats has IP, note Apple paid less for the Nortel patents, which we believe included essential wireless technology IP."

With Apple's Worldwide Developer Conference coming next week, there's a chance we'll get more insight into the Beats purchase. The company will host a two-hour keynote event on June 2 where it is expected to show off new features for iOS 8 and OS X 10.10, and possibly introduce home automation and fitness tracking platforms, too.

Regardless of what Apple's motivations were, it seems investors have been pleased with the announcement because the company's stock rose over $6 Thursday morning. Now it's up to Apple to show how Beats was worth $3 billion.

Mr. Um is maintaining his $388 to $626 target price range and "Market Perform" rating for Apple's Stock. Apple is currently trading at $630.20, up 6.19 (0.99%).

[Some image elements courtesy Shutterstock]

Comments

JonGl

I’m sorry, but as a defensive move, this purchase makes even less sense, as the quotes you offer indicate. It makes no sense defensively. In fact, the only explanation that makes sense is this quote: “Apple is future focused and it’s not what the two companies are doing today, but what they’ll be doing in the future.”

Since the current market makes no sense, and as a defensive move, it also makes no sense, then the only thing left is long-term planning. They see some use for the company in the future. We don’t know what that is, so it seems to make no sense…

I have one thought, though. Jimmy Iovine… He may make a good figurehead for Apple—someone to present Apple to the world, and who works well with Ive to help drive the creative side. I love Cook, but I’m sorry, he doesn’t have quite the same sensibilities that Jobs had. Iovine seems to be cut more from the same cloth as Jobs, and as such, would fit that part of the Jobs role, and maybe even Cook is thinking replacement CEO in him… But my speculation is as good as anybody’s. wink

KurtG

I loved SoundJam back in 1999/2000.  Great Mac mp3 player.  Then in January, 2001 out came iTunes.  Shortly thereafter SoundJam disappeared and we all found out it had been purchased a year or so before iTunes and was incorporated into iTunes.  Nobody really covered Apple too much in those days, and certainly not Apple acquisitions.  It was really a catch-up move by Steve Jobs to get into (and change) the Napster revolution.  And it did.

I am not sure how much of the above applies to Beats, but I am certainly interested to see how this plays out.  It would not surprise me if this is a great move and allows Apple a jumpstart into the future.  Wouldn’t be the first time.

ctopher

In about 3 years (assuming no growth for Beats products) the acquisition will have paid for itself. So the talent is the cream on a decent financial play. The fact that the Beats revenue is close to rounding error on Apple’s revenue as a whole ($170B in 2013) means that it won’t really move the needle, but it’s a nice play.

Or, is the revenue the bonus, and what Apple really wanted was something that Jimmy Iovine and Dr. Dre had dreamed up, but didn’t know how to execute? If so, the financial aspects of the deal are a good cover.

Or perhaps it really is the streaming music service.

According to this article and Maynard, (great name for this punch line)

Um: Beats me?

Blissmonkey

Sometimes analysts sit in their office thinking about how to frame a story in a way that no one else is in order to generate buzz and get attention.  This is an example of such an analyst.

Can’t blame him for doing it as it’s obviously something that works, but it’s so many empty calories as far as healthy information goes.

Jamie

I’m an Apple customer of some lineage, and I neither care about the gear (I don’t use headphones of any kind. I listen to music through speakers) nor the streaming service (let’s face it: if the DVR is a glorified VCR, then streaming music is glorified radio, and personally, I stopped listening to the radio some 25 years ago, it was terrible for music discovery then, and it’s terrible now. Additionally, I don’t see any reason why payola scams won’t infiltrate the streaming services just as they did the commercial airwaves) - the announcement neither entices me nor puts me off. It’s irrelevant.

Granted, I am likely in the minority, but that aside, it’s astonishing to me how the further along we get into this new technological paradigm, the more closely the systems that it operates through resemble the old (headphones, VCRs, radio stations, and the internet as cable television - premium channels/lanes for the corporations, public access channels/lanes for everybody else, etc., etc.). I’m beginning to think these days innovation is pretty much tantamount to, ‘The first time it was done was before I was born (or before there was a modern stock market wink ) therefore it didn’t really happen, so, this is the first time, and we invented it, marvel at our innovation tra la laaaa.’

Innovation, my eye! Is it really 1990 again?

Blissmonkey

Jamie,

I get what you’re saying, but I think there’s something to this streaming thing that is a product of the past you reference, but not in the same way.

Before iTunes, everyone was stuck in a place where you had to fork over an arm and a leg for CD’s, scoop shared music from the Internet, or just listen to the radio.

iTunes changed all that by presenting us with the option to buy literally whatever we wanted for a buck.  It shuttered all the brick and mortar purveyors of CDs and radio went off to wander aimlessly while everyone plugged in to their custom playlists.

As the years have passed, and with access to so much cheap music (not to mention still being able to download pretty much whatever you want for free, illegally)—there’s almost too much music to choose from making playlists less a novelty and more a burden.  Organizing all that music for a list, or hearing the same tracks on shuffle gets to be a drag.

Enter streaming music services: fairly customized musical options served to you in a random and unpredictable way;  it’s all your favourite music, plus the music that sounds like your favourite music—but isn’t.  No playlists, no shuffle repeats, no organizing, just all the music you want to hear—and stuff that sound like the stuff you want to hear (including new artists) for free (Songza) or as a paid service (Beats).

I hesitate to pay for a streaming subscription because I can’t really justify the expense.  But having seen just how customizable Beats is, I’d like to give it a try.  But alas, it’s not available in Canada.  So, problem solved.

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