Everybody seems pretty baffled by the reported deal for Apple to buy Dr. Dre’s headphone company Beats for $3.2 billion.
The only thing really baffling is the level of bafflement.
True, the acquisition would be out of character in one way: its price tag. It would be, far and away, the biggest acquisition in Apple history.
But Apple’s had a whole lot of cash on hand for a while now, and has been facing pressure to do something bold.
Dr. Dre appeared to confirm the deal in this video posted overnight:
There are a few reasons the deal makes sense.
First, and most obviously, there’s just a ton of money to be made. Yeah, $3.2 billion’s a lot to pay. But some estimates had Beats set to top $1 billion in 2013 revenue, and the company boasts a 60 percent market share. Apple could make that money back pretty quickly.
Which is saying something in the world of tech deals. Facebook bought What’s App, which has virtually no revenue strategy, for $19 billion earlier this year.
Part of the advantage with a product like Beats is that it’s a physical product. That is, it’s manufactured. It’s sold and comes in a package. You can hold it. That’s not to say tech companies with different revenue strategies are worthless, but with a physical product there’s a clear put-it-in-stores-and-watch-it-sell strategy. I’m of the belief that Facebook’s best buy in its recent acquisition spree remains the Oculus VR headset for exactly this reason. And Apple, which is still a hardware-first kind of company, is probably sympathetic to this line of thinking.
(On the less tangible side, however, Apple probably won’t mind being able to integrate Beats’s streaming services with iTunes.)
The major criticism about this deal is that Beats is more style than substance. For what it costs, and for all the hype, it’s hardly considered a top product in terms of quality—supposedly an Apple hallmark.
That train left Apple’s station a while ago, though. It would be easy to make an Apple Maps joke here, but that disaster looks like an isolated incident for Apple. And Beats isn’t a disaster itself. People who know their audio regard the headphones as decent but overpriced. A better comparison for Beats under Apple’s leadership would probably be Siri, which still has plenty of bugs and isn’t a perfect product, but is far and away the most recognizable voice recognition and personal assistant software out there.
You can also pretty easily argue that most Apple products are overpriced. They’re high-quality, for sure, but compared to the rest of the market, an Apple machine will generally run you a good bit more than its competitors’ products.
The final reason the deal makes sense is a little more qualitative. But Beats just has a cool factor that Apple once boasted so well, when it played the underdog-on-the-comeback-trail role so well last decade. Becoming a leading company tends to take away some of that shine, and archrival Samsung has made a good run at knocking Apple off that cool kid throne with a series of brutal ads.
Beats has that youth appeal and swagger that Apple might be trying to reclaim.
The money, the product, and the image all look good here. If and when the deal happens, Apple will have indeed done something bold. And it will have made a lot of sense.