I have been fascinated these past few weeks wondering why Apple is reportedly buying Beats, a “low tech” company that’s only been around for three years -- for 3.2 Billion! (The deal isn’t “official” just yet) Everyone seems to hate the Apple &Beats deal:
I’ve had some time to think about this, and I actually think it’s a very smart deal for both of them.
Dr. Dre and Jimmy Iovine win. They may not end up as full scale billionaires, but they’ll be close to it. Dr. Dre should end up with a net worth of around $800 million, so he’ll actually be ahead of Sean Combs (otherwise known as P. Diddy) who has held the title of largest net worth for a rapper for several years at $700 million. The reason Dr. Dre and Jimmy Iovine are not getting more is because they sold a large chunk of their company to a private equity firm, Carlyle, in September 2013. Don’t get me wrong, though, they’re still getting paid as much as most of us hope to win in a high Powerball lotto. So clearly, these guys are walking away ecstatic with this deal.
How does Apple win in this deal? First of all, Beats is only a three year old company, and they made more than $1 billion in revenue last year. On top of this amazing feat, they also have huge profit margins. They are selling headphones and speakers anywhere from $100 to $450, and what’s crazy is that most people could buy headphones for $10. That might even be what Beats is paying to make them . . .
Doesn’t that sounds a lot like Apple? They practically created the market of overpriced, “cool,” edgy tech gadgets. Apple was not the first company to provide portable music - let’s all have a quick flashback to the walkman and diskman. They were however, the first to make a portable mp3 player wildly popular with the iPod. They created something cool out of an already established market, and were able to leverage that to grow an entirely new industry leading to explosive growth for Apple as a company.
Apple today, though, seems to have lost its cool factor. Now everyone has aniPhone, iPad, iPod, etc. I have one, you probably have one, and every dad at my kids’ soccer game has one. Guess what . . . sideline soccer dads just aren’t an edgy group. These products have become ubiquitous in our society, which is good for Apple, but also causes it to lose its initial cool, edgy factor. Last week I asked three dads at the soccer game if they still think Apple is cool. They all pulled out their iPhones, and started talking about their plans and cases and how cool they were. It was then that I realized that Apple has definitely lost its edge.
With Apple having purchased Beats, though, they now do have a new, edgy, cool product again. Cool and unique is what they built their business on. The way I see it, it just may be the boost Apple needs.
So congratulations to Apple and Beats on a deal well done.
Wes Moss, the Chief Investment Strategist for Wela, writes a weekly blog for the AJC.com. You can find his original article here.
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