Apple on Verge of Purchasing Beats by Dre

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According to various reports, Apple is in the final stages of purchasing the popular headphone manufacturer Beats Electronics for $3.2 billion. The purported purchase would be Apple’s largest acquisition by far and would constitute a tremendous increase in value for Beats since it was last valued.

In 2011, HTC purchased 50.1% of Beats Electronics for around $300 million, hoping to boost smartphone sales with exclusive access to Dr. Dre’s rising product line. After allowing the company to operate independently and offering little more to HTC than Beats-branded equalizers and occasional bundled earbuds with HTC’s devices, the Taiwanese smartphone manufacturer sold back half their stake for $150 million in 2012 and the remaining portion for $265 million in 2013, thus ending all of their business dealings. Earning back so little on that investment was widely predicted by skeptical analysts at the time.

HTC’s sale of Beats stock in 2013 valued the entire company at little more than $1 billion. If Apple does indeed buy the entire company for $3.2 billion, they have paid a substantial premium for a company whose value had seemed to be stagnating. However, Google’s purchase of Nest, the smart thermostat firm, for $3.2 billion and Facebook’s purchase of WhatsApp for $19 billion tells us that tech companies can see their values explode when the giants of the industry come knocking.

While Google, Facebook, and Yahoo have made several multi-billion dollar acquisitions in the past year or so, Apple has tended to think smaller. 2013 was already Apple’s most active year in tech acquisitions by far, but the most they reportedly spent on a single purchase was $350 million on PrimeSense, a motion-tracking technology company. The reported Beats Electronics purchase would be nearly 10 times larger than the PrimeSense deal.

What is even more surprising, however, is the overall strategy at play here. Unlike Apple’s other deals, Beats by Dre is an incredibly recognizable and established brand. Apple is a company that is known for innovation and broadcasts itself as such. Beats itself wants to innovate and some might argue it has, by bringing audiophiles and fashion-conscious customers into the same market with its heavily-branded headphones. PrimeSense’s motion technology can be integrated into future Apple products in such a way that the average consumer would never know that the innovation happened outside of Apple’s Cupertino headquarters. There is no hiding Beats products, whose technical merits have been widely criticized; Beats is a brand more than a technology.

Perhaps the real prize here is the company’s new streaming service, named Beats Music. The service launched in January 2014 after two years of development following Beats’s purchase of fledgling streaming service MOG. So far, it is available at prices similar to Spotify Pro and Google Play Music All Access. The service offered is similar too, with on-demand streaming functionality and an equally vast music library. Beats Music’s distinctive feature is its content curation, which mixes algorithms with recommendations from human beings, including famous musicians and critics.

While Apple has iTunes Radio, that service is in competition with the likes of Pandora, Spotify’s free service, Songza, and Last.fm. As a radio-only service, it is more about discovery and low-effort listening than the kind of service Beats Music offers, which allows for users to build their own music library, which can be downloaded locally and played ad-free and without limits. Apple has always been influential in digital music, as the iTunes Store was a true innovator. This purchase might be justifiable for Apple as a way to expedite the process of entering the on-demand streaming market, leaving them with less work to do to create a working service and bypassing the arduous process of signing contracts with record companies.

The sale is not yet official, but the original Financial Times report suggested an announcement is imminent. Others have since jumped in and independently corroborated those reports. In the aftermath, there are very large questions about how Beats will be integrated into existing Apple products and services. Perhaps even bigger unknowns lie ahead if Apple is to become a player in the technology buying spree that Google, Facebook, Yahoo, and others have already been in on.

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