Apple Confirms Its $3 Billion Deal for Beats Electronics

Our tolerance for entertainers seems to be much higher than for executives. And I doubt many in the tech world think of Dre as a "real" executive. He's there for marketing reasons, but doesn't have much oversight of the day-to-day and the damage he can do is limited. This perception might be wrong.

There's no inherent need for balance (like you seem to want: https://news.ycombinator.com/item?id=7623043 ) in people exercising their free speech. If it bothers you, do something about it.

I'm not saying I like this, I'm saying this is the interpretation that seems to make the most sense.

[0] https://www.youtube.com/watch?v=btc1MflBSeQ&feature=youtu.be...

a) Dr. Dre is a performer. Rap, distasteful as you may find it, is performance art. It's the same as gangster movies. Would you object to Apple working with Scorcese? It's a character, albeit slightly autobiographical, but not much different than someone like Bukowski, IMO.

b) The Dr. Dre - Dee Barnes incident took place in 1991, almost 25 years ago. Should an isolated incident, for which he has made amends, haunt the man for the rest of his life? I don't think comparing it to the RadiumOne CEO, a current crime, is reasonable.

c) It would be rather hypocritical for Apple to profit off the musical talent of young black males creating "offensive" music, but not deign to work with them due to some moral qualms.

I personally once thought that we should ban gay marriage. As I grew up and gained more understanding about homosexuality my view totally changed. I think we definitely have to give people the chance to change. I would guess that most of the people here on HackerNews grew up thinking that homosexuality was a choice and some sort of perversion. However, I would bet that most of us have changed our views as we have either accepted who we are or have had friends that were gay help our understanding grow.

As far as Dr Dre, I had never listened to his music or really followed him in the news. I would probably error on the side of a lot of the other comments, that we should give him a break because it appears that he has changed. My two cents.

In music we seem less able to separate the story from the artist than for other artistic mediums. Is it because many rappers maintain a public persona which is in line with that presented in the albums (even though it's not in line with the way they really are), or is it because music is still generally considered to be primarily about raw entertainment, rather than storytelling? It's interesting.

Bitches != All Women (when it comes to oldeschool rap lyrics at least)

A "bitch" in ebonics/early-hardcore-rap is a scandalous/hated woman for well known reasons. Like the local gold digger or crack whore which was very prevalent in their societies which they strongly felt the need to address. They're not referring to all women as being bitches.

This is explained quite eloquently in N.W.A.'s "A Bitch Iz a Bitch" which was produced by Dr. Dre. and DJ Yella [0][1]

[0] http://rapgenius.com/1472495

[1] http://www.youtube.com/watch?v=A5TsjmaycsQ (explicit, but best source by far)

The justice system takes care of unacceptable social behavior. Everything else is a difference of opinion.

Mark Wahlberg, beat up a korean store owner - never mentioned

Sean Penn, beat up his wife, Madonna - never mentioned.

Julian Assange - rapist (allegedly)

Harry Reid - made remarks about Obama only being successful due to being "light skinned"

Bjork - beat up a female reporter

If they wanted the headphones or the talent or the streaming service, they could have bought any one individually, or purchased a number of competing services that are better in each of those spaces.

The fact that everyone is so confounded by this acquisition makes me think that Apple purchased something non-public.

One would start with a fringe, fragmented genre, to serve as a beachhead. Fragmented by not flat - there should be a node near the top of a hierarchy which can be acquired and leveraged.

$1.3 billion in 2013 headphone sales justifies a $3 billion valuation neatly by itself. But this acquisition certainly comes with interesting optionality.

2. The service has a tiny userbase, and doesn't have any technology apple does not.

Apple will be producing the headphones now and Apple will be building the streaming service. So, IMHO, this is a brand purchase, plain and simple. There's nothing else left. Tim Cook was dissembling because he didn't want to admit he just bought the rights to a name.

The music angle is touchy-feely, the talent angle makes it seem like Apple got something that's exclusive, and the profitable hardware business is the solid base to calm investors.

1 http://recode.net/2014/05/28/tim-cook-explains-why-apple-is-...

There's zero high-endness about Beats headphones. They're all right (at least if they were priced around 30% of their current price), but really, they don't sound particularly good.

Rebranded mid-range electronics with pop star endorsements and hype.

Do people really consider Beats to be high end?

I heard that kind of talk when Steve died.

I don't know, would he have? You asked the question in such a way as to imply the answer that no, he wouldn't, but you can't actually know that for sure. Also, we shouldn't be holding Apple to the standard of 'Steve Jobs was perfect so if he wouldn't have done this then it's bad'; Jobs made his share of mistakes anyway.

The confusing part is that Apple is spending $3bn on a company that makes mediocre, overpriced headphones with lousy sound quality. It makes no sense to me that they would buy a company like this when they have the money to create their own headphone line with better technology, equivalent or better design, and overall better result, likely at a lower price.

I guess we'll have to see where things go from here.

If you watch MKBHD's videos on youtube, he shows why beats headphones sound good and why there's plenty of others that sound better for a cheaper cost.

Basically it's not really a move Jobs would've done but that's what happens when your co-founders aren't running the company anymore. It's like the NFL draft.

I'd say Google is going up and Apple is going down.

The way I see it, the answer seems to be "no." The headphones are bulky, the logo gaudy - just not Steve. The advertising - think of the superbowl ads that rankled Seattle fans - just not really Apple's style or ethos.

I can't underestimate Apple - they are a wildly successful company, and may well see something great that I can't. Guess we'll just have to see.

I would argue that they've already been left behind on the music front. iPods are dead, no one wants to buy tracks on iTunes for $1.29, iTunes Radio was too little, too late. A lot of Apple fans are proudly using Spotify or other services on their iPhones. Heck, even the musicians associated with Apple are getting uncool.

So, at least a Beats acquisition is something.

1) The "premium mobile audio" market is going to be the next huge market where Apple and Samsung face-off. It's no coincidence that Samsung announced their new line of premium headphones just a week before the Apple-Beats rumors began: http://www.samsung.com/uk/news/local/samsung-launches-level-...

2)Despite the tech communities denial, Apple and Beats are very much in sync. Beats is first and foremost a fashionable hardware company for the mass markets, which APPLE IS TOO. People in the tech community, and Hacker News more specifically, are having a hard time grasping this deal because they still see Apple's roots as a niche tech company of superior quality, whereas they've long moved to a mass market company. For a long time Apple was seen in a similar light as Beats; they charged a premium for commoditized product (personal computers with operating systems) and were heavily driven by marketing. Wether Hacker News wants to accept it or not, they're both predominantly mass market fashionable hardware companies that charge a premium for their ostensibly superior products. Beats has created a justifiably large brand, whether techies want to accept that fact or not. As the dominant hardware company, Apple is just acquiring a fast up and coming trendy hardware and accessories company, just as happens in every other industry. This deal makes sense.

To be fair, from what I've read Bose has the best noise cancelling system, albeit at a high price.

I'm not incredibly persnickety about audio quality and don't think I can tell the difference among various "good" headphones. But I have a pair of Bose headphones and like them.

I think so. Apple built the iPod and purchased SoundJam because they realized the world had changed. Buying CDs in stores and feeding them into your CD player was inevitably going to be replaced by digital media players/sales. iPod/iTunes filled this demand for many years but now the world has changed again. People don't spend $200 on iPods anymore but they will spend $200 on Beats headphones. They don't like feeding digital media files into their digital media players -- streaming is much easier. They also don't care much about owning music anymore or understand why a song costs 99 cents when they can goto YouTube and listen to it for free.

Do audiophiles really agree on anything?

I wonder if Steve would have backed out of the deal because of the video that was posted online prior to the announcement.

Something tells me that Steve wouldn't have done the deal to begin with though.

If "Beats Suck" turns into "Beats are Really Good, and Less Expensive", then they will lock up a good deal of the higher end headphone market.

There may also be some interesting exploration of what's possible with a headphone-based wearable. Plenty of room in that particular fashion accessory...much more so than in a watch.

I don't understand why Apple would buy a headphone company that makes pretty but lousy products whose price is only justified by the brand name; Apple gets that unjustified criticism already, they hardly need to reinforce it by acquiring a brand to which it actually applies.

[1] http://thewirecutter.com/reviews/faq-what-are-some-alternati...

I don't see how these numbers are useful. Beats is US only right now and has only been around a few months. Spotify has been around 6 years and is available in a huge number of countries.

Also - Beats doesn't have a free option which will probably stop a lot of people trying it.

At this point it doesn't really matter. Apple is late enough to the game that they don't have time to wait another 2 years while they build a good streaming service. Purchasing was the only way to get to market fast and what better than an established music brand, with the deals and software, just launched so that they can make whatever changes they want without too much uproar.

The money the headphone business makes for Beats really helps justify the deal though. Even if things flop with the music streaming service they can make their $3bn back relatively quickly through headphone sales.

Are you saying you don't believe he's telling the truth about their motivations?

And Apple NEEDS that; for them to negotiate their own streaming service with the majors + merlin it would have cost them dear - probably some sort of huge advance or equity stake (because that is the basis that streaming deals are done on these day). Apple is too rich to do that, so it's probably cheaper for them to spend $3bn on a pre pack streaming service than it is to negotiate their own deals. They are sitting on $170bn in cash. The majors don't budge on streaming - they want big fat advances, and they want equity. There is NO WAY that Apple can pay a percentage advance that will satisfy the majors ("we can't do this for 0.1% of your cash on hand, because that means that next time someone comes to us, they will want the same terms but they will only have $100m on hand") and they can't give them equity - because they value their equity too highly. It's no surprise that this deal is 90% cash and 10% stock, or thereabouts. The Spotify/Echonest deal was absolutely the reverse - 90% stock, 10% cash, because the value to Spotify of that defensive acquisition was worth way more to the Echonest investors in an upside dictated on a future Spotify IPO. $90m of Spotify stock today turns into a whole lot more in a year when they float.

Oops.

Anyway.

For the headphones, Beats did $1.5bn in revenue last year. Let's assume that the average revenue per unit is somewhere in the mid to late hundreds - $150 - $180 per unit. At $150 - $180 per unit that means they sold somewhere around 8,500,000 pairs of headphones. Gosh. Check my maths there, because I thought it was insane too.

In 2010 Billboard reckoned the global headphones market was worth about $670m on 70.8m units sold - so that's about $9.50 per unit. Beats have massively outperformed this expectation. And thhis means Beats owns 10% of the headphones market, give or take.

There have been various tears-down/BOM costings of Beats which have brought them in at about $20 - $30 per pair - or less. A huge part of the cost of Beats is in the marketing - the endorsements, the adverts (hello, Super Bowl spot at a supposed $8m) the billboard campaigns, the product placements. None of this comes cheap. So let's assume that of their 8,500,000 pairs of headphones they spent maybe $200m - $225m or thereabouts to actually buy the pieces, and manufacture the cans. Let's also assume that - yes - they made 15% margin. On revenue of $1.5bn that means they are making $225m profit. So the manufacturing costs and the profit are about the same - which is fair enough; a 100% markup is pretty decent. But that means that a HUGE element of the value of Beats (and a huge element of that $225m profit on $1.5bn sales) is created in the aspirational value created through marketing - and the marketing costs LOTS money. Remove that marketing spend, and you have a business that doesn't look so shiny. If 90% of the value of the headphones is created by the marketing, then suddenly headphones that can retail at $180 or so per unit, on a per unit cost of $25 need to drop down and retail at $40 or so - which, coincidentally, is about the price point for SkullCandy and other fashion/aspirational headphone brands. So I think the headphones business is worth about 10% - 15% of what Apple is paying in that $3bn transaction. At most. Let's call it $450m, to be generous.

So yeah. I really don't think the headphones business is a thing.

I imagine for a while they may either incorporate Beats into a "premium" Apple headphones range - or they will drop the Beats brand almost entirely and sell the consumer headphones business off to someone else. Whatever happens, I'd doubt Apple will be using "Beats by Dre" as a brand. It'll be entirely integrated into the Apple brand - "iTunes On Demand" or something else.

Whatever they bought, it was not the headphones business. It probably wasn't the streaming business either - if we assume that maybe the Beats Super Bowl commercial netted them some more subscribers for the Beats streaming service and we call it a very generous 200k subscribers, that means that Apple has paid (once we deduct the $450m for the headphones business) something like $12750 per streaming user.

Spotify is worth something like $4.5bn at the moment (or, at least, it was until tonight, before Apple potentially decimated that market) and they have 10m paying subscribers. So that's a cost per user of $450 to buy that business. Spotify pays out 70% of every dollar of revenue to rights holders, giving them 30% of their revenue to cover their costs and make a profit. They say that they will pay out $1bn to rights holders this year. Which means that they are expecting to bring in about $1.4bn in revenue. So they have $400 to run their business and make a profit - only, of course, they don't make a profit. So the 10m subscribers + ad-supported users bring them $1.4bn.

If you want to buy Spotify today, it's going to cost you $450 per subscribing user.

Let's assume that there comes a point that Spotify has maybe 40m subscribers and they bring in $5bn in revenue a year. That gives them $1.5bn to run their business, and maybe at that point they turn a profit. If they return 15% also, then they're making $225m a year profit. That's $5.63 profit per subscriber per year. It's going to take a long time to make back the $450 you spent per user.

The value to the Spotify in buying the Echonest was that nobody else could have it.

The value to Beats in being bought by Apple is that nobody else wanted it.

The value to Spotify in all of this is that it makes it a three (or maybe four) horse race: them, Apple and whichever of the remaining players Amazon buys and bundles into Amazon Prime Instant Music. And then we'll see what Google does with YouTube Streaming.

For everyone else, it's a race to the bottom: so long as Apple can offer "iTunes On Demand" for a dollar less than anyone else, they win: they have a one click route to market, and they have a product that becomes more appealing to more people by the addition of a streaming service.

Basically, as far as streaming music goes, we're all fucked.

Here are some links to vaguely back up some of what I've said above. It's late, though, and I can't reference everything. You can pretty much Google it all though.

http://www.billboard.com/articles/news/950594/beats-by-dre-t...

http://teksocial.com/socialblog/2012/5/13/exploiting-the-con...

http://9to5mac.com/2014/05/13/beats-music-had-only-111k-subs...

http://www.completemusicupdate.com/article/spotify-tops-ten-...

EDIT: Right, it's still a profitable business regardless and I should have touched on that. But I don't want to see big tech companies acquire just for profit. They become behemoths that die slow deaths. I want to see Apple continue to reinvent based on their vision. I don't want them buying safe businesses. It's the reality of the world, I guess. I just firmly believe that Apple could have created their own spin on this market for less than $3 billion and beat out Beats.

This isn't necessarily because of the curated playlists, but it's the service as a whole. Beats is quite rudimentary in terms of music management, and requires way too many taps to add multiple songs to playlists or even just shuffle play a playlist. When I'm trying to listen to music I know I like, Beats falls behind. The curated playlists are kind of a distraction with my usage, and I personally wish they'd focus less on the celebrity playlists and more on letting me listen to music I like.

Of course, as you demonstrated, Beats is a hit or miss because of its focus on discovery/curation over music playback. It all depends on the user and how her or she prefers to listen to music.

Disclaimer: I do still subscribe to Beats, but only because of the AT&T deal that makes it cheap for 5 users.

I find that Google Play does a fantastic job on my phone, and for any sort of real use I fall back to my Sansa MP3 player. I personally dislike others making my playlists, so perhaps I'm far outside the demographic.

Is there something I'm missing here, some sort of killer feature perhaps, that validates the huge valuation of this acquisition?

The original Squeezebox was elegant and had so much potential.

Uh, yes they do, quite well in fact:

http://tech.fortune.cnn.com/2014/03/11/apple-itunes-radio-pa...

Already bigger than Spotify just six months after launch.

Hilarious

So yes, Music is extremely important. For anyone.

(Was Apple's purchase of NeXT bigger than this deal relative to their value at the time?)

Also - what does Beats have to do with his career in hip hop? Hip hop didn't make him almost $1bn, an electronics company he co-founded did. It just irks me every time I see 'hip hops first billionaire'. It has absolutely nothing to do with hip hop.