Apple stirred their behemoth pot of cash Friday with the rumor that they are buying Beats by Dr. Dre for a reported $3.2 billion. Still chump change for Apples large cash flow. Apple has recently been spending their mountain of cash on expert doctors, and stock buy backs. Apple has been rediculed by many for the lack of innovation to their old product line, as well as their lack of decisions made over the heaping cash load (look back to my article on What's The Deal With Apple for some background).
Dr Dre, one of the last pioneers of the competitive 90s rap ventured into the business world and along with Interscope Record's Jimmy Lovine have managed Beats by Dr. Dre. The Santa Monica based company boasts a large profit margin on their marked up expensive headphones. They also have huge names from numerous celebrity endorsers from the sport world to the hip hop world. Long story short a lot of people wear Dr. Dre's headphones. So now the 90s rapper who smartly got into the business aspect of hip hop, the headphone. Many have theorized this makes Dr. Dre the first billionaire in hip-hop, although that is not going to be accurate, he still will make a hefty amount of money.
Why Did Apple Buy Beats?
For those of you keeping track, this was Apple's biggest acquisition ever at $3.2 billion. And they still put down a lot of cash to buy them, so why did they? Well their is some disturbing reasons why:
1. Apple's Itunes service lost $1.34 billion dollars in sales of 2013, while Spotify sales rose showing their fall in the music industry that was once dominated by Apple. Instead, Apple ventured on to new products and failed to keep their strong position in music. It took till now to realize they should probably be doing something to get back into music, so they bought the best headphones.
2. Steve Jobs had a long track record with Jimmy Lovine and so buying Beats was something Tim Cook thinks Steve Jobs would've done.
3. They like where Beats is heading (although Im not sure where that is). Dre's Beats are at the top of their game, great business advice would say never buy something at the top of what they are doing, it is hard to say they can really grow this company from where it is now. Beats has ventured into the highly competitive aspect of the music industry in music streaming. This is not such a good idea. People are accustomed to getting music for free, whether its Spotifiy, Pandora, or Youtube, music streaming is extremely competitive. And so for people to pay for your product, it better be worth every penny or else your target audience will not budge. In conclusion, Apple bought them on the thought they could grow their music streaming services.
4. Apple was scared at the number they saw in red from their Itunes service, this has not happened since they opened the Itunes store, they want to be relevant again when it comes to music. Even though Dre's beats are profitable, other headphones will and some already have, cut into Dr. Dre's market.
In Conclusion
In the end, Apple's team of coders, programmers, high valued businessmen, geeks, nerds, and whatever doctors are doing in Silcon Valley will team up with hip hop music men, partiers, and the laid back lifestyle of Santa Monica. Apple and Beats mix could work out for the company, but as an investor, this deal isn't for the short term. The message that Apple is sending through this deal isn't a bright one for the future, many media outlets have questioned their deal. Again this is only speculation, and the rumor has it the deal will go through but no word from Apple's side of things. Only Apple knows what Apple is doing. Invest with care.
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