Apple for the day

The New York Times has an article by Ben Sisario, Brian Chen, and David Gellen about Apple:

Apple is in discussions to buy Beats Electronics, the company behind the popular Beats by Dr. Dre headphones, for just over three billion dollars, according to people briefed on the talks, in what would be the biggest acquisition in Apple’s history.
The deal includes the new Beats Music streaming service, which was introduced in January as competition to Spotify and Pandora, which may signal an effort by Apple to transform its approach to music more than a decade after it opened the iTunes download store. A deal has not been consummated, and the negotiations could still fall apart, according to these people, who declined to be identified speaking about it publicly. But if it is completed, the sale could be announced as early as next week, the people said. Apple and Beats declined to comment.
For Apple, whose revenue growth has slowed sharply in the last few years, the deal could point to a headlong move into the frontier of streaming music. The company, which only last year released its streaming product, iTunes Radio, has been slow to enter the streaming world.
A purchase of Beats would also give Apple a hot product and an even hotter brand, founded by the rapper Dr. Dre and the music executive Jimmy Iovine. After its enormous successes with the iPhone and iPad, Apple has been under intense pressure from investors to unveil new products, but none have yet been released.
At over three billion dollars, the Beats acquisition would be a major departure for Apple, which under Steven P. Jobs, its co-founder, favored smaller deals. However, Timothy D. Cook, who took over as chief executive of the company shortly before Jobs died in 2011, has been vocal about the company’s acquisitions and the strategy behind them. In its most recent earnings call, Cook said that Apple had acquired two dozen companies in the last eighteen months. “We are expanding Apple’s products and services into new categories, and we are not going to underinvest in this business,” Cook said in the earnings call.
Beats began to sell its sleek, bass-heavy headphones in 2008 as an alternative to the lightweight earbuds that Apple included free with its iPod players. And even at prices of up to $450 apiece, they quickly became fashion statements. The company’s headphones have fat profit margins. Headphone designers estimate the cost of making a fancy headset is as low as fourteen dollars.
Annual sales of Beats products, which also include speakers and other audio items, have been estimated at more than a billion dollars. Last year the private equity firm Carlyle Group invested a half billion in Beats, valuing the company at more than a billion.
Silicon Valley has lately been rife with multibillion-dollar acquisitions that have caused some investors to worry about excessive valuations and an inflating technology-industry bubble. In January 2014, Google paid just over three billion for Nest Labs, which makes Internet-connected home devices, and in February of 2014, Facebook bought the messaging service WhatsApp for more than sixteen billion.
For Apple, which has a hundred and fifty billion dollar cash hoard, a three billion dollar deal would have little effect on its purse.
Ben Bajarin, a consumer technology analyst for Creative Strategies, said that a purchase of Beats would not be a big departure from Apple’s strategy of buying companies for their technology and talent to help develop future products. In other words, it is unlikely Apple would just ship Beats headphones with an Apple logo on them. “This would have to fit into a much longer, more innovative strategy around perhaps the hardware and the service,” Bajarin said.
Apple has recently struggled in developing new products. It has been working hard to develop a smartwatch, but problems like poor battery life have plagued that project, according to multiple people briefed on the company’s plans, who spoke on condition of anonymity. And, for years, rumors have abounded that the company has been working on a smarter, Internet-connected television set to become a stronger player in the living room. But that product has not been released either.
The Beats deal, which was earlier reported by The Financial Times, also suggests that Apple may want to shake up its approach to digital music. Through the iPod, which first went on sale in 2001, and the iTunes store, which opened in 2003, Apple transformed the music business, making downloads a viable, large-scale business that has sustained the music world as sales of CDs have plunged.
Apple is still the largest seller of downloads, and its store operates in more than a hundred countries around the world. But its market share has been slowly eroded by Amazon and other sellers, and the download market itself is beginning to cool as consumers shift their listening behavior to online streaming. Last year nearly thirty million people around the world paid for a subscription music service, bringing in over a billion dollars, according to the International Federation of the Phonographic Industry, a trade group.
Beats Music arrived in January 2014 as a competitor to streaming services like Spotify, Pandora, Rhapsody, Deezer, and Rdio, which have begun to spread rapidly around the world. Like the others, the Beats service makes millions of songs available for streaming over the Internet. It trumpets its expertise in creating playlists, highlighting the involvement of prominent music figures like Dr. Dre, Mr. Iovine, and the Nine Inch Nails’ leader, Trent Reznor.
Apple’s iTunes Radio competes with some aspects of Spotify, but is seen as a more direct rival to Pandora, which has become the dominant Internet radio service, with more than 75 million regular users every month.
Beats’ music service and audio products division are organized as separate companies with overlapping management but different investors. Beats Electronics, the headphone company, is said to have accounted for most of Apple’s proposed three billion dollar purchase price.

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