Why rumoured Apple-Beats deal makes sense, and why it doesn’t

Towards the end of last week, the Internet exploded with speculation over rumours that Apple had taken steps to acquire Beats Electronics, which makes high end headphones and has a music streaming service, for all of US$3.2 billion.

The news was confirmed by Beats Co-founder Dr. Dre Young, a hip hop artiste in a video which can be viewed on Hollywood Life. Beats is also co-founded by music producer Jimmy Iovine.

While Apple itself is still silent about the move, the US media have had a field day.

The New Yorker has many supporters in suggesting that Beats is not worth US$3.2 billion. It doesn’t have many subscribers for its music streaming service, and its headphones look nothing like Apple’s designs today, notes a blog post published on May 9, though it has speakers which Apple could use to diversify into a new market. Alternatively, the author speculates, the acquisition is actually about hiring Iovine, who may be able to revitalise the company.

The Verge differs, noting that Beats earned a billion US dollars in revenues in the past year with high-margin headphones that are a status symbol with the younger generation. “Acquiring Beats lets Apple begin selling a range of high-end accessories to its own best-selling devices, earning profit margins that can exceed its own,” an article published May 9 stated.

And Forbes, in an opinion piece on May 10, notes that while Beats doesn’t offer amazing new technology nor new markets, it does offer music streaming, which is where the music industry is moving towards today. Apple now has an ‘all you can eat’ streaming music service with the acquisition, the op-ed noted, pointing out as well that when smartphones are all rectangular, self-expression may have to move to headphones.

Apple has had much success creating desire for relatively expensive items in a price-sensitive world: MP3 devices and tablets come to mind. So if Apple is going to focus on premium headphones and music streaming, who is to say they won’t be coveted by people around the globe in short order?

Beats prices are already definitely Apple-class, or perhaps even higher end than that. The Solo headphones are the cheapest at S$310 while Studio and Executive headphones cost S$490 each. At the high end, the Pro headphones are S$620.