Niggas heard I fuck with Dre, now they wanna show me love

So it’s true. Apple really did acquire Beats for $3 billion.  It’s Apple’s largest acquisition ever.

Noted New York venture capitalist Fred Wilson raised a few eyebrows earlier this month at TechCrunch Disrupt in predicting that Apple won’t be a top three tech company by 2020.  Because Apple is “too rooted to hardware” and not capable enough with the cloud.

Consider this acquisition a bullet point to that forecast.

Ostensibly, Apple is purchasing Beats for two reasons: Beats’ talent for music as an industry, and the existing Beats Music streaming business.

What Beats brings to Apple are guys with very rare skills. People like this aren’t born every day. They’re very rare. They really get music deeply. So we get an infusion in Apple of some great talent.

That’s what Tim Cook told Re/code in an interview.  So the Beats team deeply understand music. But, doesn’t Apple? This is after all the company that invented the iPod and iTunes. Beats hardware is rarely if ever considered best-in-class, and they don’t even design their own hardware. So it’s hard to understand this part of the acquisition rationale.

The music streaming business at least makes more sense strategically. In the age of Pandora and Spotify, Apple’s “pay per download” model may have run its course and Apple may want a shortcut to enter it — even though technically they already have their own streaming service in iTunes Radio.

But consider what’s already out there: Pandora, Spotify, Xbox Music, Google Music, Deezer, Last.FM, 8tracks, Grooveshark and many, many more that I can’t remember off the top of my head. Amazon is said to be readying one too. There will be massive consolidation in the music streaming industry, I can promise you that. So why is Apple so gung ho about a crowded marketplace with razor thin margins? And that’s not even considering the fact that Beats’ music streaming is still nascent with only 250k subscribers; wouldn’t it make more sense to acquire market leaders Pandora or Spotify?  Spotify, in contrast to Beats Music, has 10 million subscribers.

Moreover, the cultures between Apple and Beats may not be a good match. Plenty of research on M&A suggests that contrasting cultures is often a major reason why M&A combinations fail.  Billboard claims its sources told them the “Apple family nearly imploded with outrage” over the video of Dr. Dre and singer Tyrese prematurely celebrating the then impending acquisition:

This is our favorite bit of gossip from our sources. Apparently, the Apple family near imploded with outrage when that video went up on Facebook of an ‘excited’ Dr. Dre with R&B singer/former Coca Cola pin-up Tyrese. In the video they share, in language perhaps unsuitable for a family blog, how Dre will be hip-hop’s first billionaire and other nice things about Compton. People often forget that despite Apple being this company that makes sexy products, with sexy profit margins, and sexy retail outlets…it is not in fact a very sexy company. It is a conservative company, particularly without the leadership of its guiding light Steve Jobs who would shake things up massively on a daily basis. This is not the kind of thing Apple is used to.

While Google is figuring out its next moonshot (driverless cars, Google glass) and Microsoft is searching for a fourth pillar (in addition to Windows, Office and Server), Apple is at best taking a side step with Beats.

It just doesn’t make much sense. Unless there’s a bigger game plan that Beats and Apple has yet to reveal. It’s possible. The popular thought is that it’ll be something to do with wearables.  Here’s what Tim Cook said to the New York Times:

They’re going to be coming up with [features] that blow your mind and products you haven’t thought of yet, and seeing around the next corner to articulate the way to take music to an even higher level than it is now.

But at the end of the day, this is a Tim Cook styled acquisition.  This is a financial play, not a product-driven one.  Cook plans to marry Apple’s distribution with Beats’ products, and the expected result is bigger profit as a pair than individually on its own.

Financially, it’s great, because even in the short term there are synergies. Using Apple’s global footprint, there’s hitting the gas on the subscription service, there’s distributing the headphones globally in countries that they’re not in today. There’s lots of things like that.

So we’re projecting it’s going to be accretive in fiscal year 2015, which as you know for us, only starts in a few months.

It’s a different Apple indeed.

And this is me saying it as a Tim Cook fan, a fellow Duke alumnus and who I think is responsible (as a leader) for at least 50% of Apple’s amazing two decade long run.  And counting.

P.S.  Not that I needed to clarify, but in case I do, the title of this post is a lyric from 50 Cents’ seminal In Da Club.

One thought on “Niggas heard I fuck with Dre, now they wanna show me love

  1. Hmmm.. reasons for beats: Hardware? maybe… but its cheap-ass hardware, Apple could do much better at far lower cost… Digital music sales/database? unlikely… Beats Music has been lacklustre at best, with an actual real database arguably hovering around the 100k mark… Financial? not sure.. there’s a reason why Carlyle valued the company at $1bn, 8 months ago though

    If its new wearables, I would have presumed Apple’s in-house capabilities can do that.

    This said, i guess time will tell!

    Liked by 1 person

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