Why Apple's $3 billion Beats deal still doesn't make any sense

Apple offers three reasons to justify its big-bucks buyout of headphone maker/music streamer Beats. But they don't add up.

After weeks of rumors, leaks, and speculation, Apple has finally confirmed that it is buying Beats Electronics and Beats Music for $3 billion in cash and stock. As most everyone knows, the deal has been widely questioned, with many commentators -- including me -- wondering why Apple would buy a headphone maker (even a profitable one that sells lots of fashionable and expensive models) and a tiny, fledgling streaming music service (when it already has a nascent streaming service of its own).

See also: Why Apple should buy Jawbone instead of Beats

Well, when Apple went public with the deal at the code/conference in Rancho Palos Verdes, California, it offered up three reasons to justify the deal -- and plenty of commentators around the web rushed to anoint the deal as a “great buy” or even “genius.”


Take a even a cursory look at Apple’s own reasoning (based on a Re/Code live blog of Apple Senior Vice President, Internet Software and Services Eddie Cue, and Jimmy Iovine, CEO and co-founder of Beats Electronics and co-founder and chairman of Beats Music, speaking at the code/conference) and this deal remains just as much a complete headscratcher as it ever it was.

It's an acqui-hire -- Apple wanted Iovine. "Jimmy is the most talented person I've met in the music business," Cue gushed.

Apple's Reason #1:

Reality Check: Jimmy Iovine is indeed considered one of the most influential people in the music business, and Apple is no doubt counting on him to cut advantageous deals with the music labels and help bridge the long-standing culture gap between Hollywood and Silicon Valley.

But it's hard to believe that the labels will just roll over for Iovine now that he's bargaining for a major player like Apple. Besides, if Apple just wanted Iovine, it boggles the mind to htink that it had to buy all of Beats just to get him. A billion dollars, say, might have have been enough to tempt him to make a move with a lot less baggage.

As for Dre, his undisciplined video crowing about the deal is being blamed for dropping the Beats’ price by $200 million. That kind of behavior may not play well in tightly controlled Appleland.

Apple's Reason #2: Beats make great headphones. "They've done an amazing job of (t)aking the audio and making it sound incredible," said Cue.

Reality Check: Well, no. Beats headphones are not even close to awesome. They're fashionable in sports and celebrity circles, very well-branded and marketed, and deliver lots of bass -- sort of like the headphone versions of boom cars. That's not going to burnish Apple's image in the long run.

Apple's Reason #3: Beats Music is "the first subscription music done right," Cue said.

Reality Check: Well, sure. Beats Music seems like a good service, and Iovine has managed to cut some good deals with the music companies. But those deals may not transfer over to Apple. More to the point, Beats Music claims to have 250,000 subscribers, a drop in the bucket compared to Spotify's 10 million paying subscribers, for example.

Apple CEO Tim Cook was quoted saying "the thing that Beats provides us is a head start," but why settle for a slight advantage when Apple has more than enough money in the bank to buy a market leader. Heck, for $3 billion, Apple could have paid every Spotify user $300 to switch!

Maybe I’m all wrong about this, but it could be just a matter of Apple needing a friend. Engadget reports that "Iovine mentioned that he initially approached Apple, not the other way around," and that the two sides have been talking about getting together for a decade.

I hope it's more than that, but nothing I've heard so far convinces me this deal does Apple any real benefit. The only upside is that $3 billion is pocket change for Apple, so even if owning Beats doesn’t work out, it probably won’t hurt much either.

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