At this point, Apple reportedly acquiring ‘Beats’ for $3+ Billion will have noteworthy implications on the mobile & internet industry. This deal could definitely open up tremendous opportunities for Apple if leveraged well. But arguably it also raises lot of questions for the ecosystems & value creation leader Apple if this is the perfect fit which will help in significant value creation.
Lets analyze on what the possible acquisition would mean for Apple:
Apple has number of products which rake in billions of dollars per year in revenues and profits. But as we all realize and even Apple does that being a premium focused brand, limits the growth opportunities within the segment. Hence brands like Apple have to be innovators or smart acquirers to build newer products or offerings which will continue to create great value, boost brand equity and keep on consistently piling revenues and profits.
Being an ecosystem leader and that too the most premium one, Apple would love to cash in with offerings which will fill important gaps in the portfolio and also increase stickiness which is what keeps the users locked-in.
1. Content ( Streaming Music)
iTunes is one of the glues which help Apple locked-in many users. However, with rise of horizontal OTT media streaming services such as Spotify, Pandora, NetFlix and others, the growth has stagnated for once popular iTunes store to buy & consume content. Content is King in any form and Beats acquisition could be a step in right direction leveraging its streaming assets.
2. Hardware (Beats Headphones & Speakers)
Secondly, Beats by Dr. Dre is a premium headphone accessories brand with estimated sales of over more than 16 million units of premium headphones over the last seven years since its inception. With current growth and demand it could translate to revenue of more than a billion dollars in pure hardware revenues. With Apple’s selling power & expectations to ship more than 250 million iOS devices in 2014 plus hundreds of millions of Installed base, this is a huge opportunity for Apple. Counterpoint estimates Apple could easily generate more than a billion dollars in its first year just from headphones sales. And ‘smart bundling’ headphones with premium devices it could even accelerate the attach rates and sales to grow it into multi-billion dollar offering over the next 2-3 years.
3. Beats powered iDevices
This the third way in how Apple could leverage Beats i.e. by integrating the technology within the devices and offering a better sound experience.
Integrating the technology within the devices will increase the overall value proposition of the devices allowing Apple to maintain premium ASPs for the portfolio and continue to capture major share of the subsidy budgets. Differentiation also comes into play with Beats powered iDevices.
Wearables is a category which could benefit from integration of Beats technology.
4. Licensing Beats technology
Apple could also generate millions of dollars in revenues by licensing the technology by integrating deeper into its platform and allowing developers to leverage this into their apps. It could also become significant part of its MFI program.
These are some of the ways Apple would look to monetize Beats acquisition if it goes ahead with it as reported. This move will create substantial value for Apple and its ecosystem. We estimate Beats if integrated and exploited cleverly as above it could add minimum of 1.5-2.0 Billion dollar per year to its top line. Pretty solid ROI.
However, this won’t be a cakewalk for Apple as there are number of things which needs to be ironed out.
1. Positioning: Beats is a premium brand and connects well with teenagers in specific markets and across specific demographics. So the challenge for Apple is to integrate it in such a way that it has a broader appeal for its entire user base and doesn’t remain niche offering.
2. Pricing: Pricing for both streaming service as well as the hardware needs to be reworked as it should not be positioned as an individual offering. It needs to be tightly integrated with the platform and devices. So Apple should be flexible on pricing, especially for roping in ‘late majority’ users.
3. Place: Apple will have to work well with its channel partners on how it will distribute, bundle & sell these hardware. In subsidy driven markets it will be a challenge to stock these in bulk to garner higher attach rates so using its massive retail presence in such markets will be a boon.
4. Packaging: The overall branding, design & packaging of both hardware & software will have to change for Apple user-base to feel at home (Appleseque) and in-sync with the positioning for better appeal.
Thus, Apple if acquires Beats would like to play its cards right unlike HTC which blew the opportunity when it acquired Beats in 2011 & later gave up on it.
For competitors such as Samsung this will have greater impact than someone like Microsoft or Sony which own similar assets. On the other hand platform players such as Facebook or Google will have to soon follow the suite to beef up their content and media related technology play.