Analyst Sacconaghi on Apple buying Beats: ‘We struggle with the rationale for this deal’

“Apple Inc. potentially dropping $3.2 billion for the high-end headphone maker Beats Electronics LLC has perplexed Wall Street analysts,” Steven Russolillo reports for The Wall Street Journal.

“Such a flashy move–Beats is founded by music industry veteran Jimmy Iovine and hip-hop producer and artist. Dr. Dre–would mark a departure from Apple’s traditionally conservative stance in the M&A market,” Russolillo reports. “‘We struggle with the rationale for this deal on several fronts,’ Toni Sacconaghi, senior analyst at Sanford C. Bernstein & Co., wrote to clients. ‘While Beats headphones are undoubtedly very profitable on a gross margin basis, it is unclear whether the audio equipment and streaming technology relationships are privileged or hard to replicate.'”

“Mr. Sacconaghi of Sanford Bernstein wonders if Apple’s interest in Beats is reflective of the company struggling with iTunes. A recent Apple filing showed the company witnessed a year-over-year drop in digital music sales, he noted. And Apple hasn’t mentioned iTunes Radio on its previous two quarterly conference calls with analysts. Meanwhile, Pandora Media Inc recently said it was only seeing a ‘modest’ impact from iTunes Radio,” Russolillo reports. “To be sure, Mr. Sacconaghi notes an Apple deal for Beats isn’t exactly financially significant. A $3.2 billion price tag is roughly the equivalent of about 2% of Apple’s $151 billion in cash and cash equivalents. And as perplexing as an Apple/Beats deal may be, he notes it isn’t likely to change much about the company’s bottom line.”

Read more in the full article here.

MacDailyNews Take: It’s very likely that this Beats deal is simply that Jimmy Iovine is like Steve Jobs in one way, at least, in that he has the ability to sell ice to Eskimos, and Cook realizes that Eddy Cue without Steve Jobs is failing to seal the types of deals that Apple needs sealed.

iTunes Radio isn’t as good as it should be (plus it’s unnecessarily hidden within iTunes on the desktop, especially), a subscription option would certainly be welcome, and the work for Apple’s next-gen TV product is pretty much done, according to our sources, but lacks the necessary content deals for launch. As senior vice president of Internet Software and Services, Cue is responsible for these things. Perhaps Cook’s intention is that those types of initiatives will now fall to Iovine to make happen correctly and promptly.

We’re not going to say that we expect Cue to retire sooner than later, but we wouldn’t be the least bit surprised if he did, especially if this Beats deal gets consummated.

Related articles:
Cody Willard: Apple’s Beats buy is just stupid
– May 12, 2014
Apple may unveil Jimmy Iovine, Dr. Dre executive appointments at WWDC – May 12, 2014
Apple CEO Tim Cook’s pursuit of Beats seen presaging more takeovers – May 12, 2014
Former eMusic CEO explains why Apple wants to buy Beats – May 12, 2014
Apple’s deep ties with Jimmy Iovine key driver of Beats deal – May 12, 2014
Removal of Dr. Dre video about Apple-Beats deal likely means acquisition is real and imminent – May 10, 2014
Game changer: Apple buying Beats could radically transform the digital music business – May 9, 2014
If Beats deal happens, Apple is acquiring a fad, not quality, and that is troubling – May 9, 2014
If Apple’s really buying Beats, here’s hoping it’s brilliant in a way which isn’t immediately obvious – May 9, 2014
The reason for Apple’s $3.2 billion interest in Beats? Spotify – May 9, 2014
Apple buying Beats Electronics: Its best idea since the iPad? – May 9, 2014
Why would Apple want to blow $3.2 billion on Beats Electronics? – May 8, 2014
Apple in talks to buy Beats Electronics for $3.2 billion – May 8, 2014

28 Comments

    1. That was the only reason i saw for this deal… it just got inflated… if Apple didnt have Billions of $, there was no way Beats was going to sell for as much as it did…

      iTunes Radio is going slower than i would have thought… Ed Cue maybe cant get things done as quick as Jobs would have.

  1. Paying $3 or $3 Billion + for a marketer of shitty headphones from two thieves who ripped off Monster Cable for the original IP is without a doubt ignorant beyond all belief. There simply is no there there.

    If this rumor is true and that is the best Apple’s staff can come up with, they have jumped the shark.

  2. Content deals.

    That’s the reason for the entire thing. Apple will get far more out of a $3 billion purchase of Beats than Google ever got for spending $9 billion on Motorola (or any of the other big deals that have had us scratching our heads in recent years).

    Think about it. Apple probably has hardware/software baked that would be worth billions upon billions, held up only by the fact they haven’t been able to assure enough content owners that it really is in their best interests to play ball.

    If this opens those doors, it’ll be well worth it. And if a merged Beats+Apple brand of iPhone and iPod accessories doesn’t at least break even at $3 billion I’ll be shocked.

    This is a savvy deal. And it’s not much of a risk for a company that has more money sitting in overseas than a quarter of the world’s GDP.

  3. Sacconaghi (like any given number of AAPL analysts) has always “struggled with the rationale” of almost every deal Apple has ever made, so I’d welcome his perplexity as a positive.

  4. We’re all going to find ourselves looking in the wrong direction.
    What is EVERYTHING Apple seems to be doing moving toward?
    Wearables
    What do you need for that to work? You need to be on the beat. And Apple is moving toward just that

    1. You got it, the iWear concept, be it a watch earring, bracelet, chain broach, heck even the shirt, belt shoes can be considered. Fashion of the future.

  5. Ok people! Have you even downloaded their music service? If you have ATT wireless you get 3 months free. First thing I did was try it. Let me tell you, it is slick!!!! Unlike anything else I’ve tried and puts iTunes Radio to shame. I believe in this deal for multiple reasons, but their music service is top to me.

  6. Apple dropped the ball with iTunes Radio. It’s too much like Pandora and no real differentiation except that there’s no ads if you already have iTunes Match.

    Beats is much more than headphones and/or streaming music. It’s a style, a brand, that Apple can’t replicate. It’s hip, cool, and VERY popular with the younger generation, who think their headphones are the best.

    Their app immediately asks for music preferences by genre and sample artists to start selecting music you like. It’s pretty slick with the graphics as well.

    iTunes is seen more as a necessity now rather than the cool way to manage music. Apple needs an infusion of music style, and Beats may just be what Apple needs to grow and expand its music sales.

    1. Apple is already very popular with the young and hip. They don’t need Beats for that and Apple’s earphones sound better than the bass-heavy junk that Beats puts out.

      Beats is all sizzle and only a little steak. The price of this dinner is too high for my liking.

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