Why does Apple want to acquire Beats? That’s the key question investors are asking as they digest the news that the company is in the final stages of negotiations to acquire the company for a staggering price tag of $3.2 billion.
While the company’s premium headphones business is certainly successful, The Motley Fool technology specialist Daniel Sparks thinks that Beats’ new streaming music may also be one of the key reasons Apple wants to acquire the company.
What’s so special about Beats Music? After all, the new streaming music service only boasts about 200,000 subscribers based on a recent estimate by Re/code. That’s a far cry from Apple’s nearly 800 million iTunes accounts. The magic may be in Beats’ success at convincing members to pay a premium dollar for the service.
In the video below, Daniel takes a look at leaked numbers that are allegedly internal numbers from Beats on the company’s paying members. Daniel explains why the data suggests Beats Music may have a promising future.
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Direct link to video here.
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0.2M x $10 x12 = $24M.
That’s about 1% of the asking pricing.
The interesting point to me what that Beats headgear owns 60% of the top end market. That’s where Apple is in computers and devices.
There is a lot more to this than we know or analysts can guess at.
It’s $15/mo.
Now add that to the potential with Apple’s 800 million iTunes accounts. If half of the iTunes accounts signed up, that’s $6 billion PER MONTH in gross sales.
One month pays for the acquisition.
I did the exact same calculation before reading your post, doggonetoo. I have not been a big fan of this alleged Beats deal, but it is worth considering that the cash flow ramps up linearly with the number of paid subscribers, and there is a lot of headroom to grow above the current estimate of 200,000.
At around 2.7M paid subscribers (assuming the same $120 per year), the annual cash flow would represent $324M…approximately 1/10 of the rumored $3.2B price tag. That starts to sound reasonable. Of course, most of the subscription revenue probably ends up with the labels/artists, so Apple’s cut would be considerably less, especially after expenses. Apple might need 10M or more paid subscribers to make this deal financially attractive.
Still, Apple cannot afford to cede the streaming market to others. While it is still unclear to me why Apple should pay $3.2B to acquire Beats, or why Apple does not simply add a similar service to its existing iTunes offerings, or why Apple waited so long to get into this market in the first place, I am not quite as negative as I was in the past. It still seems too expensive to me, but it could turn out to be a good deal in the end.
I’d give Dr Dre a buck for the whole outfit. (today only.)
If Beats were offered on the iTunes homepage I suspect a reasonable uptake might be 10%. The last reliable figure I heard for credit card accounts on iTunes was 400M. At 40M subscriptions, at $120 per year that’s $4.8B per year. That’s a very reasonable scenario. Then on top of that, figure that Apple will redesign the Beats hardware to improve quality and add features. Compare the ease and likely success of this scenario versus Apple starting up its own brand. This is not a sure thing, but it looks very plausible and reasonable to me.
10% uptake – you jest.
They might get an initial 2.5% – at a stretch.
iTunes is the access point for a lot besides hip-hop bop.
That’s still $1.2B the first year.
Please dont apple.. if you do this next Ludicrous will start a new brand of streaming music in hopes that apple will buy his brand… only every 10 seconds of any song you play Ludicrous will say his name over and over and over
Ludacris.
Apple should just get Audio Technica to make their headsets and buy out Spotify/Pandora or the like… Dr Dre? really? whos brilliant idea is this?? its like apple buying 3rd party chinese knockoff iphones if they run out of their normal production…
That estimate may be very wrong. According to this, based on royalty payments, Beats only has 111,000 subscribers:
http://musically.com/2014/05/13/beats-music-subscriber-figures/
However, there’s a standard 30 day free trial for anyone, and a 3 month free trial for AT&T subscribers as well as other free promos, so of those 111,000 subscribers, the actual number of paid subscribers is something lower than that… perhaps a lot lower.
Also the number of hours of usage per user is insanely high, 5 hours. Which means that they cost (to Beats) per user would be really high, except Beats is paying really low royalty rates. That would change if the service gets larger numbers.
There’s a lot missing here for this to be “making sense”. For example, what’s the growth rate? What’s the churn rate?
Again, I could see Apple executives saying they like the service, but it’s a bit much to think that on the surface this makes financial sense in of itself.
I thought the numbers that were going to make sense were for the headphones. I’m seeing estimates that Beats makes $1 Billion to $1.5 Billion in revenue from the headphones, and they’re extremely high margin (I’m hearing estimates higher than 75%).
Going with the low estimate of $1 Billion and a low estimate of a 50% margin, that’s still a Purchase to Earnings ratio of 6.4 which yields a far greater return than Apple’s cash investments and is even better than Apple’s current P/E ratio of 14.32.
TL;DR: Apple will make back the money from this purchase in 6.4 years not counting any change in profit (which is growing BTW).