“Apple buying Beats was likely a home-run success from a financial perspective,” Andrew Tonner writes for The Motley Fool. “Because while the $3 billion price tag certainly broke Apple’s long-standing bias against sizable acquisitions, Beats is also likely a profit powerhouse very much in the same vein as Apple.”
“Apple acquired Beats as a private company, so it never regularly produced financial reports to give us a definitive sense of its financial performance. However, a steady stream of reported internal leaks suggest the company generated massive profits on each unit of hardware it sold,” Tonner writes. “A report last year from The New York Times claimed that a single set of Beats headphones carried a cost of goods sold of as little as $14, implying its high-end headphones that regularly retail for between $199 and $399 enjoyed incredible gross margins.”
“If Apple bought Beats with the sole intent of making money, it likely achieved its objective. However, as one of the most profitable companies in the world, Apple’s aims in buying Beats almost assuredly lay beyond merely purchasing a fresh profit stream,” Tonner writes. “Another possible strategic rationale for Apple’s Beats buyout was its executive team and the possibility that its seasoned leadership could help break negotiation stalemates for long-rumored services like Apple’s elusive over-the-top TV product. With Apple’s rumored TV service still not even necessarily confirmed by the company, assessing this angle’s success lacks any real veracity. However, reports that former Beats executive and music industry legend Jimmy Iovine was instrumental in helping Apple secure its exclusive debut of HBO Now indicate Iovine is active in a dealmaking or negotiating capacity for Apple. ”
Read more in the full article here.
MacDailyNews Take: Of course getting Jimmy Iovine on board was the impetus for the Beats purchase. The business of selling astonishingly mediocre, massively marked-up headphones to tin-ears was just a bonus.
SEE ALSO:
Apple’s Jimmy Iovine hints at radical Apple streaming TV service – August 10, 2015
How Apple’s Jimmy Iovine helped land HBO Now – April 7, 2015
Did Tim Cook just pay $3 billion for his successor, Jimmy Iovine? – May 29, 2014
Apple CEO Cook: Beats deal a ‘no-brainer’ – May 28, 2014
Tim Cook’s internal memo to Apple employees regarding Beats acquisition – May 28, 2014
It’s official: Apple acquires Beats Music and Beats Electronics for $3 billion – May 28, 2014
Beats will be a “profit powerhouse” for Apple exactly how? Selling their crappy headphones? Is Apple’s music service going to earn billions more in profits than it would have without adding the Beats name to its stable? Not a chance!
Beats’ Gross Revenue (from all sources) was about $250 Million when Apple bought them. If it was sound gear Apple wanted it could have bought Bose for $3 Billion.
What Apple wanted, and got, was Jimmy Iovine, Dr. dre, and the rest of Beats senior management team.
The fruits of this acquisition won’t become apparent for another 2-3 years, then watch the explosion (and the implosion of competitors).
Beats headphones will undoubtedly be re engineered to Apple’s audio standards which are high and receive Apple’s proprietary innovational engineered improvements which will only add to the factual $1.2 billion per year that Beats track record of headphone currently sales to date, proves. That alone will cover the sale amount shortly.
Iovine and his experienced music/biz team and Beats subscription model will turn into a leadng force within the next year or two and that’s only the obvious peks of this deal.
Its a no brainer.
Nope.
apple could have used beats as a way to reinvent their strategy. I think it’s possible that Apple conceived beats from the start. Call me crazy. Call me conspirator. Delete my comment. I don’t have inside knowledge. It just seems a clever way to stay relevant to the culture/the market to seed the idea to others they trust and promise a good payoff.
Not sure if that scenario is unethical really. Just clever.
Maybe the headphones will include Siri? Maybe the headphones will be able to place retractile small screens in front of your eyes (like Google Glass) ?
I don’t think we can call that theory anything but infantile.
Aren’t you the one who suggested Apple could power their EV indefinitely by using two batteries, one charging the other?
Acquiring Beats was a stupid business decision by Apple but Apple is so big that it won’t matter. Unfortunately, along the way, more sleazebags in the music industry made another fortune.
You will never get me to believe Beats was worth $3 Billion.
Three billion? As Ricky Ricardo said,”You’ve got some ‘splainin’ to do, Tim”.
Why are people so troubled about the market’s wealthiest company spending a lousy $3 billion. Apple is going to spend over $200 billion in stock buybacks which is practically setting the money in a pile and burning it. Neither Beats or stock buybacks have done much for Apple shareholders but at least that dude Iovine is probably worth something in the form of a talent draw. There’s nearly nothing to show for the stock buybacks. A raised EPS, less shares on the market and a lower share price.
Google spent nearly $10 billion Motorola and got nothing from it but investors were able to move on. What’s the point of whining about blown money. Sometimes you win, sometimes you lose. As far as Apple is concerned, $3 billion is peanuts.
Apple bought a business (Beats) that made a actual profit, more than Amazon and Netflix put together.
Wht a waste. This was something I could not wrap my mind around. How could Apple get involved with Beats? I lost a lot of respect for Apple the past couple of years.
beats had a revenue stream of over $1 billion a year from headphones when apple bought it.
google bought Nest for 3 billion which had revenues of about 300 million a year.
So Apple’s investment was 3 times better than Goog’s from a revenue point of view.
Beats headphones might have increased sales with Apple’s much larger marketing and distribution channel.
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I agree with Magni7 above that the buybacks cost a lot more and Danox who pointed out that Amazon doesn’t make much at all.
Not sure why Beats headphones have such a bad reputation, I really like mine, in fact, I prefer them to my Bose Quiet Comforts. I guess it’s a question whether you like the bass or not, I think it really adds depth to the sound. I guess millions of Beats owners feel the same way…
No.
But Apple is making the most of it.