The $3B Reason Why Apple is Buying Beats
What those “fantastic new products” should be.
Let’s start off by saying why Apple isn’t buying Beats.
Not for their existing hardware
Apple isn’t buying Beats for the headphones. As has been stated in many places, Apple doesn’t need help to get in to the headphone business.
Apple’s mode for line extensions has been to offer pace cars: one representative product in each category, to communicate both to consumers (and more importantly to other integrators) how these things should be made and how expensive they should be. If Apple charges $29 for a case, expect other cases to be around that price. They did the same with software (iWork for example.)
Secondly, Tim Cook is famously very proud that every product Apple sells could fit on a kitchen table. But headphones are a very personal choice. In order to compete in the headphone/audio market, Apple would have to more than double their total SKUs, with very little impact on market share.
Which is the third point. There’s just not enough there there. The entire headphone market is barely the size of the purchase price of the company.
Not as a way of buying growth
Sometimes companies acquire other companies (Facebook buying What’s App) because it lets it show immediate balance sheet growth. That’s not the case here because Apple’s existing, similar-sized growth sources (iTunes, iPod) are already ignored by stock analysts. Stock trackers are only looking for iPad-sized new markets. Buying the entire personal audio industry would only be a blip in Apple’s stock price.
Not for the streaming music service
People who suggest Apple is buying Beats for the music service are forgetting why Apple even got into the music business in the first place: To sell more Macs.
iPod wasn’t introduced as a way to corner the music business, or as a stepping stone to iPhones, or even as a way to create a new product line. The job of iPod was to introduce Apple to new, hard-to-reach customers.
It did that job incredibly well. And it was iPod that turned Apple into the company that they are today, allowing them to expand beyond their existing market, which at the time was well-to-do families and creative types.
The reason it worked so well is because we communicate our culture through music. But it’s not because Apple is or ever was interested in being seen as a music company. It’s a technology company. Apple makes bicycles for the mind at the intersection of liberal arts and technology.
The one reason Apple would buy Beats
For the brand.
The iPhone product is clearly Apple’s most important line, making up 57% of profits. It’s perhaps our modern world’s most shining example of an entrenched incumbent. No one can get close to their massive moat:
- fantastic product design
- the absolute best apps in the world sold through the best store in the world
- a bulletproof supply chain that can deliver ten million units in one launch weekend.
So the playbook in this case is to invest in sustaining innovation: new small things like Touch ID that keep iPhone at the top of the market. Little advances that help unlock the most profitable customers in the smartphone world, but that don’t change how we live our lives or think about the world.
Which is great for a while. Apple’s job with iPhone is to stay on course and continue to wring value from the top end of the market.
So where does Beats come in?
Apple has a tradition of overserving their markets. The majority of the detail and precision and effort that goes into making an Apple product are what make them so incredibly appealing.
But if iPhones are so clearly the best, why are the majority of phones sold today, for the same exact price, running Android?
The late writer Douglas Adams stated it perfectly:
“The Macintosh may only have 10% of the market, but it is clearly the top 10%.”
There is a limit to the number of people for whom “best” is a priority. And that limit seems to be about 40%, at least in the United States, and probably much fewer overseas.
Those 40% are incredibly dedicated. Even in the face of a “new” iPhone 5c, the super premium iPhone 5s was the most in-demand phone. And the gold color, the signifier of luxury and opulence, was the top seller.
That’s a clue that the key job of the iPhone brand is to signify to the world that the owner knows how to attain the ultimate, best things in life.
But it turns out, that job doesn’t only have one definition.
The point is, there are many ways to do the job of the iPhone (to signify to the world that the owner knows how to attain the ultimate, best things in life) that in fact aren’t iPhones.
This is where the 6” screens came in. This is why the Samsung Galaxy has such a large market. This is why there are Galaxy Notes and HTC Ones and Windows Phones.
Because while Apple has 40% of the market, it only has the top 40% in terms of income.
From the Atlantic Magazine article titled “Map the iPhone Users In Any City, And You Know Where the Rich Live”:
Income level and smartphone platform are a direct correlation. Note that this doesn’t mean that people don’t have the income to buy iPhones; in fact many Android smartphones cost more than iPhones.
This does mean that different social groups codify and signify their status in different ways.
Apple’s existing market share is carved in granite, because it has done such a great job of segmenting its brand toward the top levels of the income brackets.
So what good is the Beats brand to Apple?
A Beats-branded, 5.5”, shiny red smartphone running iOS would still be able to signify to the world that the owner knows how to attain the ultimate, best things in life. It would just signify that to an entirely different audience.
So why would Apple buy Beats?
To be able to sell high-margin smartphones to the 60% of the market for whom the Apple brand does not speak.
And that would be worth $3.2 billion dollars in a single launch weekend.
