Apple (AAPL) is back in the headlines once again, and this time the tech head-turner has propelled Dr. Dre back in the spotlight along with it. That’s because word on the street is that AAPL is close to dropping $3.2 billion to buy Beats Electronics, the high-end headphone company founded by Dre and music producer Jimmy Iovine.
So far, the speculation has yet to bump Apple stock around — although it had headphone-maker SkullCandy (SKUL) down a bit in pre-market trading, as well as streaming music provider Pandora (P). (Both reversed direction after the bell.)
But that doesn’t mean AAPL won’t feel the effect — for better or worse. Here’s a look at six key points to the deal — and let us know what you think of Apple’s strategy:
1. It’s not official yet. Financial Times first reported the news on Thursday, and Reuters has been doing sleuthing of its own to flesh out the story. The latest? “Both companies are hashing out details and the envisioned deal could still fall through, one person told Reuters on condition of anonymity,” Nadia Damouni, Christina Farr and Nicola Leske reported this morning.
2. Apple is making history. Still, tech media is abuzz for good reason. If the deal indeed goes through, this would be the biggest acquisition in the company’s history. For reference, the iPhone-maker has not made a billion-dollar acquisition in over 10 years. It’s not that Apple hasn’t been on a shopping spree — just one on a much smaller scale. AAPL has made 24 purchases over the past 18 months, but usually focuses on small companies whose technology it can nab.
3. How does it compare? While this acquisition is an outlier from the AAPL point-of-view, the rest of the tech world balls out far more often. Take a look at how the $3.2 billion deal would stack up with other recent acquisitions in the tech space:
- It’s the same amount that Google (GOOG) paid for Nest Labs.
- It’s equivalent to almost 3 Tumblrs, bought by Yahoo (YHOO), or 3 Instagrams, bought by Facebook (FB) — they paid $1.1 billion and $1 billion, respectively
- It’s approximately 50% more expensive than Facebook’s recent $2 billion purchase of virtual-reality technology company Oculus VR.
- But compared to Facebook’s monster deal for WhatsApp, this is nothing. Apple could buy almost six Beats equivalents for the same $19 billion price.
4. Apple and Beats are already partners. It’s not like the deal came out of nowhere. Apple already sells Beats products at retail locations, while Beats also recently began offering users ways to subscribe to its streaming service using Apple’s in-app purchase, according to The Verge.
5. Blame it on the streaming sites. The Beats subscription service — not the hardware — seems to be key for this AAPL buy, especially as the company is shifting its approach to music sales by necessity. While the Apple iTunes model changed the music industry, streaming sites came along and shifted that norm as well. Last year, digital-download sales actually fell for the first time. While Apple did enter the streaming space recently with iRadio, competition is stiff. Pandora (P) is popular, Spotify is gearing up for an IPO, Google and Amazon (AMZN) have moved into the game, and the list goes on. The second source referenced in the Reuters piece already cited also told the news outlet that “Apple was in the market for a subscription-based music service to complement its ‘iRadio’ ad-based offering.”
6. Or blame it on Time Cook. Of course, some are saying iRadio has been off to a slow start for one simple reason: Apple was way late to the game. Sam Gustin cut right to the chase in his Time piece, writing: “Apple CEO Tim Cook is an operational wizard — and a genius at managing Apple’s supply chain and inventory — but he’s not a product visionary like Jobs. Cook failed to anticipate that music streaming would become the new industry business model.” Worse, the Jobs-Cook issue isn’t a new one for folks following AAPL, many of whom likely wonder whether innovation died at the company along with its legendary co-founder.
So, should Apple stock fans be worried?
Apple has been making moves left and right to try and please Apple stock investors, though, including monster buybacks, an upped dividend and a head-turning 7-for-1 stock split. And the most recent announcements to that end — which came in late April — helped move AAPL stock higher of late. But at the same time, they too raised more criticisms. Skeptics point to these tactics as proof that Apple stock can no longer keep going on organic growth alone. And considering AAPL has historically relied on in-house talent and innovation for such growth, the acquisition of Beats raises a “now-familiar question,” according to Gustin: “What’s up with innovation inside Apple?”
As of this writing, Robert Martin did not hold a position in any of the aforementioned securities.