Apple's Potential $3.2 Billion Deal Works

This could be the week that Apple (NASDAQ: AAPL  ) makes its $3.2 billion deal for Beats Electronics official. It's easy to see what the market thinks about Apple's potential to strike a 10-figure deal with the headphones maker: Apple surrendered more than $2 billion in market value on Friday after the reports surfaced. Either investors think the consumer-tech giant is overpaying for Dr. Dre's company, or they just think it's a bad move.

I don't see it that way. Sure, it's true that Carlyle Group (NASDAQ: CG  ) paid roughly $500 million for a nearly 50% stake in Beats back in September. The transaction implies that Apple is paying more than three times what Beats was worth just eight months ago. That's hard to swallow, but let's not assume that Beats would have taken $1 billion for the entire company just because it sold half of it at half that price. Carlyle Group will score a massive profit topping $1 billion if this deal goes through, but it's not as if Apple could've written a $1 billion check for the entire company. Sometimes a company just isn't for sale.

Moving on from Carlyle's transaction, a lot has happened since September. For starters, that was the month that Apple introduced iTunes Radio. The platform was supposed to be a response to the growing transformation in the way we consume music. We're seeing iPod and iTunes Music Store sales shrink, as connected devices make streaming more desirable than outright ownership. Label executives tell Billboard that iTunes download sales have fallen 15% over the past year, with Apple's online store going from accounting for 70% of music sales in 2012 to just 50% these days. 

Apple bulls will argue that digital music is small potatoes. There's a vibrant App Store ecosystem that is growing nicely as iPhone sales continue to grow. We're seeing iPad sales stall, but the installed base continues to grow, feeding into Apple's app-serving strength.

However, it's too soon to abandon music. We're consuming more tunes than ever, and that creates a market for accessories and on-demand music services where Apple has been unsuccessful. Beats' signature headphones, earphones, and Bluetooth speakers give Apple a way to cash in that isn't tethered to its dwindling share of the global smartphone and tablet markets. Yes, Beats is in a peculiar way on play on Android's success.

Then we have Beats Music. Beats introduced its on-demand streaming platform in January. Unlike iTunes Radio, where listeners can't pick the actual tracks that they want to stream, Beats Music follows Spotify into actual track selection and composing playlists. Label execs say that Apple's iTunes Radio has been unsuccessful in drumming up sales, so it may as well give premium on-demand streaming a shot. Securing these licenses hasn't been easy, and that makes Beats Music an easy way to dive into this growing niche. 

Beats Music itself has been struggling. Record labels are seeing unimpressive migration rates despite a big marketing campaign earlier this year that included a flashy Super Bowl spot. Beats Music can benefit from Apple's reach, just as Apple will benefit from selling Beats' high-margin hardware. 

It's a deal that makes a lot more sense than Friday's skepticism suggests. When you have as much money as Apple, the only real mistake would be simply letting its stateside cash just sit there collecting interest in this low-rate environment. This will be $3.2 billion worth spent if it's what Apple ultimately decides to do.

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Rick Munarriz

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he now lives a block from his alma mater.

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