Apple's Potential $3.2 Billion Deal Works

Apple buying Beats Electronics makes more sense than you think.

May 11, 2014 at 1:30PM

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 owns shares of Netflix. The Motley Fool recommends and owns shares of Apple, Google (A and C shares), and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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