2 Reasons Apple Shouldn't Buy Beats

Headphones, hip-hop moguls, and history... this deal has it all.

By now, hopefully every tech investor has gotten wind of the rumor that tech giant Apple (NASDAQ: AAPL  ) has entered advanced negotiations to purchase the uber-cool headphone and streaming music company Beats Audio for a whopping $3.2 billion.

This deal has gotten plenty of deserved notoriety as it contains a number of juicy storylines at both Beats and Apple. However, in circling this deal, which appears to have yet to close as of today, it's difficult to determine whether this is a good deal for Apple and its investors.

So, as this storyline evolves, let look at two possible arguments that Apple should scrap its deal for Beats altogether.

1. Apple could be overpaying
Tech companies have a long and storied history of massively overpaying for acquisitions, but not Apple. Even as Facebook and Google happily shell out billions for emerging technologies, Apple has historically maintained its discipline on the M&A front.

Apple has always favored small, highly targeted acquisitions of key technologies as its way to control whatever technology it covets, so the rumored $3.2 billion price tag that Beats reportedly costs represents a huge shift in tactics for Apple. However as investors, we know determining a good value goes beyond simply the price paid. Beats clearly has two great products in its high-end headphones and its budding streaming service.

Source: Beats Audio.

Although it's hard to nail down specifics, most analysts seem to agree that Beats' headphones are probably quite profitable. However, even if the financial profile from Beats' headphones marries well with Apple's, it doesn't necessarily mean Apple needs to own that revenue stream. They could just as easily strike a distribution deal to sell Beats headphones through its retail channels, a far less expansive business arrangement.

This supports the notion that Apple is really interested in Beats' streaming music service. And although Beats Music product is apparently a membership conversion monster, its user base remains a drop in the bucket, at just north of 110,000 paying subscribers, especially compared to the likes of Pandora's 76 million subscribers. So, all told, between an attractive, but hardly necessary, line of headphones and a start-up music service, it's fair to question whether Apple is making the right decision in shelling out $3.2 billion for Beats rather than developing a comparable service internally.

2. Apple and Beats: Brand competition
One of the possible rationales supporting Apple's buying Beats has also been Beats' indisputably strong brand.

However, Apple is consistently ranked as the most valuable brand in the world. And while Apple has shrewdly borrowed cool points from other brands in the past (partnering with Bono and U2 for instance), it's hard to see how a marriage between the Apple and Beats brands would work from in a practical sense.

Source: Beats Audio

Apple's iTunes music brand is arguably the most universally recognized brand in digital media, which makes the notion of some kind of co-branding between Apple and Beats all the more implausible. What would this new on-demand music app be called? iTunes Music by Beats? Beats by iTunes? There just doesn't seem to be a lot of possible room for both brands to co-exist in a stand-alone product. So, why acquire the brand?

It could be possible that the Beats Audio team is more than willing to let the brand behind their music service die given the dollar figures involved. But as far as the arguments touting the combination of two great brands go, I'm certainly not convinced.

In Cook we trust
Generally speaking, I'm a big believer in CEO Tim Cook and the rest of Apple's management team.

Especially given Apple's "black box" approach to product development, there's clearly a lot of information the investing public isn't privy to that's driving management's behavior. Apple could be encountering issues with developing a parallel service for some reason or another that might make Beats Music a must-have product as digital music increasingly shifts in favor of on-demand models. Beats Music could be a perfect fit for some unnamed product as well. It's unlikely, but certainly possible.

We just don't know, and that's the point.

So, although there are still a few issues I'd like to have addressed, I'm willing to trust that Apple's management team knows what it's doing. All told, the Apple-Beats merger is still an ongoing storyline, so the deal could still unravel as well. However, as this deal represents one of the more noticeable shifts in thinking we've seen at Apple in some time, so make sure to check back for all our coverage of this key storyline as it evolves.

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Read/Post Comments (5) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 13, 2014, at 8:06 PM, larryw101 wrote:

    Another worthless article by Motley Fool.

  • Report this Comment On May 13, 2014, at 10:06 PM, Chiam wrote:

    I trade Apple almost everyday.

    I trade other stocks and invest. I read all the articles.

    I rarely even read Motly anymore. This article is one more reason. Just terrible. Clickbait!

  • Report this Comment On May 14, 2014, at 7:27 AM, jdmeck wrote:

    Larry - Your wrong on this one. When it comes to Apple, Andrew is one of the best and opened minded analyst they have. He makes good points I have yet to hear from anyone else.

  • Report this Comment On May 14, 2014, at 8:18 AM, sofiacaden wrote:

    Apple Stock growing

  • Report this Comment On May 21, 2014, at 7:40 AM, larryw101 wrote:

    @ jdmeck

    Sorry, but I must strongly disagree with you.

    Andrew Toner flip flops writing on Apple with each article. He has no true conviction one way or the other. He baits headlines to lure readers to read his stories for the the click. He's the kind of a writer that licks his finger and sticks it in the air to see which way the wind is blowing before writing a story. I have read this articles on and of for 3 years. I have no respect for anything he writes about. He will flip from bear to bull quicker than I can type this sentence.

    To me, the whole Motley Fool gang of authors are nothing more than college kids looking to get their pennies-a-click from readers who read their stories. Toner is a perfect example.

    I respect authors who stay committed in their beliefs whether bull or bear. The last thing in the world I would ever do is base my decision to buy or sell a security on Toner's opinion. As I say, what he says one day for sure will be different the next. Just look back at his articles and you will see I'm right. Even his videos are very amateurish in their presentation. It's all about getting clicks to show advertisers they have vast readers.

    Motley use to be, and I repeat, use to be, a good source of financial information. That cannot be said any longer. Motley has lost all credibility with me. And, there are many other investors such as I that feel the very same way as I do. Motley is the laughing stock of the financial community. I sometime read their articles strictly for the comment section.

    Motley Fool = Garbage Journalism.

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Andrew Tonner

Andrew Tonner is a tech specialist for The Motley Fool. He is a graduate of The University of Arizona with a degree in Finance.

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