Memo to Apple Inc Investors: Ignore the Beats Audio Acquisition and Watch for This

The latest acquisition headline swirling throughout the financial media involves Apple (NASDAQ: AAPL  ) and its potential buyout of Beats Electronics for $3.2 billion. At first glance, this seems like a good bet to silence the financial pundits that have heaped criticism on Apple and Tim Cook to pursue a large acquisition.

It's been well documented that Apple has a nearly unimaginable amount of cash on its balance sheet that's earning very little for shareholders because of extremely low interest rates. One of the things critics wanted Apple to do was to announce a strategic acquisition in order to restore innovation and growth. While Apple makes several acquisitions every year, 24 of them in the last 18 months to be exact, it has long resisted the high-profile acquisition, until now.

But while Apple's possible purchase of Beats Electronics represents a big deal that's likely to make for an exciting topic of discussion in the media, it's reasonable to question whether investors should really be all that excited about it. That's because the deal really isn't big enough to move the needle for a company of Apple's size. Also, the acquisition likely isn't enough to win the streaming music battle with Pandora Media  (NYSE: P  ) .

Apple goes shopping
Since Tim Cook took the helm of Apple, his position has long been to resist the urge to pursue a large acquisition just for the sake of doing one. He's fully aware of Apple's mountain of cash, which currently totals $146 billion in cash and marketable securities. All that cash has gotten the attention of large investors and analysts alike, who increasingly put pressure on Apple to do something with it.

Their hunger for a deal may finally be satiated with Apple's $3.2 billion potential acquisition. But from a strategic position, it's debatable whether this will really have much of a tangible effect. After all, Apple is a truly gigantic company. It generated more than $170 billion in sales last year, meaning it registered about $3.2 billion in revenue every week.

It's clear that beyond just Beats Electronics' headphones, Apple is targeting its newly launched streaming much service as a means of supplementing its own efforts in that arena. Apple's iRadio landed with a thud and hasn't latched on with consumers nearly to the extent the company would like. And even iTunes is showing signs of weakness.

Despite holding onto its spot as the world's largest music download service, total music downloads declined last year. By contrast, revenues for streaming services soared 50% last year. It's becoming increasingly clear that music downloads may soon be a technological relic, and that streaming may be the wave of the future. Unfortunately, that's where Apple is still falling short.

Too little, too late?
Pandora is still the king of music streaming. When Apple launched iRadio, it hoped it would be able to unclench Pandora's grip on market share. But that hasn't happened, and it's not likely, even with Beats Electronics in tow. Beats holds only about 200,000 streaming subscribers. By contrast, Pandora is still the leader with more than 75 million active listeners, which increased 8% in the first quarter.

Furthermore, Pandora itself controls 9% of all U.S. radio listening and racked up an impressive 69% revenue growth in the first quarter. Plainly stated, Pandora's dominance in music streaming is clear and accelerating.

The bottom line is that while acquisitions are always exciting, it's not readily clear that Apple's rumored acquisition of Beats Electronics will really help its desire to compete with Pandora in music streaming. Beats Electronics' fledgling streaming service has a very small number of subscribers, especially considering Pandora's ironclad grip on the streaming industry. While $3.2 billion is surely a lot of money, it's a drop in the bucket for a company of Apple's size.

Going forward, investor attention would be better fixed on Apple's upcoming product releases. Those are where the company generates most of its profits, and new versions of the iPhone, a new Apple television, or the much-anticipated iWatch would be much better future growth catalysts than a buyout of Beats Electronics.

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  • Report this Comment On May 16, 2014, at 3:01 PM, alarmsmallhunch wrote:

    This is a good article. However, there's one thing investors need to be aware of - Pandora and Spotify are buying time before their eventual collapse. Why? They're exploiting recording artists by not paying royalties at the standard rate and Apple's iRadio is. If Pandora and Spotify paid fair rates, they would be showing very little profit at all, so they are doing everything possible to avoid paying proper rates.

    Pandora has been intensifying its lobbying in favor of the proposed Internet Radio Fairness Act, which would cut down the proportion of revenues that Internet radio stations have to pay to copyright holders. This is entirely unacceptable and once iRadio gains traction over the years, I believe most if not all recording artists will be moving to iRadio instead of Pandora or Spotify, leaving those two with nothing but unregistered small indie bands.

    This same rationale is happening at Netflix, who is also not paying proper royalties, which is one of the reasons they are desperately getting into original programming in order to cover costs.

    Lastly, the number of subscribers is not indicative of the revenue stream in any of the above mentioned streaming services as it is being discovered that all of these services as well as Facebook have millions of "fake" or inactive accounts.

    Unless Pandora and Spotify pay the standard royalties, Apple will take them down and that is part of why the Beats deal would be lucrative. Apple has always, from the beginning, been artist-friendly. In fact, I wouldn't be surprised to see Apple take down BMI and ASCAP as well, since they're not doing a good job in the streaming royalties area, which is a multi-billion dollar industry.

  • Report this Comment On May 16, 2014, at 9:15 PM, iphonerulez wrote:

    I think the streaming music market is large enough that Pandora, Spotify and iTunes can coexist without totally ruining each other. Why does iTunes have to destroy Pandora to be considered successful?

  • Report this Comment On May 19, 2014, at 10:00 AM, alarmsmallhunch wrote:

    I don't think iTunes has to destroy Pandora to be successful, but all these streaming services relatively new to the entertainment business - Pandora, Spotify, Netflix, Hulu, Amazon, Google, etc., are choosing their own bottom line over paying proper royalties to the artists of the art they carry. The eventual result of that could be that all iTunes will be the preferred network and would give them the best content.

    The real power in all of this will come down to how the software is designed to curate what you want to watch. Right now all the above companies are doing a horrible job of this...

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