Apple and Beats: The Music Market Is Set to Shift

Image by Flickr User MirandaAnn

As the tech world waits for confirmation that Apple  (NASDAQ: AAPL  ) is indeed purchasing headphone maker Beats Electronics for $3.2 billion, and bringing on founder Jimmy Iovine (and perhaps Dr. Dre), analysts are deconstructing what the acquisition could mean. The answer appears to reside in long-term plans.

Beats comes with two benefits for Apple: First is the hardware side, which specializes in youth-oriented headphones so successful that Beats holds an estimated 64% of the high-priced headphone market and brings in around $1 billion in revenue  each year. Second is the newer Beats Music streaming app. While Apple already has a streaming service in the form of iTunes Radio, the Beats app could add more subscriptions and new features that Apple could use to better compete against Pandora, Spotify, Google Play, and the rest of the streaming crowd.

Along the way, the acquisition would also have an impact on other businesses in nearby orbits, including HTC  (NASDAQOTH: HTCXF  ) , Skullcandy  (NASDAQ: SKUL  ) , and  (NASDAQ: AMZN  ) .

Regrets for previous owners
Apple was not the first mobile company involved with Beats. Taiwan-based HTC used to own a controlling interest in the company. It sold its Beats stake in 2013 for $265 million (including a $150 million repaid promissory note), after losing around 90% of its stock value from a 2011 high. Ironically, if HTC had held onto its Beats shares, it could have made what TechCrunch estimated at $1.29 billion on the sale, nearly five times more than the total value of its sale.

On a positive note for HTC, its latest revenue forecasts expect net income at $31 million, above analyst estimates. April sales showed the fastest growth since 2011, and HTC stock value has grown by 24% thus far in 2014. But, this upward trajectory could have been enhanced even more by a large Apple payout -- if Apple would have been willing to give a competitor that much cash.

Ripples in the headphone market
Despite a relatively stable first quarter report, Skullcandy shares continue to decline after reaching a high of nearly $10, sinking toward $7 in the past month. The company's non-gaming headphones have been suffering in the market and have yet to recover. However, Skullcandy quickly rose by 6% on the morning that news of Apple's Beats deal was released, eventually approaching $7.50 and showing a positive reaction to the short-term upheaval of a competitor.

In the long term, Skullcandy's position is less certain. Apple may reinvent Beats as a new hardware/streaming combo product that could erode Skullcandy market share even further. Skullcandy could take this opportunity to focus more on its profitable gaming headphones and new international reach into the Asian nations, or in a move similar to Apple's Beats offer, a company like Nike could acquire the headphone maker and aim it toward the sports market.

Streaming music sites continue to rev their engines
On the note of music streaming synergies, Amazon contracts for a music streaming service were leaked back in April. Despite its Kindle devices and Fire TV, Amazon does not have its own headphone brand. However, if the company is working to establish its own streaming service, this puts it in direct competition with companies like Apple, not to mention Pandora and other streamers.

How will the e-commerce corporation differentiate its product? Amazon has previously said that it will not offer a free music service, which makes it likely that this project would be associated with Amazon Prime and focus on increasing subscription revenue. The service could potentially help win over customers that use iTunes Radio as well as Amazon services, but with no free streaming for non-Prime users, it is hard to say how much additional revenue the project would make alongside Pandora, Spotify, iTunes Radio/Beats, and others.

However, like Apple, Amazon also has multiple hardware lines to leverage, and additional products or acquisitions could add more features down the line. Google and Microsoft may want to take a cue from the Beats deal too, especially if Apple proves that the "streaming music acquisition" path can lead to substantial supplemental profit.

The biggest thing to come out of Silicon Valley in years
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

Read/Post Comments (1) | Recommend This Article (0)

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 20, 2014, at 1:35 AM, SimchaStein wrote:

    I listened to Jimmy Iovine talk to Walt Mossberg on youtube - last years all things D. Jimmy and Dr. Dre understand music as music. This includes the headphones, producing music, the music industry. More importantly they understand both the technology changes and the audiences.

    That's what Apple is getting. The $1B headphone and nascent streaming business are the extras.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2955610, ~/Articles/ArticleHandler.aspx, 9/2/2015 5:01:37 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Tyler Lacoma

Tyler Lacoma is a business writer and editor with experience in international economics, marketing, and tech news.

Today's Market

updated 7 hours ago Sponsored by:
DOW 16,058.35 -469.68 -2.84%
S&P 500 1,913.85 -58.33 -2.96%
NASD 4,636.11 -140.40 -2.94%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/1/2015 4:00 PM
AAPL $107.72 Down -5.04 -4.47%
Apple CAPS Rating: ****
AMZN $496.54 Down -16.35 -3.19% CAPS Rating: ***
HTCXF $21.84 Down +0.00 +0.00%
SKUL $6.70 Down -0.32 -4.56%
Skullcandy CAPS Rating: **