Apple and Beats: It's About Your Car

Tapping into the huge search and ad revenue opportunities of the mobile-connected “smart-car” could be the next big thing in mobile. Apple’s anticipated purchase of Beats is the company's move to make sure the company is ready.

May 24, 2014 at 3:00PM

Both Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) are pulling out the all the stops to quickly integrate their mobile operating systems into cars and trucks. The incentive? Tapping into the new search and ad revenue opportunities of the mobile-connected "smart car." A solid in-car music streaming product is likely to be a major piece of the pipeline needed to connect to mobile search and advertising revenue. Apple's anticipated purchase of Beats is the company's move to make sure its streaming music product is ready to compete for new mobile business.

The evolution of the connected car
Car manufacturers have had limited success creating their own proprietary smart-car systems -- it's just too difficult to keep a mobile system up-to-date over a car's ownership period. Also, major app developers balk at the idea of creating custom apps for each manufacturer's unique smart-car system. As a result, car manufacturers are turning toward third parties to provide their smart-car systems.

Apple CarPlay, announced in March 2014, is Cupertino's iOS-based smart-car system. With CarPlay, drivers will be able use existing iOS apps, such as iTunes and Maps, by voice command, touch screen, or steering-wheel-mounted controls. In addition, developers will be able to offer new CarPlay-specific applications, which will continue to increase the value of the in-car systems over time. Plus, because an owner's iPhone is tethered to CarPlay while in the car, ongoing software refreshes via the iPhone will keep CarPlay software and applications up-to-date.

Google is also working to get in the car
Google is also moving forward with its smart-car plans. In January, Google announced the Open Automotive Alliance. The Alliance, consisting of car manufacturers and various tech companies, is Google's effort to organize the partners necessary to create customized smart-car systems powered by the company's Android mobile operating system. Taking a page from the company's smartphone and tablet strategy, an Android-based smart-car system will likely offer far more flexibility to brand and customize an automaker's smart-car system.

Getting in the car means big money
Gartner, in a recent study, estimated that global mobile advertising will be a $42 billion business by 2017. Gartner also predicted a major benefactor will be local and search mobile advertising -- driven by the increasing use of location based mobile apps. Both Google and Apple want a slice of that $42 billion pie -- hence the moves Mountain View and Cupertino are making to slide into the car with you.

Why Beats matters to Apple
Apple was late in recognizing the demand for streaming music -- introducing the company's iTunes Radio streaming service only last year -- while Pandora, the industry leader, began streaming music in 2000. Apple is now paying the price for the company's late start. Since the company's initial announcement of 11 million unique iTunes Radio listeners in its first week of service, complaints and negative comparisons to competing services have increased.

Despite the massive success Apple has had selling music on iTunes, the company has likely realized the huge gap that exists between expertise in music retail versus a deep understanding of music content, and it's the latter skill that's needed to maintain music streams that are relevant, fresh, and engaging to listeners.

Final thoughts
Beats Music provides the content expertise that Apple needs in the company's bid to own the smart-car experience. While relatively new, Beats is already known for industry-leading music curation, which is largely a result of the company's close ties to the music industry. With the Beats acquisition, Apple obtains the company's music curation talent and technology it needs to skillfully stream its library of more than 37 million songs.

At $3.2 billion, Beats would be Apple's largest acquisition to date. But, considering the smart-car mobile search and ad dollars that are up for grabs, investing in Beats now could prove to be lucrative for both Apple and its investors.

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Bill Shamblin owns shares of Apple and Google (C shares). The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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