Here's How Beats Music Could Boost Apple, Inc. Stock

Spending $3 billion to protect a $90 billion franchise is exactly what Apple, Inc. stock owners should be looking for from CEO Tim Cook and team.

May 28, 2014 at 8:30PM

By now, you've heard the arguments against a $3 billion purchase of Beats Music. I'm still on the fence, but I could envision a scenario where Beats would not only be a nice fit but also a boost to Apple, Inc. (NASDAQ:AAPL) stock.

Beatsmusic


Source: Beats Music.

Protection money
Specifically, I can see Apple using Beats as a lead-in for selling iPhones. Buy an iPhone and your Beats Music streaming account is free so long as you're streaming from an iDevice. Have an Android or Windows device and want Beats? Sure, just pay the standard $9.99-a-month fee.

Paying $3 billion for an accessory business that also happens to have a streaming service probably sounds crazy. Trouble is, the iPhone isn't as materially different from alternatives as it once was. Android handset sales have been on a tear as a result, accounting for 78.4% of worldwide smartphones sales in 2013  versus 66.4% the year prior, Gartner says. Apple needs a new catalyst to protect its largest business -- a product responsible for more than $90 billion in fiscal 2013 sales.

Follow the rhythm
Why bet on Beats? I mean, aren't there other ways to improve the iPhone? I'm sure there are, but it's also important to consider how we use our smartphones. An early 2013 study from NPD Group found that 56% of smartphone owners use the device for listening to music. Of those, 65% reported using an Internet radio service such as Pandora and 60% said they brought their own music to the device.

My guess is not much has changed since NPD released its findings. Beats Music had 110,000 subscribers as of March, just three months into the life of the service. A partnership with AT&T no doubt helped to boost the rolls, but I also can't help but wonder if our penchant for using a smartphone as an MP3 player had a role as well. Either way, Beats Music hasn't taken long to establish itself as a worthy alternative to Spotify, Rdio, and others.

A perfect pairing
Finally, it may be worth noting that Apple occasionally bundles products to help boost sales. Like when you get a free printer with a new Mac. Why couldn't the company pursue a similar strategy with Beats? It wouldn't be hard to do. Just include a 10% discount on Beats earbuds or headsets with a new iPhone purchase. Make it 20% and toss in free streaming for those switching from Android or Windows Phone. Add it up, and I think you've the makings of a suite that would set the iPhone apart once more.

Bigger than anything in Apple's storied history
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Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Apple at the time of publication. Check out Tim's web home and portfolio holdings or connect with him on Google+Tumblr, or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool recommends and owns shares of Apple and Pandora Media. 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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