The Apple-Beats Disaster

This story originally written by Pascal-Emmanuel Gobry at CITEworld. Sign up for our free newsletter here.

As countless observers of the business world have noted, the world's great companies all seem to decline after their founder or early leader leaves. Sony has been listless since its iconic founder Akio Morita left in 1994. Since Bill Gates left his day-to-day role at Microsoft, the company's stock price has been flat and it has lost its edge. GM has been on a secular decline since it has lost its legendary CEO Alfred P. Sloan. The examples are countless.

Whenever the iconic leader leaves, the same story is trotted out: The founder has left such a mark on the company's culture that that culture will continue to carry it toward excellence. The next CEO, often a company man, along with the founder's excellent handpicked leadership team, who know the founder's values, will carry them on, and the company's success will continue.

The story always seems to repeat.

In the case of Apple (NASDAQ: AAPL  ) and Tim Cook, everyone wanted to believe it would be different this time. It's easy to love Apple, with its amazing products and its astonishing business success. And because of Steve Jobs' untimely departure, we all felt robbed of many years of astonishing products.

So we told ourselves the reassuring story about Apple's future. It still has its design visionary Jony Ive. Apple has a famously long product pipeline, so many Jobs-stamped products are to come. Apple's values of focus on a handful of product and design excellence are too deeply ingrained to go away. Steve Jobs seemed to break every rule and win by doing it, and if anybody could do that even from the grave, it would be him.

Apple is "is a fractal design," wrote über-Apple blogger and fan John Gruber after Jobs' resignation as CEO. "The company itself is Apple-like. The same thought, care, and painstaking attention to detail that Steve Jobs brought to questions like 'How should a computer work?', 'How should a phone work?', 'How should we buy music and apps in the digital age?' He also brought to the most important question: 'How should a company that creates such things function?' Jobs's greatest creation isn't any Apple product. It is Apple itself."

It's time to stop kidding ourselves.

For all his outstanding talent and his great personal likability, Tim Cook has revealed himself as what we knew him to be in our heart of hearts all along: A suit MBA. He is the Steve Ballmer to Jobs's Bill Gates, and the consequences, in terms of the company's inventiveness and long-term future, will be the same for Apple.

The reason we now know this to be indisputably true is because Apple just spent $3 billion to buy the Beats headphones company, a deal that makes no sense whatsoever.

Sorry. I won't even give you the Devil's advocate. I won't even give you the "to-be-sures." This deal stinks, but more importantly it reveals that Apple as we've known and loved it is gone, forever.

Let's start with technology. This should be quick, because Beats doesn't have any. By the unanimous standard of everyone who knows about such things, its headphones are good-ish. They're not bad, but there's nothing "revolutionary" about them (unlike the Parrot Zik, an excellent product that it really would have made sense for Apple to buy, for much cheaper). Exactly the same can be said about its streaming service. It's good. It's also not insanely great compared to any other music streaming service, including anything Apple could build in-house. 

I don't have anything against Beats: It's a phenomenal business success, it's a great branding story, they cracked open an excellent opportunity. I would be very proud to be involved with that company.

It just makes no sense whatsoever for Apple to buy it.

Beats is a branding success: It has found a way to make its brand very appealing to teenagers. That's a very hard thing to accomplish, and it is highly respectable. But Beats's most valuable asset isn't its technology, or its people, or its product -- it is its brand.

Apple already has a brand. It's the best brand in the Universe, built over painstaking decades by the greatest marketing genius in living memory. It makes absolutely no sense for Apple to own another brand. And if Apple plans on retiring the Beats brand, it makes absolutely no sense to buy Beats and then destroy its only valuable asset.

It just makes no sense.

It's the most un-Apple-like thing Apple has done since... since... since the last time it was run by a man not named Steve Jobs.

The times, they are a-changin'.

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Read/Post Comments (17) | Recommend This Article (5)

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 29, 2014, at 4:13 PM, Morgana wrote:

    Myopic article

  • Report this Comment On May 29, 2014, at 4:16 PM, AddieSt wrote:

    This purchase tarnishes the image of Apple as a company that admires quality in all things they do. Dr. Dre is not a quality product and does not fit into the Apple picture.

  • Report this Comment On May 29, 2014, at 4:22 PM, marv08 wrote:

    Uh, well. A lot of hyperbole here...

    Beats hardware is a $1bn p.a. business, that pretty much pays the price of this acquisition. Beats Music has the fastest trial to subscription conversion rate of any subscription service and includes basically all discovery mechanisms of its competitors, plus content curated by experts, something no other service offers. I can't put a price tag on that, but as they basically got it for free, I don't need to.

    Beats Music also solves another issue for Apple: not being on competing mobile platforms, Beats is on Android and Windows Phone and will remain there. This opens an opportunity to bring media sales and e.g. also iAds to competitors with virtually no cost. What's not to like?

    And finally, and maybe most important: Apple gets two executives which understand the content business. Jobs insight into the movie industry was a door opener, it made the original iTunes licensing and subsequent movie and TV show licensing possible. It allowed Apple to invent formats like iTunes Albums and iTunes Extras, something no competitor has even today. Cook is an excellent CEO, but a player in content like Jobs he is not. Getting respected and well-connected experts onto the payroll is the ultimate solution to that.

    So, where is the disaster here?

  • Report this Comment On May 29, 2014, at 4:31 PM, Viking70 wrote:

    How has Ford Motor Company done since Henry Ford left the company? I'd say Henry Ford was pretty visionary.

    How has IBM done since the founders of the Tabulating Machine Company, the International Time Recording Company, and the Computing Scale Company left?

    How has GE done since Thomas Edison left? Was Thomas Edison a visionary?

    The argument that companies struggle after their founders leave so Apple will struggle as well is comical. Yes some do. Some don't. Some companies struggle if the founder stays. Some don't. Some companies do much better after the founder leaves. Some don't.

    Trying to say that if the visionary founder leaves the company is doomed is faulty, and indicative of 'herd mentality' thinking. Do some independent research first instead of listening to the pundits who just want to hear themselves talk (or blog).

  • Report this Comment On May 29, 2014, at 4:33 PM, Jamesd99 wrote:

    If you feel that way sell and move on. That's what makes a market. My view AAPL wins they are gaining talent and rights. I agree with marv08

    I have been using apple for 30 years and it just keeps getting better, just bought a new BMW and it is integrated with the system all with a push of a talk button.

  • Report this Comment On May 29, 2014, at 4:35 PM, EquityBull wrote:

    Would Steve Jobs have done this deal? Probably not. Nuff said

  • Report this Comment On May 29, 2014, at 4:36 PM, melegross wrote:

    Fortunately, as we can see today, WallStreet is warming up to this deal. Articles like this will go away, as writers actually begin to think. I hope that's not asking too much of them though.

    The knee jerk reaction is negative, but there are a number of good things about this deal.

    First of all, beats had $1.3 billion in revenue fiscal 2013. A valuation of substantionally less than three times that is a good deal. But, more so is that Beats is ncorporated in Ireland. Forbes has said that at the original price we heard of $3.2 billion, this would actually cost Apple $2 billion because of tax rules, which is a very good deal. At the actual price of $2.5 billion plus $400 million of acruing stock, the deal is much better. Not all that much more than revenue.

    But the subscription service and Iovine himself are worth a significant amount.

  • Report this Comment On May 29, 2014, at 4:39 PM, smehlman wrote:

    Getting Iovine, the next real leader for Apple is what this is all about.

    The business will pay for itself, but Jimmy is the real story here.

  • Report this Comment On May 29, 2014, at 4:57 PM, GigMaster wrote:

    Some articles are written just for the sake of controversy in an effort to draw eyeballs to the website the writer blogs for. This seems to be one of those cases because the arguments the writer makes are nonsense.

    Why can't a great brand own another great brand?

    Why can't a great business buy another great business that is heavily cash flow positive?

    Why can't a company do something different from what the founder would do if it has a really good chance of succeeding?

    Currently, Apple is rewarding my port fabulously. I say keep doing what you're doing Tim Cook. You are creating value and still turning out solid products. Kudos to you and the Apple team!

  • Report this Comment On May 29, 2014, at 6:10 PM, Trololololo wrote:

    It's gratifying to see so many level-headed, intelligent responses above from fellow Fools. They are not the comments of fanboys, but of intelligent investors who are viewing the deal in rational terms based on analytics, not hype.

    The author of the article cited above shows an obvious dislike for all things Apple. When I read articles based on hype, click-trolling or outright hatred, I immediately discount them. The ink is hardly dry on this deal, and in the past few weeks, it's been subject to much armchair punditry. As an investor, I've learned the value to patiently waiting, letting time be the judge and not jumping to either conclusions or assumptions before knowing the facts that drove this deal. But hysteria and ready-fire-aim is often the stock and trade of armchair pundits, who live for the moment and spew noise without looking at the valuation of a deal or having all the facts.

    Time will tell. But I give a tip of my cap to the fellow Fools above whose dispassionate, rational analysis beats anything I've read on what passes for major news outlets. Well done, gang.

  • Report this Comment On May 29, 2014, at 8:58 PM, Mrr82 wrote:

    1) in a years time 3m won't be missed and their valuation right or wrong will work more off of growth. This helps with that, they keep putting more money in the bank and it's ignored in their valuation.

    2) Ever think they might gain new iphone/tablet customers from existing Beat customers? How much you want to bet there are S5 customers walking around with beat head phones on? Those customers will be shopping at an apple store in the future. More people through the retail door the more money they make.

    3) It's ridiculous to suggest the buy on Beats sales potential is either bad or great. Give it time before judging. I remember everyone bashing FB with Instagram....now it's viewed as brilliant. Never a smart idea to be so hold thinking you 100% know best.

  • Report this Comment On May 30, 2014, at 1:05 AM, singaporenick wrote:

    An article that just does not understand the future of Apple or the reasons behind the Beats deal.

    The author either really is a "fool" or has short position on Apple which is killing him.

  • Report this Comment On May 30, 2014, at 4:17 AM, djtetsu wrote:

    3B purchase for a company that does 1B per year is doesn't seem risky at all to a company the size of Apple.

    With that said, Google is throwing away money ALL over the place, the strangest one being in development of robotic animals of some sort.

    I think TIm Cook is a friggin genius in realizing that he isn't a visionary himself necessarily but that he doesn't have to be, he can just hire the best creative people.

  • Report this Comment On May 30, 2014, at 5:17 AM, hembreeder wrote:

    Another "Apple is dead" story.

    Ho-hum. I've seen dozens of them over the last 20 years. Even read most of them. But I'm getting really tired of them.

    The "analysts" always know so much more than the guys who run Apple! So why hasn't Apple hired any of them?

  • Report this Comment On May 30, 2014, at 12:04 PM, ericls12 wrote:

    Ohhh come on don't be so mean to Tim Cook... he just wanted to help his doofus self and get in the heebeejeebee beat with Dr. Dre!

  • Report this Comment On May 30, 2014, at 12:08 PM, ericls12 wrote:

    @djtetsu there is a difference in Apple and Google... Google is the innovative company that lands big as technology grows and Apple is Apple. With Steve Job they have lost all ingenuity and overpaid for stuff that has a very slim money making expand future.

  • Report this Comment On May 30, 2014, at 9:54 PM, margiecfl wrote:

    Here are some thoughts on the Apple/Beats deal specifically in regard to this column-- http://obvious-stock-picks.blogspot.com/2014/05/does-apple-b...

    Always enjoy getting the opinions of others, so I don't begrudge the author for his position.

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