Apple Inc: Beats Acquistion Makes a Ton of Sense

Apple's  (NASDAQ: AAPL  )  acquisition of Beats Electronics is a great move by the company -- as it will give Apple newer revenue streams from Beats hardware as well as a music streaming segment. The subscription streaming service of Beats is in its early stages and should get a major boost in terms of new customers, as Apple has a large installed customer base. Apple's $3 billion acquisition of Beats will give the company a much stronger foothold in the music industry, as it will complement Apple's own ad-supported music service and its sales from iTunes.

Newer revenue
In the March quarter, Apple's iTunes store generated gross billings of $5.2 billion, which is a 24% year-over-year increase, and iTunes portion of the revenue stood at $2.6 billion a 9% year-over-year increase. Apple clearly has great momentum in generating revenue from the company's iTunes store and now the Beats acquisition will go a long way in expanding that base. 

Beats will make the company's music offerings more attractive and offers more choice to consumers as they will have the option of choosing between a Beats Music subscription or an Apple's ad-supported free streaming service, iTunes Radio. Beats Music will provide users with a more customized user experience curated according to the users' preference and tastes. Beats Music offers a free trial, after which users can choose to pay $9.99/month or $99.99/annually. 

Beats has a strong brand and close ties to the music industry thanks to its founders Jimmy lovine and Dr. Dre. And Beats is already a market leader in the premium headphone space, as its high-end products can be extensively marketed through Apple's online store, worldwide retail stores, as well as authorized resellers. 

The fancy line of Beats headphones will keep up the cool factor especially among the youth, and drive revenue through Apple's large fan-base and global scale. Based on the pricing of Beats headphones, the product almost certainly has very high gross margins, which is in line with Apple's own pricing strategies.

Competitive landscape
Apple acquiring Beats is a change for the company, as it has focused on acquiring small companies with valuable technologies and/or great engineers. Apple will almost certainly use the technology utilized at Beats and apply it to some of its products. Apple's multi-billion dollar acquisition might be a sign of things to come. The company's hasn't come out with a major innovation since the iPad and might be inclined to buy more innovative companies.

Apple has 800 million registered iTunes accounts on its platform, and might want to increase revenue from software and services through acquisitions. Apple's iTunes Radio hasn't been a major hit for the company yet, but has roughly 20 million active listeners. Still it is well behind Pandora Media  (NYSE: P  ) . Clearly, Apple's music offerings will face a lot of competition from existing players in the space. 

Pandora Media just reported that its May 2014 listener accounts and hours are both on the upswing. Monthly listening hours in May increased 28% year over year to 1.73 billion, and the company now has 77 million active users on its platform. Pandora is doing well very in the music streaming space in spite of competition from Apple and Google  (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) .

Google All-Access Radio comes at the same price point as Beats, and should have a larger addressable market relative to Apple due to Google's much larger position in mobile OS through Android. In addition, Google's YouTube is by far the largest music streaming service in the world, and YouTube disclosed that 40% of its total users are coming from mobile devices, so YouTube is definitely a strong competitor for Apple. 

Going forward
The Beats acquisition will enable Apple to sell a lot of hardware accessories worldwide, and give the company's revenue a small boost. And the music streaming service might face a tougher climb due to a much more competitive environment, but still increases Apple's service offerings to its large fan-base. Overall, I think Beats was a smooth acquisition by Apple. 

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