Apple (NASDAQ:AAPL) took the world by surprise last week when news leaked that it was in the late stages of negotiating a deal to acquire Beats Electronics for $3.2 billion. Acquiring a well-known brand for such a big price goes contrary to Apple's history of much smaller acquisitions -- all at less than $500 million. But a close look at the deal reveals four compelling reasons it would make sense for Apple to bring Beats under its umbrella.
Apple has frequently said that one of the main reasons it makes acquisitions is to get access to the talented human resources running the show. With Beats co-founders, music industry veteran Jimmy Iovine and celebrity rap musician and entrepreneur Dr. Dre, Apple would be adding some of the most influential names in the music industry to its executive team if it acquired Beats.
Sure enough, Iovine and Andre Romelle Young (Dr. Dre) are rumored to be key reasons Apple wants to acquire Beats. Both co-founders are expected to take on senior roles at Apple if the deal goes through, reports The Wall Street Journal. The New York Post even believes that Iovine will serve as a "special advisor" to Apple CEO Tim Cook on creative matters.
2. Industry ties
Hand in hand with Beats' talented leadership come critical industry ties. Beyond Iovine's key experience in dealing with major labels, he has celebrity status in the music industry. With Cook known for sharing the spotlight with top executives, Iovine could make quite a splash at Apple's product, software, and service launch events.
The Beats brand, mostly known for its headphones, is one of the few other consumer electronics brands beyond Apple that have been able to boast consistently lucrative margins in a price-competitive market.
Interestingly, a person with knowledge of the Apple-Beats talks told Bloomberg that Apple intends to keep the brand separate. This would be the first time Apple attempts to support a well-known brand under its own corporate ownership. But given Beats' irrefutable success in the headphones market, it could turn out to be an effective way for Apple to profitably branch out into new areas.
4. A better streaming music service
The Beats streaming music service is still new to the market, but its early success looks promising. So promising, in fact, it could be argued that it has more potential than iTunes Radio. In March, Bloomberg reported that the new streaming service was garnering about 1,000 paying subscribers per day in its first month. Even more impressive, however, was the ratio of paid to free members: seven to 10. And the Beats streaming music service isn't cheap; the company is charging $10 a month for the premium version of the service -- far lower than the $25 per year Apple charges for an ad-free version of iTunes Radio.
While $3.2 billion would mark Apple's largest cash outlay for an acquisition so far, Beats Electronics may be worth the price. Between the talent, industry connections, brand, and a proven streaming service, Beats could help Apple make a comeback in the budding streaming music industry while also expanding its hardware lineup with a proven brand.
Daniel Sparks owns shares of Apple. The Motley Fool recommends and owns shares of Apple. 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.