As the tech world waits for confirmation that Apple (NASDAQ:AAPL) is indeed purchasing headphone maker Beats Electronics for $3.2 billion, and bringing on founder Jimmy Iovine (and perhaps Dr. Dre), analysts are deconstructing what the acquisition could mean. The answer appears to reside in long-term plans.
Beats comes with two benefits for Apple: First is the hardware side, which specializes in youth-oriented headphones so successful that Beats holds an estimated 64% of the high-priced headphone market and brings in around $1 billion in revenue each year. Second is the newer Beats Music streaming app. While Apple already has a streaming service in the form of iTunes Radio, the Beats app could add more subscriptions and new features that Apple could use to better compete against Pandora, Spotify, Google Play, and the rest of the streaming crowd.
Regrets for previous owners
Apple was not the first mobile company involved with Beats. Taiwan-based HTC used to own a controlling interest in the company. It sold its Beats stake in 2013 for $265 million (including a $150 million repaid promissory note), after losing around 90% of its stock value from a 2011 high. Ironically, if HTC had held onto its Beats shares, it could have made what TechCrunch estimated at $1.29 billion on the sale, nearly five times more than the total value of its sale.
On a positive note for HTC, its latest revenue forecasts expect net income at $31 million, above analyst estimates. April sales showed the fastest growth since 2011, and HTC stock value has grown by 24% thus far in 2014. But, this upward trajectory could have been enhanced even more by a large Apple payout -- if Apple would have been willing to give a competitor that much cash.
Ripples in the headphone market
Despite a relatively stable first quarter report, Skullcandy shares continue to decline after reaching a high of nearly $10, sinking toward $7 in the past month. The company's non-gaming headphones have been suffering in the market and have yet to recover. However, Skullcandy quickly rose by 6% on the morning that news of Apple's Beats deal was released, eventually approaching $7.50 and showing a positive reaction to the short-term upheaval of a competitor.
In the long term, Skullcandy's position is less certain. Apple may reinvent Beats as a new hardware/streaming combo product that could erode Skullcandy market share even further. Skullcandy could take this opportunity to focus more on its profitable gaming headphones and new international reach into the Asian nations, or in a move similar to Apple's Beats offer, a company like Nike could acquire the headphone maker and aim it toward the sports market.
Streaming music sites continue to rev their engines
On the note of music streaming synergies, Amazon contracts for a music streaming service were leaked back in April. Despite its Kindle devices and Fire TV, Amazon does not have its own headphone brand. However, if the company is working to establish its own streaming service, this puts it in direct competition with companies like Apple, not to mention Pandora and other streamers.
How will the e-commerce corporation differentiate its product? Amazon has previously said that it will not offer a free music service, which makes it likely that this project would be associated with Amazon Prime and focus on increasing subscription revenue. The service could potentially help win over customers that use iTunes Radio as well as Amazon services, but with no free streaming for non-Prime users, it is hard to say how much additional revenue the project would make alongside Pandora, Spotify, iTunes Radio/Beats, and others.
However, like Apple, Amazon also has multiple hardware lines to leverage, and additional products or acquisitions could add more features down the line. Google and Microsoft may want to take a cue from the Beats deal too, especially if Apple proves that the "streaming music acquisition" path can lead to substantial supplemental profit.
Tyler Lacoma has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com and 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.