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Will Apple, Inc. Fix Beats' Terrible Hardware Reputation?

By Evan Niu, CFA – Jun 21, 2015 at 8:45AM

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Apple has a very good reputation when it comes to its hardware. The same can't be said about Beats' headphones. What will the Mac maker do?

Beats Solo headphones may not be worth the hefty price tag. Image source: Beats.

In some ways, Apple's (AAPL 3.19%) relatively large acquisition of Beats last year makes a lot of sense. At the same time, I'm still scratching my head over 12 months after the fact.

Beats had made something of a reputation for itself among audiophiles and music enthusiasts. The company's iconic headphones dominated the premium headphone market ($200 or more), but they weren't actually good products when it came to sound quality. It was mostly just incredible marketing and branding at work.

While Apple is also known for extremely strong and effective marketing, it's not known for making bad products. Now that Apple is the proud owner of Beats, will it work to improve the quality of the hardware?

Beats headphones are bad
Case in point, Bolt has published a detailed teardown of a pair of $199 Beats Solo headphones -- one of the most popular models -- on Medium. Bolt is a seed-stage venture capital fund that specializes in hardware and prototyping, helping start-ups that need guidance on how to manufacture hardware products at scale. Avery Louie is the Bolt prototype engineer that conducted the teardown, and the results don't inspire a lot of confidence in Beats' hardware.

Instead of using screws, Beats prefers to use snaps and glues in an effort to cut costs. The majority of the headphones are also made out of injection molded plastic, which Louie says is "essentially free at high volumes."

In order to convey a sense of substance and durability, Beats inserts four tiny metal weights whose only purpose is to increase weight. The actual earphone drivers that deliver the sound are generic and completely commodities – there's nothing unique about them. After everything is said and done, Louie estimates that the bill of materials totals just $16.89, before labor or shipping.

Consumer Reports is also unimpressed. Interestingly enough, Consumer Reports noted in 2013 that Apple commands similar brand strength and pricing power.

What's a Mac maker to do?
Apple is known for making extremely high-quality hardware products. Even though the Mac maker uses many commoditized components (in addition to custom ones), its design and manufacturing prowess ensure very high build quality. Both Apple and Beats have strong brands, but the quality of Apple's hardware actually lives up to the brand, while Beats products do not.

Apple is probably ready to forget the iPod Hi-Fi. Image source. Apple.

We already know that Apple has scrapped a Wi-Fi loudspeaker capable of streaming music directly from cloud-based subscription services that Beats had in the pipeline to challenge Sonos, thanks to a recent Variety report.

However, it's unclear why Apple pulled the plug on the product. Perhaps Apple wasn't confident in the device's ability to compete in the marketplace. Perhaps it was just junk. Perhaps Tim Cook still has nightmares about the iPod Hi-Fi, Apple's own misguided attempt at launching a high-end loudspeaker nearly a decade ago.

Variety's sources even suggest that Apple isn't committed to Beats' hardware. Beats has lost quite a few employees following the acquisition, including high-level hardware engineers and execs like chief product officer TJ Grewal.

If Apple doesn't trust Beats to design compelling hardware, it could very easily take matters into its own hands and design, manufacture, and distribute a new portfolio of premium headphones that merely carry the Beats brand that Apple paid so much for. That would be the best of both worlds.

Evan Niu, CFA owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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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