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Vertical Merger Analysis - Apple Merge Beats

In: Business and Management

Submitted By michaelwgao
Words 1534
Pages 7
Case: Apple buys Beats Electronics

| | | | | | | | | | | | | | | | | | | | | Word Count of main content: 1187

Introduction
In early May 2014, Apple disclosed its intention to buy Beats for US$3 billion and announced the deal completion in early August 2014, welcoming Beats to the Apple family. Apple’s rationale for buying Beats is best summed up by Tim Cook - “Music is such an important part of all of our lives and holds a special place within our hearts at Apple, that’s why we have kept investing in music and are bringing together these extraordinary teams so we can continue to create the most innovative music products and services in the world.” iTunes moved music purchases from CDs to the online platform in 2000. For the first time in 2013, iTunes music sales declined, this downward trend has continued. The fall has been largely attributable to the rising popularity of online streaming music platforms such as Pandora and Spotify. A similar amount of money to buy one track on iTunes can purchase a one month subscription to millions of tracks on Spotify. Beats has a music streaming platform similar to Pandora and Spotify. By merging with Beats, Apple will be able to tap into the music streaming business. However, some analysts doubt whether Apple needs Beats to achieve this, questioning why Apple doesn’t attempt to develop a similar or better streaming platform internally. Speculation has it that Apple is buying the talent of Jimmy Iovine and Dr. Dre to help them grow their entertainment sector as a whole. Regardless of whether Apple is interested in Beat’s streaming business or their talented leaders, Apple has faith that Beats will bring new innovation, creativity and value to the company.

How can Apple create value from Beats
With music one of the key foundations of Apple’s business, the merger with Beats will further strengthen Apple's brand image and leading position in the music industry.
For Beats Electronics, besides the good profit margins from premium headphones, the acquisition will also help to bring synergy to the two businesses as they are both designed for high quality music playbacks and premium users.
Apple's interest in Beats Music has a long-term focus, as the music industry gradually shifts away from downloads, Apple’s initial focus, to streaming services. Beats Music will give Apple the boost they need to catch up with Spotify and Pandora to regain their position in the market.
The acquisition of Beats will also secure Apple the talents they need for the further development and some may say the most important part of the deal - Jimmy Iovine and Dr. Dre. Where their talents and experience is believed to be able to help Apple revamp and run its whole music strategy for Apple and also to help break the stalemate on pursuing the content deals for the company's future products such, as Apple TV.
Analysis of impact on relevant players in the industry
Whether it’s a good deal or bad deal, Apple’s acquisition of Beats Music & Beats Electronics, the tech giant's largest acquisition, will have a huge impact on the music industry and beyond. Beats' financial backers clearly benefit from the sale price. Others, from competitors to customers, will also be affected as following: a) First and most direct impact comes to Pandora and Spotify. Pandora and Spotify rank as the number one and number two music streaming apps in terms of downloads, which were best positioned to dominate the streaming business for years to come. Now with Apple’s iTunes Radio and Beats Music under one roof, another major competitor has emerged—with more than enough resources to stay in the game. Over the short term, Apple's entry into subscription music services could create more consumer awareness for the category and benefit all competitors. Over the long term, only the strongest subscription services will survive and pricing will be critical. Do Spotify and Pandora have the capital to compete on price with Apple? b) The previous close partner of Beats will be the losers of Apple’s purchase of both Beats Music and Beats Electronics, like AT&T and HP. AT&T no longer offers Beats Music subscriptions to its subscribers as an add-on service until October 14. The cellular company has ceased giving customers the option to sign up for Beats Music when purchasing a new phone plan and the Beats Music website has been updated to remove its "Subscribe with AT&T" options. Beats Electronics was the supplier of the audio technology for HP – included in 15% to 20% of its consumer PCs products, including some of its tablets. HP confirmed that it will drop Beats Audio from its line of high-end PCs and tablets by the end of 2015 after Beat Electronics was acquired by Apple, HP’s rival in personal computers and tablets. It does put HP between a rock and hard place. If HP still advertises how wonderful Beats is in current HP devices now, it will be helping Apple persuade consumers that Beats-infused products are the best music experience. c) The consumers and mobile carriers will benefit from Apple’s acquisition of Beats. Firstly, it will give consumers greater choice in music subscription services and user experience that are drastically different from its competitors. In addition, Apple's global footprint and relationships with mobile carriers other than AT&T, give it an advantage over its competitors in creating a consumer-friendly relation of mobile subscriptions and music subscriptions. The greater competition could lead to better services and lower prices.

Response of Stock Market
Looking at the one-week responses of Apple’s stock market after the news was released for this acquisition at 3 stages: * Apple’s acquisition of Beats was first reported by Financial times on 08 May 14. The stock price of Apple increased by 0.71% from 588.25 (08 May 14) to 592.43 (14 May 14). The stimulus of the merger rumor to the stock price of Apple is marginal. * Apple’s acquisition of Beats was officially announced on 28 May 14. Stock price climbed from 626.02 (28 May 14) to 628.46 (03 Jun 14) in the course of a week, representing only 0.39% increase. * The acquisition was closed on 01 Aug 14. Change in stock price was even more marginal in the following week (from 94.90 on 01 Aug 14 to 94.93 on 07 Aug 14 representing 0.03% increase). The anticipation of value-added of Beats did not hold up from when the merger took place.

This muted response from the market is unsurprising given the alternative assessments from analysts (legitimate negative and positives raised) and the enormity of Apple’s market capitalisation. On the one hand, Apple's acquisition of Beats is a very deliberate shift in strategy to gain a stronger foothold in the market for music content, by diversifying its product offering into a new format in online music streaming, with some predicting "streaming and subscriptions will grow to reach $8 billion in 2019." On the other, Apple just spent a mere 2% of its whopping $150 billion cash stash to purchase a company with revenues reportedly in the $1 billion range annually. Nonetheless, that’s a significant investment with an unclear path to long-term profitability, which makes it look like a real gamble. No doubt a calculated one.

Reference * Apple agrees to buy Bets Electronics for $3 Billion - http://www.bloomberg.com/news/2014-05-28/apple-agrees-to-buy-beats-electronics-for-3-billion.html * Music sales decline for the first time since the iTunes Store opened - http://www.theverge.com/2014/1/3/5271528/music-sales-decline-for-the-first-time-since-the-itunes-store-opened * Apple-Beats Deal: The Winners and Losers - http://www.youtube.com/watch?v=RdvkYxvgErQ * Evaluating Apple’s $3 Billion Beats Buy: Wins, Losses and Draws - http://www.forbes.com/sites/zackomalleygreenburg/2014/05/30/evaluating-apples-3-billion-beats-buy-wins-losses-and-draws/ * Winners and Losers from the Apple-Beats Deal - http://www.billboard.com/biz/articles/news/digital-and-mobile/6106223/winners-and-losers-from-the-apple-beats-deal * Apple in talks for $3.2bn Beats deal - http://www.ft.com/intl/cms/s/0/e330e830-d6f3-11e3-b95e-00144feabdc0.html?siteedition=intl#slide0 * What Beats’ President said about expansion – Before Apple bought it for $3 Billion - http://www.inc.com/burt-helm/apple-buys-beats.html?cid=em01011week22day28a * Apple closes $3B Beats deal, welcomes the company “to the family” - http://www.cnet.com/news/apple-closes-3b-beats-deal-welcomes-the-company-to-the-family/ * Was Apple’s Inc. Beats deal a bad investment? - http://www.fool.com/investing/general/2014/06/12/was-apples-inc-beats-deal-a-bad-investment.aspx * Dr. Dre Jimmy Iovine expected to become Apple executives as part of Beats acquisition - http://9to5mac.com/2014/05/09/dr-dre-jimmy-iovine-expected-to-become-apple-executives-as-part-of-beats-acquisition/ * Dr. Dre and Jimmy Iovine will take senior positions at Apple in Beats deal - http://www.cultofmac.com/278471/dr-dre-jimmy-iovine-will-take-senior-positions-apple-beats-deal/ * Apple buys Betas Electronics for $3B -
http://techcrunch.com/2014/05/28/apple-buys-beats-electronics-for-3b/…...

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