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Did Apple Just Spend $3 Billion On 'Mediocre' Headphones?

Did Apple Just Spend $3 Billion On 'Mediocre' Headphones?

Apple (NASDAQ: AAPL) made a stunning announcement Wednesday afternoon: the company confirmed reports that it planned to buy Beats Electronics.

The $3 billion purchase price is a tad lower than expected, but it will still make Dr. Dre the world's richest hip-hop artist.

"Music is such an important part of all of our lives and holds a special place within our hearts at Apple," Apple CEO Tim Cook said in a company release. "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."

Investors may notice that Cook made no mention of Beats or of the value it brings to Apple. Instead, he promoted the "extraordinary teams" that have been brought together, which includes Apple engineers and Beats co-founders Dr. Dre and Jimmy Iovine.

Related: Apple's Improved Upgrade Cycle Could Drive iPhone Sales

It seems that Apple may have had to acquire Beats to bring those teams together, but at what cost?

"You're buying mediocre headphones," BGC analyst Colin Gillis told Benzinga. "You're buying a subscription service that's very nascent. You gotta get into subscriptions though, so you gotta get into streaming. This is a way to do it."

Gillis said that a "more impactful way" would have probably been to chase after Spotify. He said Apple could have used its offshore cash to "land the biggest player in the space instead of the smallest."


Apple may have paid a lot of money for Beats, but it is not yet known how the brand may be integrated into the rest of the company's product lineup.

"This is the first time they've acquired a separate brand, so that will be something that you'll have to watch," said Gillis. "If you want to try to build up a streaming business outside of iTunes, to slow the cannibalization of iTunes sales, that's a way to do it."


Gillis doesn't expect Apple to give away Beats Music subscriptions to anyone -- not even iPhone users.

"I doubt they'll give it away for free," he said. "I think the whole point is to build up a paid subscriber base."

But if Apple doesn't give it away to iPhone users, how will it ever compete with Spotify?

"It's free but it's a freemium service," Gillis explained. "They've got 10 million paying subscribers paying $10 a month. They've got 40 million total [monthly active users]. The idea is to get 'em in with the ads and click 'em over to the paid."

"Apple already has an ad-supported service with iTunes Radio," Gillis added.

Disclosure: At the time of this writing, Louis Bedigian had no position in the equities mentioned in this report.


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