) is planning to acquire Beats Electronics for a whopping $3.2
billion. Per Reuters, which quoted
- if the deal goes through, it will be Apple's largest buyout to
date. The acquired service will complement Apple's ad-based
music-streaming service iRadio, launched last June.
Beats Electronics, founded by rapper-producer Dr. Dre and music
producer Jimmy lovine is popular for its "Beats by Dr. Dre"
headphones, priced between $170 to $450. Earlier this year, Beats
Electronics launched its $10 a month streaming-service, which gives
users unlimited access to its catalogues (more than 20 million
songs at the time of launch) through a smartphone, tablet or
As revenues from music downloads continue to decline at a rapid
pace, subscription-based services are expected to be the next
life-line of the music industry. Per ABI Research, streaming music
services are expected to generate $5.0 billion revenues this year.
The analyst firm forecasts revenues to grow to $46.0 billion by
2018, which presents a significant growth opportunity.
However, the market is already crowded with the presence of
), Rdio, Rhapsody,
) All Access,
) Xbox Music and
) Music Unlimited. YouTube and French company Deezer are also
expected to launch their subscription-based service in 2014.
Despite intensifying competition, Beats Music's aggressive
marketing and its unique "Right Now" offering has been instrumental
in driving market share. Under the "Right Now" offering, users are
allowed to create a playlist of their choice based on four
variables: a place, an activity, a person and a genre of music.
This user freedom compared to some other services has benefited
Beats Music. Moreover, its partnership with
) and promotion by celebrities such as Ellen DeGeneres has also
positioned it well over peers. We believe that the deal will expand
Apple's footprint in the growing music-streaming market over the
Nevertheless, the acquisition price seems too high for a company,
which was valued only at $1.0 billion in its latest round of
private funding by the
). In Sep 2013, Carlyle invested $500.0 million for almost 50.0%
stake at Beats. The reported deal will hand over a net $1.0 billion
profit to the group.
However, it may not be much profitable for Apple, at least in the
near term, primarily due to the intensifying competition. Despite
all the growth forecasts for subscription-based steaming market,
service providers are finding it difficult to grow paid user base.
Services like Pandora have yet to report profit, which is a major
concern for investors.
Although Apple's loyal customer base is a big advantage in this
regard, we believe that the company will take substantial time to
gain a strong foothold in the market. Moreover, Beats Music pays a
higher loyalty to labels compared to its peers, which can hurt
Apple's profitability in the near term.
Further, the lack of a new gadget from Apple will remain a headwind
for the rest of 2014. The company is expected to launch iPhone 6 in
August, a month earlier than forecasted, which will be a key growth
Apple's growing market share in the BRIC and emerging markets is a
major positive. We believe that a larger screen iPhone 6 will get
good response in these markets, which will further boost top line
in the second half of 2014.
Currently, Apple has a Zacks Rank #3 (Hold).
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