Apple: The Bigger Beat

As a music industry analyst, my post last Friday on the rumoured Apple / Beats deal focused squarely on the Beats Music part of the equation – if you are a hammer everything looks like a nail right?  There are of course much bigger pieces in play than an unproven music service, so to illuminate some of the bigger picture, here are some of the broader product strategy implications of what the deal could mean if it does close:

  • Wearable tech: Apple is a consumer tech company whose reputation for innovation was dented in recent years while it grappled with the challenge of retaining relevance for the mass market with a limited device portfolio while at the same time trying to nudge the innovation needle forward.  Wearable technology is an area in which Apple can innovate bravely while leaving its more mainstream phone and tablet product lines to evolve at more conservative paces.  The nascent nature of the wearable tech space means that there is much that Apple can do to both push the boundaries and gain innovation kudos.  Beats is a wearable products company, Apple is a portable technology company.  It is a wearable tech partnership waiting to happen.  Beats could even conceivably be the Apple brand / division for wearable tech, keeping it cleanly differentiated from the core device business.Whether the outcomes would be smart headphones, fitness devices, smart watches etc. almost doesn’t matter.  The important implication would be that Apple would have a fantastic platform and brand for opening up new markets.    For more on the wearable tech angle, watch this fantastic video blog from my former Forrester colleague James McQuivey
  • Segmenting music consumers: When Apple’s portable device business portfolio consisted of iPods alone it was immediately obvious who the music fans were within its customer base.  Now it is far more difficult for Apple to identify the media preferences of potential customers until they have actually started using an Apple device.  That is one of the retailing implications of producing multi-purpose devices. But start selling device-headphone bundles, or even device-headphone-music service bundles and Apple will find itself with a highly effective tool for targeting the music aficionados.  These super fans can be sold premium music products without the risk of alienating other customers with premium price points in the main product portfolio.
  • Reinvigorating the brand: Apple is not a high-end brand and never has been.  Instead Apple plays in the same brand space Sony did in the 1980s and 1990s, namely that of the aspirational premium mainstream: the top end of the mass market and just scraping the lower reaches of the upper echelons.  But the price Apple has paid for large-scale success is that its user base and brand have crept downwards.  No product can take more blame than the iPhone: the smartphone market is the most commoditized of sectors, with fixed replacement cycles, carrier subsidies, fierce competition, aggressive marketing all reducing brand loyalty and value.  Beats, for all the criticism of the technical quality of its headphones, has created an aspirational, youth focused brand built on the foundations of the aesthetics of quality.  Like Apple, Beats is a brand focused on the upper end of the mainstream and would be a great strategic complement, presenting the opportunity for Apple to reinvigorate its core brand values and at the same time enhance youth resonance.
  • Putting cash to work: Apple is a very cash generative business with an investor community that has consistently higher expectations than Apple is able to deliver on.  Consequently Apple has had to face the paradoxical situation of delivering results of unprecedented quality only to see tepid investor response.  Couple that with ever growing demands to redistribute its vast cash reserves to investors in the form of dividends and it is little wonder that Apple has been on something of a spending spree of late.  Spending big on Beats kills two birds with one stone: it puts cash to work and sends a strong message to investors.

Whatever happens to the prospective deal, what it clear is that there are countless potential benefits to Apple.  And if the deal does not transpire then it is equally clear that Apple either needs another such partner quick, or instead needs to put its cash to work right away on addressing each and every of these strategic permutations.

8 thoughts on “Apple: The Bigger Beat

  1. Apple or music industrydoes not need Beats! We need coordinated effort to create $100 billion dollar indusry.
    $40B 1999 was made with just 3 billion $13 CD transactions in EU, US and few countries in Asia. Today with 5 billion smartphones and 10 times as many potential buyers we can get $100B before 2020 with price per tune at just 39 cents. All we need to do is close the music in virtual walls. Simple and profitable to all task.

  2. Great thoughts as always, Mark. I respectfully disagree with the above comment. I’d say we’ve enough billions in the industry. There’s plenty of “Me, me, me!” But it would be great would to see an industry focused on artists having control of their work and see a creative renaissance born out of that. While there is a host of amazing stuff going on in the industry, and has been for years, it would be great to see what would happen it artists were treated as equal partners, or at least acting participants in these technologies and transactions which make millions and billions of dollars off of their work and passion. Perhaps rather than focusing on a $100 billion music industry run by corporations who already have billions of dollars, time would be better spent cultivating a music industry in which artists can build a career for themselves based on more than a single song with a lot of glitter. There’s nothing wrong with artists pairing up with brands if the artist gets something positive out of the partnership as well and the partnership allows the artist to make the music they wish to make, but perhaps too many artists are focused on corporate deals than they are on music. The Jay-Z deal was brilliant but now many artists are thinking that’s the expectation….and those artists aren’t Jay-Z. Labels and managers seeking new artists are comparing young artists to career artists and entering with a mindset of ‘what company can I pair a new artist with?’ and that’s ridiculous. It’s unrealistic and unfair pressure in what can already often be a pretty ridiculous industry. (*Obviously this doesn’t apply to all, but it does apply to many as so many want the next huge act rather than working to cultivate a career). Coming back to the Apple Beats deal, diversification in the industry is always a good thing, but only if those involved allow true diversification to take place. If Apple allows itself to truly learn how to adapt to the streaming model and hopefully use its resources to make it fair (finally) for artists, that would be a wonderful thing. If they integrate it into iTunes Radio and make a successful platform into a huge flop, well, that would be a huge travesty. If you recall when Live Nation acquired Ticketmaster, red flags were raised immediately about monopolies. Live Nation’s oh so savvy attorneys argued that there wouldn’t be a monopoly-their acquisition of Ticketmaster would actually be *better* for consumers and open up the marketplace. Here were are, years later and Live Nation owns even more stakes in the music industry, Ticketmaster is the only game in town for tickets, and there was none of the diversification Live Nation’s attorneys promised everyone. Hopefully that won’t happen with Apple and Beats. I don’t think it will-I hope it won’t. I think the key to diversification and the ultimate sustenance of the industry doesn’t come down to focusing on money, though obviously a financially solvent industry is important. I think it’s time for people to change one key element in their overall thinking: Artists are not a link in the chain, they are the entire reason the chain exists at all. If people (consumers, corporations,) would stop acting like artists are just passive participants in these economic equations things may be quite different.
    Apologies for the long comment, which was honestly more for Remi than you…I always enjoy your work 🙂

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  4. Great article, I personally think that the Apple brand needs a shot in the arm and the Beats brand is definitely that!

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  8. Apple doesn’t move rapidly into any market it can’t easily get a foothold in. It didn’t invent the mp3 player, the mobile phone, or the tablet. It just seized on a market ready to become a mass market. I think this is true with streaming. But there are a couple other aspects to this you might want to consider.

    What is the effect of the Beats acquisition on Spotify? Personally I think this was less about wearables and hardware than the music service, considering as a retailer, Apple already makes plenty of money off every Beats product without any of the cost to design or build those products.

    1. Apple just screwed up Spotify’s valuation. They essentially paid $3B for a streaming service that has 200k customers. They’ve made a line in the sand. Spotify’s last valuation was somewhere around $4B…Facebook just bought Occulous for $2B and Whatsapp for $19B. Who else could even acquire Spotify? Amazon has a service coming, Netflix could possibly do it, Facebook is better off being agnostic, Yahoo doesn’t really have the cash or proven ability to not ruin something, Google hasn’t really been killing it (but they already have two services already), and Twitter also doesn’t need it or have that kind of cash. A giant telecom/cable company could do it. Murdoch could do it (ugh). Spotify, as an acquisition, is really an albatross since it has no proven profitability or any real track record that it could be profitable. So it’s IPO…and to go public they have to survive long enough for a positive valuation, but after the IPO they’ll have investors to answer to.

    2. Apple’s iTunes Radio has already 10 million more listeners than Spotify’s free listeners. Spotify is in 57 markets. Apple is in 2. Apple has 800 million credit cards on file. Spotify has 10M.

    3. Dare I mention the $160…er…$157B in cash Apple has lying around. They now have an app/service on two platforms and could offer a free year with every new iPhone/Android phone if they wanted to…could lose money on music for a very long time…if not indefinitely.

    4. To win, or at least survive, Spotify has to keep burning cash to establish its market, but they should have limited that market to Europe and cemented it so no one else could chip away at the edges. Instead they now are in the position of having to defend the 57 markets they are in.

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