In Light of iTunes Strong Performance in Apple’s Fiscal Q3 2014, Perhaps the Beats Acquisition Makes More Sense

When Apple announced its intention to acquire Beats Music and Beats Electronics on May 28, 2014, many analysts expressed surprise and looked skeptically on the potential of this merger to add considerable momentum to Apple’s bottom line. But the strong performance of Apple’s iTunes content service in Apple’s Q3, 2014, fills in the blanks and should dispel a lot of analyst concern.

Merely 7.5 minutes into the Apple Earnings webcast, Peter Oppenheimer, CFO reports on iTunes performance for the quarter: “In fact, for the first 9 months of this year, the line items we call iTunes software and services has been the fastest growing part of our business”. Oppenheimer attributed a lot of iTunes “record billings of $4.7 Billion in the December quarter” to App Store sales.

So, with iTunes optimized, and producing a substantial contribution to Apple’s overall revenue around products substantially removed from its own core market (popular music), the addition of Beats looks like a promising method of rejuvenating the business base for iTunes without cannibalizing any of its other segments. Beats Music is a music subscription service, and a direct competitor to Spotify, with, arguably, strong market appeal.

If, and when the subject of market cap comes up, with reference to Apple, it is not likely analysts will ignore the added value of Apple diversifying its exposure to markets via the Beats acquisition, and a resurgent iTunes brand. With a P/E of 15.75 based on trailing 12 mos earnings, Apple looks very much like a value stock at its market cap of $589 Billion.

In contrast, Facebook, and Twitter are certainly several orders of magnitude more speculative (not to mention expensive); both produce revenue entirely from one market, online advertising and promotion. Finally, neither does Google stand up well to Apple in this comparison. Its dubious distinction is a number of efforts to actually enter markets distinct from its online advertising core, but with not much success. Sure, the Play Store is successful, but the “Other Business” segment continues its very slow pace towards some kind of meaningful contribution to Google’s bottom line.

In this writer’s opinion, the performance of Apple’s iTune business during the Q3 2014 is very good news.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved


Apple Apparently Plans on Acquiring Beats Electronics

According to an article written by Ryan Faughnder and Chris O’Brien, titled Apple may be buying Beats Electronics for $3.2 billion, which was published on the LA Times web site on the evening of May 8, 2014, on May 8, 2014, the Financial Times published a report of talks between Apple and Beats Electronics. The driver for the report amounted to a strong likelihood Apple intends to acquire Beats Electronics. A sale price of $3.2 billion is included in the LA Times article.

In a short video clip titled ‘Apple: Can-Kicking’ Alan Livsey and Joseph Cotterill of the Financial Times opine on the merits, or lack thereof, of Apple proceeding with the acquisition.

Joseph Cotterill sums up what will likely prove to be a popular investor concern about the deal: “Where else could [Apple] have spent the $3 Billion?”

Messrs Cotterill and Livsey go on to delineate why the deal fails to make a lot of sense:

  • iTunes, which back in 2008, according to Mr. Cotterill, amounted to a $16.00, per subscriber, business, is now just a $1.00 per subscriber business. He sees the Beats subscription service as, essentially, more of the same
  • Mr. Livsey characterizes Apple as the quintessential brand, and wonders why it makes sense for them to buy another heavily branded business — Beats Electronics
  • Finally, Cotterill notes Apple will not be buying the Beats Electronics hardware business, just the subscription engine they have developed, which though highly regarded, still has far fewer subscribers than Spotify

Is this Apple’s attempt to build its own SaaS, cloud offer? In other words, is the Beats Electronics subscription service Apple’s attempt to cobble together their own version of Microsoft’s highly successful Office 365 cloud SaaS offer? Certainly the target market is entirely dissimilar (SMBs and enterprise businesses on the Office 365 side, vs music lovers with a credit card for Apple/Beats side), but the recurring revenue, low maintenance, presumably high margin business is very much the objective of both attempts. Presumably we will all know a lot more about the rationale behind the deal if Apple makes a formal announcement about it.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved