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Wall Street warming up to $3B Apple-Beats deal, sees potential to offset declining iTunes revenue

post #1 of 97
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Apple's newly announced $3 billion acquisition of Beats Music and Beats Electronics has received a generally warm response from prominent analysts on Wall Street, who believe the purchase could help Apple compensate for shrinking digital music sales on the iTunes Store.




Apple made it clear in announcing the purchase on Wednesday that the Beats Music streaming subscription service was key to its interest in the company, while the headphone making side of the business will live on under Apple's direction. But Beats Music is seen as complementing the existing iTunes Store and iTunes Radio, offering a new service that was not previously available from the company's offerings.

Analysts on Wall Street accordingly focused on the acquisition of the Beats Music service in their reactions, and most came away with a positive feeling about the $3 billion deal.

Morgan Stanley



Analyst Katy Huberty sees Apple's purchase of Beats as a "low-risk, potentially high-return deal." She noted that Beats' device business is seeing strong growth of 30 percent per year, and believes the high margins justify Apple's acquisition price.

But it's the subscription music service that could make the Beats deal a home run, Huberty said. She believes every 1 percent penetration of Apple's 800 million active user accounts equates $960 million in revenue.

"Apple believes Beats offers the right strategy for streaming music as it leverages both algorithms and 200 human curators to create playlists, which differentiates it from competitors," Huberty wrote. "Apple plans to monetize the service with aggressive subscriber growth (from 250K today) and become profitable over the long term."

J.P. Morgan



While analyst Rod Hall believes the $3 billion final cost is "pricey," he isn't concerned about how much Apple is willing to pay, as the company is sitting on a massive $133 billion cash pile.

"Rather, it is about what Apple can do to with Beats Music to revitalize their own music business," Hall wrote. "We also see the addition of Dr. Dre and Jimmy Iovine to the musical network and creativity they bring as a positive for Apple."

Hall noted that iTunes content sales declined about 8 percent in calendar 2013, while his estimates suggest sales declined over 25 percent year over year in the second half of 2013 alone. In light of this problem, he sees the "innovative" Beats Music service as a potential solution.

In fact, Hall said he wouldn't be surprised to see Apple sell off Beats Electronics at some point in the future, allowing the headphone making side of the business to stand on its own while Apple would keep the talent and Beats Music service it has acquired.


Photo via Paul Stamatiou.


RBC Capital Markets



Analyst Amit Daryanani also sees the Beats deal as a positive, adding to Apple's recurring revenue streams. Along with the Beats Music service, he's encouraged by the addition of Iovine and Dre to Apple's team, as well as the profitable headphone hardware, which he estimates brings in 70-plus-percent gross margins.
While analysts were skeptical at first, many have begun to see value for Apple in buying Beats, particularly through its subscription music service.
In order for the Beats acquisition to be viewed as a success, Daryanani believes Apple needs to see growth of iTunes sales and increased hardware sales from Beats. He also expects to see innovation in Apple's iTunes product line thanks to input from Iovine and Dre.

He noted that subscription-based music revenues were up 50 percent in 2013 to $1.1 billion. During that same period, sales of digital music fell 2 percent to $3.9 billion, representing the first decline in history.

Piper Jaffray



Gene Munster was originally confused by the Beats deal when rumors first surfaced, but like others, he's begun to warm up to the marriage with Apple. In particular, he believes that adding Iovine and Dre could "help propel Apple into the next level in its content offering, particularly in video."

Munster also noted that because the $3 billion Beats purchase is Apple's largest acquisition in history, it could open the door for other purchases, including potential Internet services outside of content.

As for the Beats headphone lineup, Munster believes Apple will be able to leverage its distribution channels to help the brand rapidly grow over the next few years.




Wells Fargo



Maynard Um views Apple's purchase of Beats as a defensive move, and it's not one that he entirely agrees with. In his view, Apple should be acquiring "more offensive assets to better position itself."

Um doesn't believe investors should be focused on accessory revenue from the Beats purchase, at least in the near term. And while he's intrigued by the music subscription business, the analyst said Beats lacks scale, and he's not sure it justifies the $3 billion valuation.

Um does, however, see value in the addition of Iovine to Apple's lineup, while the Beats design team could help Apple in the wearable devices market.

Evercore



Analyst Rob Cihra admitted the $3 billion price tag on Beats is "steep," but argued that "the cost of Apple not getting the next generation of music right would be much steeper."

He believes Beats headphones will add more than $1 billion in annual revenue for Apple, but like others, he sees the bigger factor in the deal being the addition of Iovine and Dre to Apple's team. In his view, both men bring with them "invaluable industry relationships" that could benefit Apple in content negotiations.

As for Beats Music, Cihra believes Apple was in a position where it needed an answer to subscription streaming service Spotify, and the Beats product fits that bill. While he admitted Beats Music is just getting started, he believes the purchase will provide Apple not only with established content deals, but also an option for split branding if it so chooses.
post #2 of 97
And I could find just as many who think this is a dumb idea. http://tinyurl.com/p5ltpy8

Gotta love spin. 1wink.gif
post #3 of 97
I can see some value in Iovine but what's the value of Dre? And no it's not because he's black.
 
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post #4 of 97
I'm starting to warm up to this too as a stockholder. I'm now seeing all the possibilities of Apple's pieces coming together. Subscription based music thru iPhone, Macs, Apple's CarPlay, Satellite connected Headphones, etc. Combine this with an iCloud Subscription and I might actually sign up.
post #5 of 97

Well It's Called "Beats by Dr. Dre"

post #6 of 97
I really can't see why this is such a bad deal. When FB buys whatsapp for $19B or google buys Nest for around the $3B mark, no one seems to comment. The negative Apple press is curious.

From what I've seen of the Beats subscription service I can see apple turning it into a great thing to complement iTunes song purchase model. Steve was right when iTunes first started saying people want to own their music, but now i think more and more ppl are happy to pay a small monthly fee to have access to a vast collection. Next for Apple should be a huge investment in Netflix! 1smile.gif
post #7 of 97
Oh, please. "Wall Street is warming up" to the deal... This deal was practically designed by Wall Street. It's the Apple longs who have more of an issue with it. I see it more as appeasement.

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post #8 of 97
It will remain to be see if Cook can to do Beats subscriptions services what Jobs did when Apple purchased SoundJam and turned it into iTunes.
The bar is high.
Anyone know what Apple paid for SoundJam? Talk about a return on investment.
 
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post #9 of 97
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Originally Posted by gremlin View Post

I really can't see why this is such a bad deal. When FB buys whatsapp for $19B or google buys Nest for around the $3B mark, no one seems to comment. The negative Apple press is curious.

Sure they do, they say Apple should have outbid them. 1biggrin.gif It's some weird aberration of the positional good by proxy where they only want Apple to buy it because it's desired by another company. If Samsung had wanted Beats those same people would probably be ecstatic that Apple bought them first.

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post #10 of 97

The goal of Apple should be to bring their *own* products and values in to the world. It follows that since the music on the iTunes Store is not written by them, increasing/maintaining sales of it should not be a corporate goal.

 

The original purpose of iTunes was to help sell more iPods (to sell a digital music player you needed a decent digital music store and there was none). But what about these days? Will adding a subscription service to iTunes help sell more iDevices? No, because these days iDevices can already run the third party app anyway. 

 

They are spending billions to maintain a position in digital music that is no longer causal in the sales of their devices. I suspect that if the music section of iTunes closed tomorrow, the sales of iDevices would not suffer.

post #11 of 97
Quote:
Originally Posted by Rogifan View Post

And I could find just as many who think this is a dumb idea. http://tinyurl.com/p5ltpy8

Gotta love spin. 1wink.gif

Why all this incessant stupid quibbling over what has already happened, and what others think? Apple paid $3B for something. That means it meant quite a bit to more than a few at the company. So move on, people!

 

I just signed up for my free trial of Beats Music, which I wouldn't have done if not for this acquisition. I figured this is what Apple is interested in. I wanted to see what there was to it.

 

So far, I like it. It's kinda like the "gap" the iPad filled in Apple's hardware lineup, but this is a "gap" now filled in Apple's music lineup. It's not going to replace music purchases. But it may just boost them. I'm finding that, with Beats, I can now listen to more than just 120-sec clips of a lot of music, and without having to buy. I can re-discover a lot of stuff I used to enjoy listening to in years past. And then I will most likely buy some of what I discover with Beats. I'm sure Apple will do what it can not to stiff the artists out of Beats royalties, either.

 

I'm sure that's the genius of this acquisition.

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post #12 of 97
Quote:
Originally Posted by DanielSW View Post

I'm finding that, with Beats, I can now listen to more than just 120-sec clips of a lot of music, and without having to buy. I can re-discover a lot of stuff I used to enjoy listening to in years past. And then I will most likely buy some of what I discover with Beats.

That only works while you're in the beta. Outside of that it's $100 per year to find new music new buy. For me that's not worth it as music rental isn't how I like to listen to music. Even if they though in $100 worth of new songs per year you can grab from iTunes as a Beats Music credit that probably wouldn't appeal to me as I think I'm at a point where I don't want several dozens new songs per year to own.

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post #13 of 97
Quote:
Originally Posted by ascii View Post
 

The goal of Apple should be to bring their *own* products and values in to the world. It follows that since the music on the iTunes Store is not written by them, increasing/maintaining sales of it should not be a corporate goal.

 

The original purpose of iTunes was to help sell more iPods (to sell a digital music player you needed a decent digital music store and there was none). But what about these days? Will adding a subscription service to iTunes help sell more iDevices? No, because these days iDevices can already run the third party app anyway. 

 

They are spending billions to maintain a position in digital music that is no longer causal in the sales of their devices. I suspect that if the music section of iTunes closed tomorrow, the sales of iDevices would not suffer.

Totally disagree.

 

iTunes will continue to be an important part of the ecosystem, and Beats will only bolster its role. Beats will simply help more people access Apple's entire music library, if only on a subscription basis, but will also "market" that same music to those inclined to buy, all while increasing royalties to artists.

 

The ecosystem is possibly the biggest reason people buy Apple products and buy into its culture.

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post #14 of 97
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Originally Posted by SpamSandwich View Post

Oh, please. "Wall Street is warming up" to the deal... This deal was practically designed by Wall Street. It's the Apple longs who have more of an issue with it. I see it more as appeasement.
I could maybe get behind this deal if Apple decided to use the Beats brand to create cheaper, downmarket products. Everyone is screaming about how Apple needs a cheaper smartphone. Well maybe create something with 5C type styling under the Beats brand. Market it along side new and improved Beats headphones and maybe offer a free trial of Beats music. Use Beats as a cheaper sub-brand of Apple.
post #15 of 97
Quote:
Originally Posted by SolipsismX View Post


That only works while you're in the beta. Outside of that it's $100 per year to find new music new buy. For me that's not worth it as music rental isn't how I like to listen to music. Even if they though in $100 worth of new songs per year you can grab from iTunes as a Beats Music credit that probably wouldn't appeal to me as I think I'm at a point where I don't want several dozens new songs per year to own.

Wrong. I'd consider subscribing if only on a month-to-month basis in order to get this "enhanced access." Not everyone shares your skepticism.

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post #16 of 97

I think this will be a good long term acquisition because I don't just see this as an acquisition of a music streaming service, a couple of faces with credibility and contacts in the industry, or a ploy to build an image among the black community, but rather I think that the production potential is enormous.  Apple has already launched A-list performers' albums exclusively on iTunes and iTunes has given a tremendous amount of smaller, independent performers a venue to market their music.  Why not take it to the next logical level; groom and produce this new talent and sign them to an iTunes or Beats label?  This would allow Apple to cut out the middle man (the record company) and offer more royalties to the performer and at the same time pocket their 30% plus a bit more.

post #17 of 97
Quote:
Originally Posted by gremlin View Post

I really can't see why this is such a bad deal. When FB buys whatsapp for $19B or google buys Nest for around the $3B mark, no one seems to comment. The negative Apple press is curious.

From what I've seen of the Beats subscription service I can see apple turning it into a great thing to complement iTunes song purchase model. Steve was right when iTunes first started saying people want to own their music, but now i think more and more ppl are happy to pay a small monthly fee to have access to a vast collection. Next for Apple should be a huge investment in Netflix! 1smile.gif

 

Eh, the downfall of radio was the "Top 40" crap that was constantly played.

The downfall of subscription based music libraries were all the limitations. Plus, having to browse through huge libraries to find a song or artist you want to listen to is just freaken tiresome and overwhelming.

 

The reason iTunes took off is because it allowed people to purchase what they liked with very little hassle.

The reason Pandora took off is because it allowed people to customize "radio" to their tastes.

 

It wasn't until iTunes Radio, that I got the best of the latter two... By creating a Black Keys station, it would play songs by Arctic Monkeys and Cold War Kids... I ended buying albums from both bands - and I haven't bought music in a long time.

 

iTunes Radio isn't perfect, far from it (really, Katie Perry as part of my station!?) and this is where Beats could help make the experience much better. I just hope Apple keeps iTunes Radio free w/ads (and without ads for iTunes Match subscribers).

Disclaimer: The things I say are merely my own personal opinion and may or may not be based on facts. At certain points in any discussion, sarcasm may ensue.
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post #18 of 97
There's another aspect to the Beats purchase and the increased focus on the youth demographic at Apple (the hire of Ahrendts, former CEO of youth clothing brand, is another dimension of this). It all feels like chasing marketshare, while the largest segment of the population, the aging Boomers, are less of a focus. Will they only be served with the imagined Apple health and fitness band, iPad and iPhone? Surely they will be completely uninterested in Beats headphones.

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post #19 of 97
Quote:
Originally Posted by DanielSW View Post

Wrong. I'd consider subscribing if only on a month-to-month basis in order to get this "enhanced access." Not everyone shares your skepticism.

If I'm wrong then explain how I can use Beats to listen to entire songs without paying for or being on a trial subscription.

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post #20 of 97

This is actually surprisingly good analysis by the analysts. I too have come to the conclusion that this acquisition is basically a "worst case, not much to lose; best case, a lot to gain" type of deal. Between them, these analysts have articulated the logic well.

 

The naysayers here can stuff it. Or stew in it. But the nays are really getting old. Enough already.

post #21 of 97
Quote:
Originally Posted by SpamSandwich View Post

Oh, please. "Wall Street is warming up" to the deal... This deal was practically designed by Wall Street. It's the Apple longs who have more of an issue with it. I see it more as appeasement.

That's a weird assertion. What evidence do you have for it?!

post #22 of 97
Quote:
Originally Posted by anantksundaram View Post

This is actually surprisingly good analysis by the analysts. I too have come to the conclusion that this acquisition is basically a "worst case, not much to lose; best case, a lot to gain" type of deal. Between them, these analysts have articulated the logic well.

The naysayers here can stuff it. Or stew in it. But the nays are really getting old. Enough already.

Have you considered a "best case, not much to gain" scenario?

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post #23 of 97
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Originally Posted by kfeltenberger View Post
....or a ploy to build an image among the black community...

What "image" does Apple currently have among the "black community"? What exactly does Apple need to "build"?

 

It's not clear what you're getting at. Are you some type of sociologist of the "black community"?

post #24 of 97
Like it or not, Apple's already done it so bitching up a storm here isn't going to fix anything. Time to move on!
post #25 of 97
Quote:
Originally Posted by SpamSandwich View Post

Have you considered a "best case, not much to gain" scenario?

No, I just wrote it for fun.

/s

post #26 of 97
Quote:
Originally Posted by pazuzu View Post

It will remain to be see if Cook can to do Beats subscriptions services what Jobs did when Apple purchased SoundJam and turned it into iTunes.
The bar is high.
Anyone know what Apple paid for SoundJam? Talk about a return on investment.

 

I've never seen a price for SoundJam but Jobs had a two year secrecy deal with Robin Casady and Michael Greene. Maybe Cook should have done the same thing with the Good Dr.

 

Fantastic ROI.

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post #27 of 97
Quote:
Originally Posted by DanielSW View Post
 

Totally disagree.

 

iTunes will continue to be an important part of the ecosystem, and Beats will only bolster its role. Beats will simply help more people access Apple's entire music library, if only on a subscription basis, but will also "market" that same music to those inclined to buy, all while increasing royalties to artists.

 

The ecosystem is possibly the biggest reason people buy Apple products and buy into its culture.

But Beats was already in the ecosystem before the acquisition (through their app).

 

I guess it depends what your ultimate corporate goals are. Do you want to spread certain products, with a certain design, or do you just want to get bigger and bigger even if it's selling other people's stuff. I believe Elon Musk has said he will sell Tesla once electric cars reach a certain critical mass, which is an example of the first kind of philosophy, as against the beats acquisition which is just about maintaining a position in a certain market regardless of whether it actually makes your own products better. 

post #28 of 97
Quote:
Originally Posted by anantksundaram View Post

That's a weird assertion. What evidence do you have for it?!

It's a Wall Street focused deal, whether you agree or not. Stylistically and philosophically it's a mismatch. Does Beats represent best-of-breed product? Nope. Is it trendy? Yep. Does Beats embody the intersection of technology and liberal arts? Hell no. It's style over substance and "the kids" could decide tomorrow that they no longer like Beats because they lost their "edge."

I actually noticed kids wearing over the ear Beats headphones when they first appeared because I thought they looked so stupid and unsafe. Wearing a completely enclosed set of cans in public is a signal (IMO) that one has no interest in interacting with the world. They looked extraordinarily rude to me then and I still don't like them.

Also, I have a theory that kind of headphones will cause hair loss due to the rubbing on top of the head. 😳
Edited by SpamSandwich - 5/29/14 at 7:40am

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post #29 of 97
Quote:
Originally Posted by DanielSW View Post

Why all this incessant stupid quibbling over what has already happened, and what others think? Apple paid $3B for something. That means it meant quite a bit to more than a few at the company. So move on, people!

I just signed up for my free trial of Beats Music, which I wouldn't have done if not for this acquisition. I figured this is what Apple is interested in. I wanted to see what there was to it.

So far, I like it. It's kinda like the "gap" the iPad filled in Apple's hardware lineup, but this is a "gap" now filled in Apple's music lineup. It's not going to replace music purchases. But it may just boost them. I'm finding that, with Beats, I can now listen to more than just 120-sec clips of a lot of music, and without having to buy. I can re-discover a lot of stuff I used to enjoy listening to in years past. And then I will most likely buy some of what I discover with Beats. I'm sure Apple will do what it can not to stiff the artists out of Beats royalties, either.

I'm sure that's the genius of this acquisition.

". . . all this incessant stupid quibbling . . ." —well said. Meanwhile, reasonable people will be calmly analyzing to see what Apple saw in this new chunk of ecosystem they acquired.

I like this analogy with the iPad as a platform which fills a gap. (The iPad was given the same kind of treatment by the chihuahua brigade when it appeared.)

Apple bought two new platforms here, both with a huge future: curated audio streaming, plus the first successful wearable audio for the world's urban environments.

The incessant quibblers can't stand the thought of sharing their world with people who have more street smarts than they do. That's what's got their fear hormones raging.
post #30 of 97
Quote:
Originally Posted by anantksundaram View Post
 

What "image" does Apple currently have among the "black community"? What exactly does Apple need to "build"?

 

It's not clear what you're getting at. Are you some type of sociologist of the "black community"?

 

No, I'm not a sociologist, but I do see the numbers where the young black community buys Android based phones between 70 and 80 percent of the time instead of an iPhone. 

post #31 of 97
Quote:
Originally Posted by SpamSandwich View Post

There's another aspect to the Beats purchase and the increased focus on the youth demographic at Apple (the hire of Ahrendts, former CEO of youth clothing brand, is another dimension of this). It all feels like chasing marketshare, while the largest segment of the population, the aging Boomers, are less of a focus. Will they only be served with the imagined Apple health and fitness band, iPad and iPhone? Surely they will be completely uninterested in Beats headphones.
Apple should use Beats to create a downmarket brand that is cheaper and that they can have fun with and target a different demographic. Don't taint the Apple brand trying to pander to young people. Use Beats to create a hip, colorful, fun sub-brand. A brand with more focus on music and style. Harken back to the iPod silhouette campaigns which were hugely successful. I think Apple absolutely could pull this off and it would be a way of not tainting the premium Apple brand which has a more affluent, slightly older demographic.
post #32 of 97
Quote:
Originally Posted by Flaneur View Post

". . . all this incessant stupid quibbling . . ." —well said. Meanwhile, reasonable people will be calmly analyzing to see what Apple saw in this new chunk of ecosystem they acquired.

I like this analogy with the iPad as a platform which fills a gap. (The iPad was given the same kind of treatment by the chihuahua brigade when it appeared.)

Apple bought two new platforms here, both with a huge future: curated audio streaming, plus the first successful wearable audio for the world's urban environments.

The incessant quibblers can't stand the thought of sharing their world with people who have more street smarts than they do. That's what's got their fear hormones raging.
i was one of the naysayers, and I'm still not sold on the deal. But if Apple used Beats as a sub-brand as a way to go down market and target a younger demographic then it might be worth it.
post #33 of 97
Quote:
Originally Posted by kfeltenberger View Post

 

No, I'm not a sociologist, but I do see the numbers where the young black community buys Android based phones between 70 and 80 percent of the time instead of an iPhone. 

Cite?

post #34 of 97
Quote:
Originally Posted by SpamSandwich View Post

There's another aspect to the Beats purchase and the increased focus on the youth demographic at Apple (the hire of Ahrendts, former CEO of youth clothing brand, is another dimension of this). It all feels like chasing marketshare, while the largest segment of the population, the aging Boomers, are less of a focus. Will they only be served with the imagined Apple health and fitness band, iPad and iPhone? Surely they will be completely uninterested in Beats headphones.

Maybe you're right.  As a proud AAPL owner myself, I'm pleased that Apple wants the business of old people and the business of young people.  Is that OK with you?

post #35 of 97
Quote:
Originally Posted by anantksundaram View Post
 

Cite?

 

It was in a recent (within the past couple days) article that looked at the deal from beyond just the bare nuts and bolts.  I don't have time to dig through them all to find it, but it's out there. 

 

I find it interesting you zero in on perhaps the least of the comments and ignore the rest.

post #36 of 97
Quote:
Originally Posted by delreyjones View Post
 

Maybe you're right.  As a proud AAPL owner myself, I'm pleased that Apple wants the business of old people and the business of young people.  Is that OK with you?

 

Apple doesn't have business from young people?

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post #37 of 97
Quote:
Originally Posted by SpamSandwich View Post

It's a Wall Street focused deal, whether you agree or understand that aspect. 

It's more likely that you (and the other tiresome naysayers here) refuse to understand because you don't agree.

 

The overwhelming reaction from analysts, financial media, financial commentators, and talking heads to the deal when it was first announced (as a rumor by the Financial Times) was negative. (For the record, I was quite negative about it too -- you're welcome to go back and check my posts.) Apple's stock price fell by much more than the market's did when this rumor came out.

 

Look at the reaction of both the analysts and the market today.

 

I think you guys are totally blinded by your hissy-fits.

post #38 of 97
Quote:
Originally Posted by pazuzu View Post

I can see some value in Iovine but what's the value of Dre? And no it's not because he's black.

 

 

They both feel the same way about music, and have the same reach. One in Rock, the other in Hip Hop and R&B. More importantly, Dre ran a record label where he made artist give it their best. He signed dozens of artists that worked on CDs, but if the CDs weren't great (remember this is subjective, not everyone likes hip-hop) he would never release them. Think of his label as, Aftermath, as Apple. He wasn't going to release a new CD(product) every month, he took his time, and sometimes the products got dropped, sometimes people complained about the amount of time he took to release a product, but he just said he wouldn't release it until it was perfect.

post #39 of 97
Quote:
Originally Posted by anantksundaram View Post
 

This is actually surprisingly good analysis by the analysts. I too have come to the conclusion that this acquisition is basically a "worst case, not much to lose; best case, a lot to gain" type of deal. Between them, these analysts have articulated the logic well.

 

The naysayers here can stuff it. Or stew in it. But the nays are really getting old. Enough already.

I agree with you.  It seems to me that you really have to be able to "think different" to appreciate this deal.  Apple did it first, some of these analysts came along 2nd, and eventually there might even be a consensus amongst the AI commenters.  OK OK, maybe it was the drugs talking about that last one, but two out of three aint bad!  8-) 

post #40 of 97
Quote:
Originally Posted by Rogifan View Post

I could maybe get behind this deal if Apple decided to use the Beats brand to create cheaper, downmarket products. Everyone is screaming about how Apple needs a cheaper smartphone. Well maybe create something with 5C type styling under the Beats brand. Market it along side new and improved Beats headphones and maybe offer a free trial of Beats music. Use Beats as a cheaper sub-brand of Apple.

Finally, reason has returned. You could have saved everybody a lot of time by thinking (instead of reacting) from the beginning. Congratulations.

"Cheaper sub-brand" still reeks of your class-based prissiness, though. And we don't "use" Beats. We are fortunate to have Apple management that knows a wave to surf when it sees one.
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