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Apple's massive $3B bet on Beats a sure thing compared to all-in gamble on NeXT in 1996

post #1 of 109
Thread Starter 
Apple's recently-confirmed $3 billion purchase of headphone maker and streaming music provider Beats may be the largest cash outlay in its history, but it's far from the Cupertino company's biggest bet on an acquisition.

Steve Jobs and Gil Amelio in 1996
Steve Jobs and Gil Amelio in 1996


When then-Apple CEO Gil Amelio announced in December 1996 that his company would buy Steve Jobs's NeXT for more than $400 million, the world was a much different place. Toni Braxton's "Un-Break My Heart" topped the Hot 100, Hong Kong was still a British colony, and Apple was in dire straits thanks in no small part to Windows 95's blockbuster debut.

The $25 million profit that Apple posted in the quarter preceding the NeXT acquisition surprised many analysts, who widely expected yet another loss from a company that had shed nearly $2 billion in market cap that year. The cornerstone Mac was still reeling, and Amelio saw its salvation in NeXT and Jobs, the Mac's godfather.

So Amelio and Jobs agreed on a deal: Apple would pay NeXT $429 million ($648 million adjusted for inflation) in cash and grant Jobs 1.5 million shares of stock, worth about $9 million ($13.5 million) at the time. With a market cap of just $2.9 billion ($4.3 billion) when the acquisition was announced, Apple was betting more than 15 percent of the company on Jobs and his new object-oriented operating system.

A failure would likely have meant the death of Apple, and Jobs was no sure thing at the time. NeXT had burned through hundreds of millions of dollars with little to show for it, and his other company -- Pixar -- had failed in its own bid to sell hardware before stumbling into the feature animation business.

May 28, 2014


Luckily, Jobs proved equal to the task and Apple is now one of the richest companies on earth. Underpinned by NeXT's technology, the iPhone and iPad are the standard-bearers of the post-PC movement while the Mac is more popular than ever.

Just as Amelio bet on NeXT to save the Mac, current Apple chief Tim Cook seems to be looking to Beats to rescue iTunes. Music sales are quickly being replaced by streaming subscriptions, and Apple's efforts -- even with iTunes Radio's 40 million users -- have been lackluster.

The Beats deal includes $2.6 billion in cash and $400 million in stock, a similar arrangement to the one Jobs and Amelio reached nearly 17 years ago. The $3 billion figure is comparatively staggering, but in reality it represents just 0.5 percent of Apple's now-massive $538.9 billion market cap.




If an Apple employee bringing home $75,000 per year made purchases of the same magnitude, the NeXT acquisition would be like buying a car while the Beats agreement would net a nice lunch.

For that relative pittance, Apple will gain a fast-growing streaming service -- Beats Music is thought to have doubled in size over the last two months -- and add music industry heavyweights Jimmy Iovine and Dr. Dre to its leadership ranks. It also comes with a profitable, $1 billion-per-year accessories business on the side.

Only time will tell whether Iovine and Dre will be good for Apple, but there's certainly no cause for hand-wringing over the price. Apple can afford to eat out.
post #2 of 109
Sure, it's all just a matter of percentages... LOL.

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post #3 of 109
Very true that this is really not that big of a gamble. The headphone division alone should pay off the deal in a few short years. The staff from Beats that will now work with Apple and their streaming platform that allows Apple to get a foot in the door there as all are really just icing on the cake. I was against the deal when I first heard about it but now I see it as a smart move. I still think companies like Netflix, Broadcom, or Nintendo could also make great acquisitions for Apple as well but at least we now know Apple is not afraid to pay billions for a company if they really want it.
post #4 of 109

Apple is up 2% or over $12B

 

They could buy Beats 4x with the increase in share price.

 

Wow.

 

Apple would take 12 months plus to catch up to where Beats is in streaming music/insider connections.  They don't have that kind of time.  Time is money and Apple needed a head start.

post #5 of 109

The price or the amount has never been my main concern, and it shouldn't be Apple's main priority either, if I am to believe what Apple has said in the past.

post #6 of 109
Quote:
It also comes with a profitable, $1 billion-per-year accessories business on the side.

 

It's never actually made clear in the news reports I've read whether that billion dollars is profit or sales.  

 

But, I have a hard time believing it in either case.  

post #7 of 109

My original negative take was based off of a headphone purchase a young friend of mine made several months back. He often consults me about any tech type questions and asks my opinion. He wanted some high quality headphones and was trying to decide between a few different Beats models. I did some research and gave him a few suggestions for models by Shure and Sennheiser instead were actually cheaper but seemed to get far better ratings from some pro review sites. He would have none of it. He would not consider those brands for even a second. It was Beats or nothing. So even though he knew review sites rated Beats poorly and thought they were overpriced, that is what he wanted and would not even consider superior sounding and cheaper alternatives. That says a lot. Imagine how sticky the consumers will be once Apple engineers get a chance to actually make Beats headphones sound far better. 

post #8 of 109
I think as fast as Beats has grown, it will grow a lot faster now that it has Apple's name on it as well. They definitely won't lose money from this deal, its just we are unsure of how much money they will make.
post #9 of 109
Quote:
Originally Posted by gwmac View Post
 

My original negative take was based off of a headphone purchase a young friend of mine made several months back. He often consults me about any tech type questions and asks my opinion. He wanted some high quality headphones and was trying to decide between a few different Beats models. I did some research and gave him a few suggestions for models by Shure and Sennheiser instead were actually cheaper but seemed to get far better ratings from some pro review sites. He would have none of it. He would not consider those brands for even a second. It was Beats or nothing. So even though he knew review sites rated Beats poorly and thought they were overpriced, that is what he wanted and would not even consider superior sounding and cheaper alternatives. That says a lot. Imagine how sticky the consumers will be once Apple engineers get a chance to actually make Beats headphones sound far better. 

 

That's the beauty of "peer pressure".

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post #10 of 109
Quote:
Originally Posted by gwmac View Post
 

...a headphone purchase a young friend of mine made... was trying to decide between a few different Beats models. I... gave him a few suggestions for models by Shure and Sennheiser instead were actually cheaper but seemed to get far better ratings from some pro review sites. He would have none of it.

 

When considering a smartphone a few years ago, I inquired about iPhone, but got recommendations that another brand (Palm Pre) was cheaper, had better reviews, and so forth.  Okay, I took the advice, and got shackled with a dead-end OS, hardware that was difficult to use, couldn't do simple navigation without paying a fee to the carrier, and ultimately withered and died.

 

I can't blame your young friend for choosing the models he sees in actual use, doing what he wants.

post #11 of 109

You can get Beats Executive for $199 at Costco

 

http://www.frugalhotspot.com/2013/12/beats-executive-by-dr-dre/

post #12 of 109
Quote:
Originally Posted by sog35 View Post
 

You can get Beats Executive for $199 at Costco

 

http://www.frugalhotspot.com/2013/12/beats-executive-by-dr-dre/

 

Hire that man!

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post #13 of 109
Quote:
Originally Posted by TeaEarleGreyHot View Post
 

It's never actually made clear in the news reports I've read whether that billion dollars is profit or sales.  

 

But, I have a hard time believing it in either case.  

I have heard it many times, in fact, numbers as high as $1.5B (http://www.crunchbase.com/organization/beats-by-dr-dre). And, it would be revenue.

post #14 of 109
Quote:
Originally Posted by TeaEarleGreyHot View Post
 

 

When considering a smartphone a few years ago, I inquired about iPhone, but got recommendations that another brand (Palm Pre) was cheaper, had better reviews, and so forth.  Okay, I took the advice, and got shackled with a dead-end OS, hardware that was difficult to use, couldn't do simple navigation without paying a fee to the carrier, and ultimately withered and died.

 

I can't blame your young friend for choosing the models he sees in actual use, doing what he wants.

But headphones are not like a smartphone because they will work with any phone you have. No OS upgrades, contracts, or anything like that. I still think the Shure and Sennheiser sound better because since that time I ended up buying a pair of Sennheiser myself and we both tested them out compared to his Beats phones and even he agreed mine sounded better. He regrets his decision now that he actually had a chance to compare them side by side but even now would probably not change his decision because he views the Beats logo as a status symbol among his peers. They have never heard of Shure or Sennheiser but they know Beats are expensive. It is not unlike gold necklaces or any other bling. 

post #15 of 109
Quote:
Originally Posted by anantksundaram View Post
 

I have heard it many times, in fact, numbers as high as $1.5B (http://www.crunchbase.com/organization/beats-by-dr-dre). And, it would be revenue.

I've seen numbers from $150-300 million in profits.

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post #16 of 109
How is this a sure thing and not an expensive Ping? Time will tell if this was the right thing or if it was a backwards looking defensive move. Of course the Wall Street types that are obsessed with Apple doing something, anything will like this.
post #17 of 109
This is the key to Apple and this acquisition. Apple are not just a technology company, if it was this acquisition would be hard to absorb. Instead it fits neatly into the picture.
post #18 of 109

These are all fancy acquisitions.  First Apple should fix cloud and work on it for better pricing models!  

post #19 of 109
Quote:
Originally Posted by gwmac View Post
 

But headphones are not like a smartphone because they will work with any phone you have. No OS upgrades, contracts, or anything like that. I still think the Shure and Sennheiser sound better because since that time I ended up buying a pair of Sennheiser myself and we both tested them out compared to his Beats phones and even he agreed mine sounded better. He regrets his decision now that he actually had a chance to compare them side by side but even now would probably not change his decision because he views the Beats logo as a status symbol among his peers. They have never heard of Shure or Sennheiser but they know Beats are expensive. It is not unlike gold necklaces or any other bling. 

 

Exactly, they're fashionable and good enough for the masses.  They're not what I would choose, but I tend to require more from my tech devices then your average user so performance trumps style everytime.  If I can save money in the process, then that's a bonus!

post #20 of 109
Quote:
Originally Posted by Chandra69 View Post
 

These are all fancy acquisitions.  First Apple should fix cloud and work on it for better pricing models!  

 

Honestly, I'd still like to see free iCloud storage equivalent to the individual device's storage.

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post #21 of 109
Well this is disappointing. Apparently the home automation rumors that the Financial times reported on are nothing more than a Made for iPhone program for connected devices in your home. Essentially all of those devices would still be controlled by their respective individual apps. I hope Apple isn't considering that some big announcement for Monday. I don't see anything exciting about that. It's about as exciting as the MFI game controllers. Zzzzzzz

http://gigaom.com/2014/05/29/heres-how-apples-smart-home-program-will-work-2/
post #22 of 109
Quote:
Originally Posted by Rogifan View Post

Well this is disappointing. Apparently the home automation rumors that the Financial times reported on are nothing more than a Made for iPhone program for connected devices in your home. Essentially all of those devices would still be controlled by their respective individual apps. I hope Apple isn't considering that some big announcement for Monday. I don't see anything exciting about that. It's about as exciting as the MFI game controllers. Zzzzzzz

http://gigaom.com/2014/05/29/heres-how-apples-smart-home-program-will-work-2/

 

I've no interest in "connected home" solutions. That's something that would be better controlled by Siri or some kind of artificial intelligence that learns from the home dweller's patterns.

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post #23 of 109
Quote:
Originally Posted by DroidFTW View Post
 

Exactly, they're fashionable and good enough for the masses.  

 

Good enough for the masses is not a benchmark that Apple should be aspiring to. I hold them to higher standards than that, or at least I used to.

post #24 of 109
$375 would have to be a really nice lunch
post #25 of 109
Quote:
Originally Posted by SpamSandwich View Post

I've no interest in "connected home" solutions. That's something that would be better controlled by Siri or some kind of artificial intelligence that learns from the home dweller's patterns.
It's disappointing to me. The FT rumor made it sound much more expansive than a MFI sticker on a product. Hopefully there is more to it than that.
post #26 of 109
Quote:
Originally Posted by Apple ][ View Post

Good enough for the masses is not a benchmark that Apple should be aspiring to. I hold them to higher standards than that, or at least I used to.
But hey they're profitable, so I guess that's all that matters these days. The fact that Apple is bringing the design in-house gives me some hope that they'll work to make the products better.
post #27 of 109

The real reason Apple bought Beats: they gave up trying to develop good earbuds and bought them for their expertise.

 

/s

 

But in all seriousness, I sense Apple will bundle Beats branded EarPods with the next-generation iPhone and iPods.

post #28 of 109
No idea how to judge the transaction - except I have to say that as much as I like most Apple products, for me, Apple Radio is useless. Never ceases to amaze me by playing songs unrelated the station I created. I mean, such bad matches I just have to quit it and play my own mix.
post #29 of 109

This is an ignorant pile of thought. With just over 300 regular full-time employees, world-wide, Apple gains a world class Operating System for the Consumer to the Federal Govt., decades worth of technologies that are the heart and soul of Apple today.

 

Sorry, but please don't speak of NeXT, unless you were an employee at NeXT. You paint yourself a fool to do so.

post #30 of 109

This acquisition has almost single-handedly sucked out all of my enthusiasm for Apple... and I say this as the owner of my 6th iPhone, 3rd iPad, and countless MacBooks/Powerbooks.   Facebook and Google are busy acquiring innovative tech companies like Oculus and Word Lens - and Apple is busy acquiring for image and style.  This is like Apple acquiring king-of-shitty-audio Bose.  If you think Beats sound good, you should have turned up your bass EQ and saved yourself the $200 brand fee.  This is a horrible mismatch in company culture and product design approach.  This is the business version of cranky old neighbor Tim Cook listening to "the rap music" in order to relate to the neighborhood kids. 


Edited by sucaj - 5/29/14 at 1:22pm
post #31 of 109
Quote:
Originally Posted by TeaEarleGreyHot View Post
 

 

It's never actually made clear in the news reports I've read whether that billion dollars is profit or sales.  

 

But, I have a hard time believing it in either case.  

Typical acquisition costs are 2.5x gross revenue so Beats does 1 billion in revenue. If it was 1 billion in profits, Apple would be paying much more to acquire.

post #32 of 109
15% of $75,000 = 7,500 3,750 = $11,250. OK, you can buy a fairly old used car for that.

0.5% of $75,000 = $375. That's some lunch! Perhaps you mean an iPod touch?

Your examples aren't great.
post #33 of 109
Quote:
Originally Posted by anantksundaram View Post

I have heard it many times, in fact, numbers as high as $1.5B (http://www.crunchbase.com/organization/beats-by-dr-dre). And, it would be revenue.
1.5 billion in revenue with their 75% + profit margin = 1.1 billion in profit.
post #34 of 109

I am thinking EVERY supplier of Beats hardware components will soon be receiving a notification signed "Tim Cook".

post #35 of 109
Quote:
Originally Posted by sucaj View Post
 

This acquisition has almost single-handedly sucked out all of my enthusiasm for Apple... and I say this as the owner of my 6th iPhone, 3rd iPad, and countless MacBooks/Powerbooks.   Facebook and Google are busy acquiring innovative tech companies like Oculus and Word Lens - and Apple is busy acquiring for image and style.  This would be like Apple acquiring Bose.  If you think Beats sound good, you should have turned up your bass EQ and saved yourself the $200 brand fee.  This is a horrible mismatch in company culture and product design approach.  This is the business version of cranky old neighbor Tim Cook listening to "the rap music" in order to relate to the neighborhood kids. 

I think you're looking at Beats headphones and not much else. According to Apple, they're looking at everything much more than the headphone business. If the headphone business weren't so profitable, Apple would fold it in a heartbeat. Apple doesn't want Beats headphone technology and engineering, they want the brand so that they can build off of that.

 

I guarantee a 180 degree turnaround in headphone performance quality perception by end of year. Real or not, it's already began. New Beats headphones were announced today and are getting good reviews.

post #36 of 109
Quote:
Originally Posted by Rogifan View Post


It's disappointing to me. The FT rumor made it sound much more expansive than a MFI sticker on a product. Hopefully there is more to it than that.

 Please stop being so short sighted about Apple. Check out these links about Apple's possible plans for the connected home...

 

http://www.patentlyapple.com/patently-apple/2014/05/apple-shines-more-light-on-their-home-controller.html#more

http://www.patentlyapple.com/patently-apple/2014/05/a-brief-overview-of-ibeacon-technology-that-could-also-be-used-in-future-home-automation.html#more

http://www.patentlyapple.com/patently-apple/2014/05/apple-may-surprise-the-market-with-a-new-smart-home-platform.html

post #37 of 109

Psychosis. Beats is to Apple what SoundJam MP was to Apple.

 

I make no comment as to the purchase itself here; simply that the comparison is in no way legitimate.

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post #38 of 109
Quote:
Originally Posted by genovelle View Post

1.5 billion in revenue with their 75% + profit margin = 1.1 billion in profit.

In no way is there net profit close to 75%. That would mean an operating margin for HW that's 25%. That's simply not reasonable.

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post #39 of 109
I was hoping we'd see more than an MFI program at this WWDC. Yeah I know Apple has a lot of cool patents. I remember seeing ones for smart covers that offered additional functionality 2 years ago. The question is when does some of this stuff finally come to market?
post #40 of 109
Quote:
Originally Posted by mdriftmeyer View Post
Sorry, but please don't speak of NeXT, unless you were an employee at NeXT. You paint yourself a fool to do so.

 

I've never worked at NeXT and I'm not connected to them in any way, but I would be offended too, if somebody compared NeXT, which provided the foundation that all Apple products are built upon today, to a company that merely makes headphones. What a joke.:lol:

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