Apple are reportedly going to buy Beats Music for $3.2 billion; a number that would have been big news a year ago but is modest news today. Beats is a very interesting entrepreneurial story in of itself and I encourage people who want to know more to read this Inc piece from a couple of months ago. But the story today concerns just why Apple might be making this purchase.
Put simply, the consensus is that there is no great technology at the heart of Beats and no tangible assets of note. It has a brand — albiet a good one — but that is all. Apple normally don’t make purchases like this. Although others do.
So if the obvious doesn’t make sense let’s just look towards the less obvious. And by this I mean the really less obvious.
What did it take for Beats to build a brand so quickly in what was previously a commodity end of the headphone and speaker segment? The answer is — and I am going to put this in ways a five year old can understand — they understood what the young people wanted. Specifically, what the young people wanted to wear. Because that’s the thing about Beats headphones. They are wearables. You see people wearing them.
Now what is generically the problem with wearables. Well if you look at big high tech plays in the past, the problem is that people don’t want to actually wear them. This is what happened to the Segway and is happening now with Google Glass. And no one will ever wear an Occulus Rift in public. The response to this has been to try and work out how to make these things innocuous. But the technology doesn’t really allow that just as it didn’t allow it with good headphones.
If that was the big issue, what should a company thinking of moving into the wearable space or perhaps providing a revolutionary product do? They need to acquire the capabilities to learn how to make things that people want to wear and don’t mind doing so in an obvious manner. Thus, you hire the head of big fashion brand and you acquire the company that has proven itself to make techy things that people want to wear — specifically, your customers shopping in your own store.
Analysts struggle to analyse capabilities. That is why they have trouble working out Apple at all. It is a capability based company. So when a company like that acquires another company like that, they are really struggling. But if you accept that appealing to people in public is a capability that can’t just simply be built, you start to build a more plausible picture here.
Of course, this should only add fuel to the fire that something interesting is coming from Apple soon.
Digitopoly 
This is clever & I think you are right on this point.
Apple has always sold a better interface by understanding what people actually are doing with the hardware.
really? beats makes headphones, headphones are wearables, wearables are hot but people don’t wanna wear them, people wanna wear beats.
THIS is an investment thesis?
Y not mention that this might be payoff to Carlyle.
I am not sure if that is a plausible explanation. I mean “cool to wear” is a capability that Apple has in plenty. Compared to most other brands, people have always strutted out with their Apple ipods and iphones with their characteristic white ear phones. I am not sure if Apple needs to acquire that capability from Beats. Might just be a defensive play ?
It sounds like you are a little biased towards apple. Everything they do makes sense.
I’m Not sure it’s fair to compare headphones with dorkier wearables like glass or oculus- I can’t think of an example of head/earphones that people don’t want to wear.
Will be interesting to see if they manage to translate their brand appeal to other wearables but I’m skeptical
Ok, here is a good counter-reply by the New Yorker.
“Most of the $3.2 billion price tag, then, comes from the headphones.
Beats doesn’t disclose its financials, but estimates put annual revenues at just over a billion dollars—about what Apple makes in two days. Beats’ products are big, bold, and closely identified with the celebrities who help design them—Justin Bieber, Lady Gaga, Sean (Diddy) Combs.
Apple products, on the other hand, are known for their minimalist design and understated elegance.
It’s hard to imagine Apple’s design chief, Jonathan Ive, knowing what to do with the Beats aesthetic. Ive could change Beats’ design to fit his tastes, but then what would be the point of buying the company?
Meanwhile, the idea of Beats’ current designer continuing in his job seems far-fetched. Beats headphones are designed by Ammunition Group, which is owned by Apple’s first industrial design chief—and Ive’s former boss—Robert Brunner, whom Ive has openly criticized inside Apple.’