Beats Doesn't Make Sense For Apple

Tickers in this article: AAPL GOOG NFLX P

Updated from 11:42 a.m. to include analysis about cost in the seventh paragraph. 

NEW YORK (TheStreet) -- When the rumored deal about Apple buying Beats Electronics broke last night, the entire tech community was in shock. Nearly 12 hours later, seemingly everyone (and their brother) has an opinion, but there's no clear consensus and that's probably a bad thing.

Last night, the Financial Times broke the story that Apple was in deep negotiations to buy Beats Electronics for $3.2 billion to bring the headphone maker and streaming music service under Apple's roof in Cupertino, Calif. Reports suggested that the deal could be announced as soon as next week, but given the reported high price tag, perhaps CEO Timothy D. Cook may want to rethink this one for a bit longer.


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Noted Apple watchers, such as John Gruber and analyst Benedict Evans (two people whose opinions are held in extremely high regard in Apple circles), have had trouble making sense of the acquisition, further confusing the industry about this deal.

In my opinion, the deal is more about Beats' streaming music subscription service, and less about headphones. Beats' headphones are notoriously pricey (some cost as much as $300), so the idea of luxury headphones fits in with Apple's luxury cache for smartphones, tablets and computers. However, the subscription service, which has approximately 200,000 subscribers, doesn't exactly scream out "best-in-class," a mantra Cook, and his predecessor, Steven P. Jobs, had mentioned ad nauseam.

Beats Electronics' music streaming app, Beats Music, is currently ranked 18th in Apple's App Store under the music section.

Companies such as Spotify, Rdio and the like arguably have better products, but with plenty more subscribers for their streaming services. Given the fact that Apple is running low (ha! like Apple is ever really low) on domestic cash, perhaps buying Sweden-based Spotify would be a better move, though it would come at a much heftier price.

Even if Apple really wanted Beats (the two companies met last year when word broke Beats was thinking about its own streaming service), the cost of the deal, reported to be more than $3 billion, seems like a waste of shareholder money. Private equity firm Carlyle invested in Beats in Sept. 2013 at a valuation of around $1 billion. Since then Beats has launched the streaming subscription service, but with a reported 200,000 subscribers it doesn't seem like it's worth an extra $2 billion, even if Apple can afford it.

At the end of its fiscal second quarter, Apple had $18.4 billion in domestic cash, a sequential decline of $16 billion, due in large part to share buybacks and dividends. The company did just recently raise $12 billion in debt to help fund dividends and buybacks, giving it a domestic total of around $30 billion. But it still has approximately $132.2 billion (and growing) in offshore cash.

See this exchange I had with renowned venture capitalist Marc Andreessen of Andreessen Horowitz