Today Apple announced their purchase of Beats Electronics for a spectacular $3 billion. It’s left many industry analysts scratching their heads. Although a little shy of the original, anticipated $3.2 billion price tag, it’s surprising how close it is to the amount that Google paid to acquire Nest earlier in the year. So what’s behind the new $3 billion price point?
There are some interesting similarities in the two acquired companies. Both were started for similar reasons – their founders were exasperated with the quality of products which were currently on the market. In the case of Nest, Tony Fadell wanted to design thermostats and other household products which were intuitive and worked, whereas at Beats, Dr Dre was exasperated that expensive music players and smartphones shipped with low quality earbuds which cost less than $1 and failed to reproduce the music. (The Register has a nice opinion piece on whether they succeeded.) Both companies have produced high profile, high end products to address these deficiencies along with very high media profiles for themselves and their founders in industries which have historically had little branding.
That may give us a clue about the price tag that each has commanded. As I argued in an earlier piece, both Apple and Google may have been more interested in acquiring visionary leaders at a point where the industry is sorely lacking in that commodity. Both seem to be making much of the fact that they will continue to run their new acquisitions as separate companies. But the game could be to corral expertise as the industry tries to work out what comes next in the evolution of consumer electronics.
It’s a gamble which has paid off for Apple before. In 1996 they paid $400 million for Next Software, a not dissimilar sum at the time, as a result of which they acquired, or rather reacquired Steve Jobs. If they can pull that same trick again, then $3 billion is good value. It may also inform them about their next major product category. Beats has around 64% of the US market for high end headsets (over $100 per pair) and as I’ve previously suggested, the ear is likely to supplant the wrist as the major market for wearable technology in the form of Hearables. The Beats acquisition may mean that Apple is thinking about ditching the much-delayed iWatch to concentrate on iBuds instead.
The more interesting question is who’s next, both in terms of acquisition and acquirer? There’s plenty of cash sloshing about within the industry titans, along with a desperation to find a way to clamber out of the pit of commoditisation onto the hockey stick of profitable consumer delight. It seems that the game is to look for talent in high profile, boutique technology companies, if only because it’s there to collect. Which is very good news for those founders, particularly if the industry maintains the current going price of $3 billion. Whether it remains a purely West Coast phenomenon remains to be seen? What would probably put the cat among the pigeons and start a real bubble would be if Samsung joined in the game.
There’s still plenty of 2014 left and my guess is that we may see another two or three of these headline acquisitions this year as major technology companies acquire their trophy gurus. If you’ve any suggestions of who they’ll be, please share them. And if any cash-strapped corporate wants a cheaper option, I’m open to offers.
As a postscript, on January 15th 2015, Google confirmed that Glass would be graduating from Google Labs to the real world, focusing on professional applications. That new division will be overseen by Tony Fadell. Rumours from within the industry suggest that the next version of Glass aimed at these users is well underway. So the investment is starting to show fruit.