Nobody knows why Apple would buy Beats, but plenty of people are guessing

I've spent a significant chunk of my morning reading all about the real reason Apple would want to buy Beats Electronics for $3.2 billion.

Some say it's because Apple is "afraid" for its music mindshare. Or it's because Apple wants to fight Spotify. Maybe it's because people are buying a pair of headphones that "replaced white earbuds as a status symbol." It's because Apple wants to maintain its cachet with the youth of today. It's about reaching out to Android users. It's because Beats investors are looking to make a quick buck. It's an April Fools' joke with the wrong date on it. It's a completely unfathomable mystery, like crop circles or Stonehenge.

 

 

The upshot is that nobody really knows what Apple is thinking, though that never keeps anyone from guessing. It's the largest acquisition in Apple's history, which lends it an air of significance, but that significance isn't immediately obvious. It's fun to imagine a future in which iPhones and Macs have big Beats logos emblazoned on them, but that's probably not going to happen (the reverse, an Apple logo slapped somewhere on Beats headphones, seems more likely).

 

Some of the confusion is because even the most convincing of those arguments is a little strange—Apple and Beats both dabble in related fields, but it's not as though there's a big headphone-shaped hole in Apple's lineup, and headphones aren't the kind of huge growth driver that investors want Apple to seek out. It's also worth noting that, at least according to the comparison-shopping pros at the Wirecutter, Beats headphones and their ilk "never win" audio quality shootouts with comparably priced headphones from other companies. Even if most buyers don't seem to care about that, it's an odd fit for the quality-obsessed Apple.

Beats has a Spotify-esque streaming subscription service, but "industry estimates" provided to Recode suggest it only has about 200,000 users—compare this to roughly ten million paid Spotify users and the 800 million Apple IDs that Apple bragged about in its last earnings call. But there is some sense to this speculation, at least. It lines up with previous rumors that Apple is looking to break iTunes Radio out into its own app, making it more visible than it currently is. Apple could feasibly add a subscription option on top of iTunes Radio's Pandora-style random streaming. But as others have said, Beats' streaming agreements with the various record labels won't transfer to Apple, and $3.2 billion seems like an awfully steep price to pay for an (admittedly nice-looking) app.

There's really no precedent for this sort of acquisition at Apple, which adds to the confusion. Generally, it buys smaller companies with interesting technology but little-to-no name recognition. Consider the 2008 purchase of PA Semi for $278 million as an archetypal example. That company's processor smarts ended up being instrumental to Apple's growth, but PA Semi wasn't a huge, established company with products already on the market. Apple presumably absorbed the technology and personnel it needed and got rid of the rest, and it's hard to see how that plays out with Beats.

We're content to wait and see what happens, though. It's a big acquisition in terms of dollars, but compared to Apple's roughly $160 billion pile of cash, it's a pittance—$3.2 billion is just two percent of what Apple has on hand, though the stash would be smaller if Apple paid the taxes it would incur by bringing the portion of that money that's overseas into the US. Maybe we're all reading too much into this. Maybe the equation is as simple as "Apple sells music, and people listen to music with headphones, and Beats is an instantly recognizable maker of headphones." Recode's sources say Beats does about $1 billion in sales a year, so even if Apple changes absolutely nothing about Beats, the deal would presumably make financial sense within just a few years (assuming Apple works to grow that income).

The only people who know for sure are the people at Apple, and they aren't talking. Maybe Apple will mention it in September, which the company likes to reserve for music-related events. In the meantime, all we can do is guess.