Has Apple missed a Beat with mega-bucks acquisition?

Apple is on the verge of acquiring the headphone and online music business Beats Electronics for US$3.2 billion.

But with the industry somewhat divided on the mega-bucks deal, Martin Scott, Head of Analysys Mason's Consumer Services research practice, offers his comments.

"Apple are not just buying a headphone business – it’s a streaming business too," Scott says.

"Apple’s investment makes sense. We’re talking about a strong higher-end headphone manufacturer – industry estimates tend to put their 2013 sales at US$1.5 billion.

"Beyond that, however, Apple are also buying a strong brand and an interesting burgeoning online streaming music business.

"Beats Music is well integrated with AT&T handset plans, and its ‘curatorial’ approach to music recommendation (getting musicians and celebrities to recommend tracks and playlists, not just an engine) should have good synergies with the Apple brand.

"We’d expect Apple to take some of the best aspects of Beats Music, such as the curated recommendation system, and put them into its own music services."

According to Scott, Apple is likely to do a lot more with headsets, and wearables, possibly around health.

In February 2014, Apple was successfully awarded a patent for a health-monitoring earphone system," Scott adds. "These earbuds would monitor temperature, heart rate, perspiration and potentially act as a controller, as well as delivering audio.

"The broader wearables market is drawing the attention and investment of all major handset manufacturers at the moment and sport and health is a key application – we estimate that around 20 million US smartphone users currently use health and fitness apps."

Beats’ has history with smartphone manufacturer HTC with Scott claiming HTC realised the value of the premium audio experience in 2011, when it acquired a majority stake in the company.

Profitability issues since then pushed HTC to downgrade and then divest its investment in the company across 2012 and 2013.

"This was not a ‘mistake’ for HTC but a necessary financial move at the time – it needed to present a positive margin to the market in the final quarter of 2013," Scott adds.

"HTC continues to present itself as a brand for audiophiles through its built-in sound systems in the HTC One and MTC One M8."

Should Apple acquire Beats?