It wasn’t the music or the headphones.
http://legendsofthenewcool.com/thecool-apple-beats-electronics-power-circle/
Buying a music company is the first step in a process for Apple to figure out how to sell television and movies to people in any form. Yeah, that’s right: buy music to sell video.
Apple already has a great business selling copies of music digitally (apparently about 80% of digital music is sold through iTunes). But it has not figured out how to make a business selling premium video, otherwise known as television and movies. Apple has already learned that it cannot own the media itself, so it isn’t about to do what Netflix, Amazon, and even Microsoft have chosen to do, which is invest directly in original content (all for television content). But it hasn’t figured out how to resell it either, which means the iTunes video library is just as bad as Google’s and Amazon’s.
What if Apple buying Beats is the next logical step in the process of Apple delivering its much-rumored television product? Sure, Beats is a music company. But Apple needs to start somewhere.
What are the options for any company that wants to deliver an integrated service into the living rooms of America (for now; world later)? I started to think more broadly about this after reading this very interesting take from Janko Roettgers at GigaOm, on “Reinventing The Internet”. It’s pure speculation about how AMC might re-invent the economics of delivering content, because it’s a marginal company compared to HBO. Instead of living off of fees from cable companies, it has a shorter path to independence by making money directly from consumers.
Roettgers’s piece has nothing to do with Apple or Beats. Instead, it made me think of the Beats acquisition because it’s the same kind of thinking that lead T-mobile to shake up the mobile operator business in the U.S.: It was desperate to get customers so it got rid of contracts and starting flexible pricing that forced both AT&T and Verizon to respond with better pricing and terms. AMC could be a distruptor precisely because it’s desperate not to be marginal anymore!
It’s also the same kind of thinking that lead AT&T (then desperate) to make a bet on the iPhone (by giving up control of the design) and got a multi-year exclusive in return.
Apple is far from desperate, except in one domain: getting rights to distribute any kind of premium video. Even Steve Jobs wasn’t able to move the needle with the studios and networks before he died, and he was the guy who got the major music labels to work with Apple when it first started selling music in the iPod.
Indeed, Netflix is the one company that seems to have figured out how to build a truly substantial business from selling subscriptions to content it (mostly) doesn’t own. It has 33M subscribers in the U.S. alone. (Hulu is #2 at 5M, but has ownership issues.) Apple could try to buy Netflix, but CEO Reed Hasting’s isn’t likely to sell for anything less than an outrageous premium to its current $25B market value and $40B+ (only a third of Apple’s cash) might be a stretch even for Apple!
The question is: How can any other company build a business like that? What if, I said to myself after reading Roettgers’ piece, Apple was buying Beats as a prelude to assembling a set of businesses that can become an integrated system for distributing content. Maybe it did the same analysis Roettgers did and decided HBO (part of Time Warner, all valued at $60B), Discovery ($27B) or Netflix ($25B) would be too expensive; maybe Apple could buy AMC ($2B)? (Remember that I am NOT leaking anything except brain matter here!)
Netflix, Amazon and Microsoft are now producing content but are doing it primarily to win the affection and loyalty of their subscribers or other customers, rather than to compete with other content companies. If Apple bought any of the named companies above, including AMC, it would suddenly be a full force (and threat) in the content business. Buying Beats does not put it in the content business directly.