Published on May 11th, 2014 | by Alan Cross1
Another Possible Reason iTunes Wants Beats: To Beef Up Retail
Ever since the story of Apple (probably) buying Beats Music surfaced late last week, business, tech and music pundits have been trying to figure out why. What would possess Apple to spend $3.2 billion on acquiring Beats? Apple, of course, is not talking, so we have have to guess.
If you want my opinion, I think the wearables theory is a step in the right direction but it doesn’t go quite far enough. Could it be that Apple wants (needs?) Beats to boost the fortunes of Apple Stores?
Hear me out.
While it’s true that Apple Stores still boast the highest sales-per-square-foot of any retailer on the planet, growth has slowed. Even though the outlets may seem as crowded as ever, same-store sales have actually begun to decline, something that must surely concern Cupertino. With no new products to display, customers are staying away.
Meanwhile, there’s been turmoil at the top of Apple Store food chain. Ron Johnson, the man who set up the Apple retail network in the first place, bolted a few years ago for JC Penney (where his efforts were a failure, by the way). He was replaced by John Browett, who came over from a UK discount electronics chain called Dixons. He proved to be a poor fit and was removed from the post.
The new head is Angela Ahrendts, the woman who built Burberry from a raincoat company into a global high-fashion brand. She knows a thing or two about what sorts of things people will put on their bodies for reasons of function and style. Her job as Senior Vice President of Retail is to make sure that Apple Stores get back on the growth track.
But what of this problem of Apple not having any new products for customers to play with in its stores? Well, if you’ve been to any Apple Store, you’ll know that they already sell Beats merchandise: headphones, earbuds, Bluetooth speakers and so forth. And they sell a lot of it.
I think it’s safe to speculate that out of the $1.5 billion-ish in revenues generated by Beats last year, a significant portion came from sales in Apple Stores. By owning the company, Apple will get to keep all the money from those sales, giving a large statistical boost to Apple Store sales figures.
And that’s just from existing Beats merchandise. Who knows what else Beats might be directed to develop and manufacture? This is where we can introduce the wearables theories. If that comes to pass, we begin to see how $3.2 billion could turn out to be a very smart long-term play.
As my friend Pete summarizes things “Apple isn’t moving products through the pipeline fast enough. To keep the high $/square foot ratio Wall Street loves, buy Beats, keep the margins nice and high [maybe even crush out some costs the way Tim Cook is famous for] and buy some time until the wearables thing shakes out.”
Then again, I could be full of shit. After all, Apple moves in mysterious ways.
If you want more on the bigger picture aspect of this deal, check out Music Industry Blog.