Large Questions Loom on News of Apple's Acquisition of Beats

I wrote a piece yesterday after news broke that Apple is near closing on a deal that would make them owners of Beats for a bit of spare change, $3.2 billion. I highlighted a few reasons why this doesn't seem to add up, and those are still valid.

Reports seem to be hinting more and more strongly that this is legit, but it still isn't quite settling right for me. In one camp, you've got those that believe the headphones are the primary driver for the deal (Ben Thompson for one). In another (perhaps larger) camp, you've got those that think it is for the music streaming service.

Both of these are valid thoughts, but both have major hurdles. It would make sense that the purchase is likely to be for both products, if it is real at all, otherwise they'd spin off (or not sell) the other half I would think. Tough to say for sure.

Headphones

If the deal is primarily for the headphones, the biggest problem I see is the brand. The Beats brand is valuable as a brand. People know it, people love it, and people are willing to spend a lot of money on it despite the obviously inferior sound quality. They sound "good enough" (audiophiles disagree) and look good enough that people want them. They've become an icon. You don't have that without the Beats brand, and when was the last time Apple sold their own product with any hint of any other brand on it? There is just no way you will see something like this happening...

How valuable would Beats be without the brand? If they wanted headphone technology, why not purchase Sennheiser or someone like them?

Music Streaming

So what if this deal is for the music streaming? iTunes Radio isn't exactly sweeping the industry by storm like iTunes did, so that might make sense, right? Well, maybe. The biggest concern is that the content rights that Beats managed to get that Apple hasn't managed to obtain for themselves aren't transferable (most likely) in the event of an acquisition. Add to that the fact that Beats Music only has around 200,000 subscribers, and you've got a much harder time justifying a $3.2 billion deal.

Video Leak

This morning, a video was posted on Facebook by Dre himself that "confirmed the deal" was happening. That makes this all seem more like a joke than anything as Apple doesn't usually stand for that kind of thing. If the deal was happening, I'd think such a slip up could certainly jeopardize it.

Closing Thoughts

I stand by my prior conclusion, despite the fact that online news sources seem to be more convinced by the minute that this is imminent. If this deal is real, there's a major piece we're all missing. Otherwise, I just don't see the value in it for Apple.

Why Apple, Despite Low Profit Opportunity, Might Announce Mobile Payments at WWDC 2014

The first, and by far the strongest, reason that Apple might not be in a rush to deploy a mobile payment/wallet solution is that the margins are extremely low. They're even lower if you're paying with a credit card since those companies already take a cut.

Google Wallet hasn't exactly taken off. Square is growing in larger cities, but it is far from ubiquitous. So why would Apple bother? If there isn't much money to be made and previous attempts are less than successful, what's to be gained?

Apple's strategies rely heavily on their ecosystem and stickiness to that ecosystem. Getting users into the walled garden, then keeping them there, is the Apple way. The other fundamental technique that Apple uses is to quietly and slowly introduce infrastructure or software or something subtle that no one pays much attention to, then a few years later - BOOM - it is the foundation of something big.

It worked with iTunes for the iPod, iPhone, App Store, and eventually the iPad. Once those credit cards were on file sales in the ecosystem kept growing, which grew the ecosystem, which sold more devices. Those successes have driven other parts of the business too as Mac sales continue to grow.

I think they began the next phase years ago. People noticed when they added Bluetooth LE (low energy) to the iPhone 4S in 2011, but it didn't make too many waves. Only the geeks noticed when iBeacon (BTLE) support was announced in iOS 7; sure the MLB is adopting it, but it isn't a household name. People noticed when they added TouchID to the iPhone 5s in 2013, and that one made waves but some argued it wasn't exactly profound.

What happens when you combine all of these though? You've got hundreds of millions of phones that already support BTLE. You've got an ultra-cheap infrastructure piece (iBeacon transceivers) that can very easily be deployed, or has been already. You've got 800 million credit cards already on file, and you've got lights-out security to authorize payments with TouchID. Suddenly a lot of the major problems have been solved.

Adoption is much less of an issue because the products that people already own will support it, they're already being used 24/7, and their credit card information is already plugged in. There is a level of trust with Apple that is higher than many other technology companies because Apple doesn't profit off of user data, in fact they profit off of NOT profiting off of user data. The same can't be said for all of the other players in this product segment.

The biggest speed bump here is that while phones as old as the 4S support BTLE, only the 5S (and presumably upcoming 6/6c) has TouchID. It isn't clear if they'd only roll out mobile payments to this latest set of hardware, or if they'd just require password authentication for older devices. However, I think their user-base (either way) is large enough that 2014 could be the year.

There is, without a doubt in my mind, no one better positioned than Apple to release a mobile payment solution that will finally break through.

Oh, and I'd say this meet's Tim Cook's "new product segments" promise, wouldn't you?

How Successful Will A New Apple Product Need to be to Considered Successful?

The iPod, iPhone, and iPad are unequivocally considered to be profound and world-changing technological breakthroughs that forever changed the world we live in. They sell by the millions and account for staggering quarterly revenues.

The funny thing is, none of them really sold well on the first generation. The first iPod is barely a blip on the sales radar coming in well under a quarter million units.

Image credit: Wikipedia

Okay, so what about the iPhone? Nope - 270,000 units in their first quarter. Sales did pick up a bit for a total first year sales of a little over 5M, but they sell that on opening weekend now.

Image credit: Wikipedia

Fine, but surely the iPad was a grand slam, right? Comparatively, yes (at 3.27M units the first quarter). But by today's standards? Not so much.

Image credit: Wikipedia

So what exactly are "today's standards"? Every time there is a new sales record, that seems to become the new standard. If a company returns to their previous normal revenue, normal sales, or normal product volumes it is usually viewed as the end of days for that company. Growth is important, don't get me wrong, but Apple's repeatedly mind-boggling quarterly revenues are dismissed because some of the growth numbers are flat.

I've written about the flat iPad growth and so has Ben Thompson, so I won't rehash it, but suffice it to say they're selling a lot of iPads. The speculation for their next product is, well, creative to put it nicely. Many things are products that could certainly be interesting, but often many don't address a real problem like these iDevices did. This tweet from Benedict Evans hits the nail on the head.

Before the iPhone and iPod we knew the problem but not the solution. With smart watches we don't know the problem

— Benedict Evans (@BenedictEvans) April 19, 2014

Apple's next product could be a health wearable where the total addressable market is technically every human, but realistically far, far smaller. It could be a watch. It could be television. Each of these has inherent problems, but did many of their past breakthrough products, all of which were overcome.

Suppose Apple does the Apple thing and overcomes the battery life or content delivery or whatever hurdles stand in their way. Suppose they introduce the next leg of their product stool at WWDC in a few weeks. What happens then? Is there any sales number that would draw a positive result from the masses? They sell 50M iPhones per quarter, so do they have to beat that? It sounds insane, but after seeing the 50M number, 1M doesn't sound so good to those that are so hungry for something, for anything new, that they live with blinders on and won't stop writing about how innovation is dead at big companies like Apple.

If it isn't the sales number that gets people, perhaps it'll be the revenue. As Ben Bajarin has pointed out several times, for any product to even show up on their revenue pie chart it would have to make many billions of dollars. That's a stretch, even for Apple.

I certainly hope a new product is met with new (and realistic) sales volume expectations, but I'm not holding my breath. News agencies are pushing this sense of urgency that a monumental breakthrough is absolutely required for Apple as we know it to stay relevant. Once the stimulus bar has been raised, it (apparently) can never go back down.

What is the magic number of unit sales or revenue they've got to hit? Will it even matter, or will the next round of pessimists start immediately beating their tired drum? Only time will tell.

Reports of Apple Testing New Screen Sizes... Yawn →

If we reported on every screen size, material, product, and mold shape that Apple has tried, it would be like drinking from a fire hose. I'm not saying new screen sizes won't appear in new devices eventually, but let's be realistic.

• iPad "Pro" - Nope*.
• Larger iPhone - likely in the next 2 years. I would expect an announcement related to vector-izing graphics in the OS to be part of this.
• Smart "Watch" - I don't see what Apple has to gain here. I think Gruber's idea of a new iPod with a watch strap is more likely, but even that isn't something I'd bet on. Once battery technology improves, I think this could change. Right now the batteries needed are far too large for a device worthy of the Apple brand.

*The time frame on the "nope" projection is 2-3 years. Not happening.

AT&T Announces Sponsored Data →

There is no doubt that privacy is getting more visibility than ever with the NSA leaks of late. A lot of people are opting for more secure services, apps, and hardware. This often comes at a price as these services are harder to engineer and maintain, they're not usually given away for free. The exception is Kim Dotcom's MEGA service with 50GB of free ultra secure cloud storage.

AT&T announced sponsored data plans today that allow providers to pay for the data that you use on your mobile device while using their services. Imagine streaming Netflix without it counting toward your 2GB data cap, seems neat right? Well the financial savings represent the most obvious upside, the privacy issue presents the largest down side. Your data and your usage are now bought and paid for by someone else, meaning they own it.

This isn't to say that sponsored data is bad in all regards, sponsored Netflix seems like the most obvious win since they already know what you're watching, you're not really revealing anything. Where do you draw the line though? Will AT&T give you fine control over this, or will it be fully opt-in or opt-out? From the looks of the press release, users will get this new sponsored data automatically, there is no mention of an opt-out policy.

I think there is room for both sides of this privacy issue to win - sponsored data and secure data. I think there are appropriate times to use both. However, I do not expect to be able to really balance the two any time soon, it'll be all or nothing for a while.