The recent announcement that Apple is acquiring Beats Electronics for its streaming audio and electronics capabilities has caused consternation on Wall Street in terms of whether this is an indication that Apple’s renowned ability to innovate in-house is cooling and that the company is beginning to stall.
Most of the attention around the Beats acquisition has focused on its streaming capability and whether it offers as good a service as Spotify or Pandora. The potential that this joint team brings for developing future offerings in the broader entertainment landscape, including video, should not be ignored.
Other key benefits for Apple include Beats’ wealth of aggregate knowledge of the entertainment, music and electronics industries, as well as its connection with the youth culture – something that many other companies seek to emulate. Beats is considered to be a relatively strong U.S. brand with a youth flavor and one that, when attached to Apple and its global market presence and subscriber base, could infuse a stronger linkage with their younger purchasers, further extending their cool image and status.
At the heart of this transaction, however, is the issue of “the innovation divide”, where larger process driven companies are not always as flexible and in tune with the rapidly changing technologies and consumer demands that startups seem to easily tap into. This is why we have seen Facebook acquiring WhatsApp and Oculus. as well as Google acquiring Nest.
The real challenge faced when executing such acquisitions is being able to blend the cultures and mindsets of the new company with the dominant corporate culture that prevails. This may seem easy but the reality is that the founders and creative thought leaders who drive the acquired company usually leave fairly quickly. What can Apple do to prevent this happening and also create a mechanism and process for future acquisition and expansion going forward? The key may be keeping them as independent operations and brands supported by the power of the Apple global logistics, branding and design machine.
Are there other reasons that Apple should be considering this broader transformation? At the recent DLD NYC Conference, Scott Galloway identified that technology is a terrible business to be in because: “If you don’t reinvent it every year, your stock gets hammered”. He stated that “you want to be in a business that leads with your heart not your head, as it results in irrational wants and needs which in turn lead to larger margins”; he believes that the investment community has recognized this, giving Cartier as an example of having a larger market cap than Deutsche Telecom. Galloway identified that “the best neighborhood in the world is luxury” and although, in his opinion, Apple is the best house brand in the world, it’s in a bad neighborhood which can be a “terrible stock strategy”. He believes that Apple needs to transition its business into the luxury neighborhood in order to become a great iconic luxury brand and, in so doing, become the first trillion dollar market cap company. There seems to be strong evidence that Apple has already initiated this transformation with the appointments of Angela Ahrendts, former CEO of Burberry, and Paul DeNeve, former CEO of Yves Saint Laurent, into key positions within its organization.
The possibility is that the acquisition of Beats could be Apple’s fledgling step to creating not just a single luxury brand but a house of brands, similar to LVMH, with multiple appeal points for a broader global audience, rather than limiting their offering to a single brand or a single technology. The creation of a new techno-luxury house of brands supports Apple’s quest to become the first trillion dollar market cap company, and the company’s transformative strategy indicates a return to its historic reputation for unpredictability!
Steve Bell, President, KeySo Global LLC