Apple buying Beats; one idea everyone appears to be missing

Beats by Dre Logo

There’s been a lot of commentary on blogs and podcasts following the apparent strong rumour that Apple are paying over $3 Billion to buy the Beats by Dr Dre headphone business and associated music streaming service. Most of it very bemused as to why Apple would want to do this. Thinking about it, I have my own theory, though i’d be first to admit I may be way out.

In trying to deduce a theory, a few characteristics of the position Apple find themselves in today:

  • Worldwide, they have circa 70% of all handset makers profits.
  • In every market they enter, they displace the previous market leading high end Android competitors, and relentlessly ratchet up their market share (currently 20% in most established geographies)
  • They are parked in the premium, highest price volume segment everywhere they serve
  • In developing markets, a lot of their initial adoption comes from users buying previous model second hand or refurbished handsets.
  • The latest 5c model was parked a bit too close to the 5S, making it a decoy price in both contract and prepay markets. Colour did not lead an appeal to a younger demographic as was originally expected.
  • Carriers (with the exception of Japan) tend to sell a handset on a cost recovery basis, either upfront (for PAYG) or as part of a 2 year term (Contract)
  • Users change their handsets about once every two years
  • There is a burgeoning market for the collection, disposal and/or resale of old iPhones
  • Historically, the strongest competitor has been Samsung. However, upstarts like Xioami are taking share from Samsung in China, and showing signs of doing that elsewhere as they sell into more territories. Xioami’s target demographic is 20-30 year old, first time purchasers since leaving the parental nest; high quality product, thin margins, but supplemented by useful, high quality and paid online services
  • Smartphone growth has started to stall, where the growing segments are either at the bottom (feature phone replacement or first step onto the ladder) or in the midrange (circa $300)

So, if I was Apple, what would I do in order to preserve the current high end volumes and profit margins, but dip down into growth segments? I think my strategy would be:

  1. In the car markets of the USA, Toyota sell Lexus at the premium end of the market, and Scion to the young, first time buyer demographics. Mindful there is also Honda/Acura and Nissan/Infiniti with similar volume/premium brands. Beats becomes Apple’s brand for the Xioami (20-30 year old) demographic; past that, many will hop onto the Apple brand as they age (or become wealthier).
  2. Apple formalise the bundling of a replacement handset and associated online services into a perpetual $15-ish scale monthly subscription. New replacement requires return of old handset, which Apple can continue to use in emergent markets; by doing so, they garner more wallet share. Telco services become relatively unbundled commodities.

I think that would give them high growth, more people in their 100’s of millions entering the Apple ecosystem, and without affecting the current iPhone business dynamics at all.

So, what do you think? It’ll be interesting to see how this pans out in the coming months.

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