You'd have to be pretty insane to spend $3b to get into the content industry in 2014. First, it's an industry that's been plummeting for a decade, secondly, the entire recording industry is worth about that much, and thirdly, the entire concept of making money from copyrighted works of art is under threat.

This theory doesn't hold water, sorry.

The meat of this deal is the headphones business [1]. I'm opining on the transaction's optionality for Apple. A lot of attention has been given to the streaming service. I'm pointing out another joker Apple may have considered to hold, if not immediately play.

[1] https://news.ycombinator.com/item?id=7812793

The main evidence you give in support of that claim is that the service doesn't have a lot of customers. But that is true for literally just about every other Apple acquisition. Apple buys technology and talent in the early stages or in component form. Like Tim Cook said there's 70+ other examples of tech & talent acquisitions to look at, and this is just another one of them.

It makes sense financially for Apple, sure, but only in the sense that it doesn't lose them money to purchase the attached headphones business. That business would not even register as a blip in their future growth to be the main goal of the deal.

His other quote was how he was looking forward to Iovine & Dre working on revolutionizing the music industry. That's not about headphones.

How did you arrive at the 15% margin figure?

($3 billion purchase price [1] / 14.9x AAPL P/E ratio [2]) / $1.3 billion 2013 Beats headphone sales [3].

We are asking how much in earnings (E) would Beats need to earn to give a $3 billion price (P) no more than a 14.9x P/E ratio. We then turn those minimum earnings E and turn them into a quick-and-dirty margin by dividing E by sales.

[1] http://www.nytimes.com/2014/05/29/technology/apple-confirms-...

[2] https://www.google.com/finance?q=aapl&ei=_0qGU5C_BabzsgeenYH...

[3] http://nypost.com/2014/05/27/apple-cuts-purchase-price-of-be...

Apple made 170 Billion dollars last year. They are insane not to try to spend chump change on the music industry. The own the delivery of sound from that industry INTO a vast % of the consumers of it.

Apple is going to own the entire experience of media consumption for some % of their customer base.

They will be the label, the distribution, the hardware and the content. A 100% apple audio feed, all wrapped up in a tight little box tied directly to your bank account. Every click costs you something.

Apple has never been one to nickle and dime their customers. While I have little doubt the model will have some component of "you pay for what you use", you can be sure it will be done in such a way that 1) much of the cost is buried in the cost of the hardware and 2) if doesn't feel like every click is costing you something.

In general, perhaps not, but for a specific example, iCloud storage.

At a minimum, there should be enough storage for a full backup of each device.

NZ$125/year for 50GB is, to put it mildly, somewhat subpar.

It's plummeting because it's run by in outdated ways by companies that haven't adapted to new technology. A forward-thinking company that embraces technology would have some advantages.

A company like Pandora or Spotify? Two debt-financed companies that still can't turn a profit from music.

Neither of which also sell music in their own online stores, so it's hard to make a fair comparison.

Also, Apple's iRadio is probably not taking off as well as they'd like and Beats Music already has a better feature set.

Pandora and spotify are structurally unprofitable because of their licensing problems/payments. Apple is %500Bn company-- big enough to become a label--has the marketing expertise (iTunes) and Capital ($X0Bns cash) to be a next-generation 'label'. Or maybe I'm missing something?

If Apple (or Google) had wanted to buy out the record labels and their catalogs, they could have done so years ago. They obviously didn't, probably because it's a dying industry that isn't nearly as profitable as their current products.

The very idea of a 'record label' is a relic of the 20th Century, when all recorded music was distributed on heavy physical artifacts.

Not sure I follow. Who said anything about buying out the record labels? Apple can just <become> a label-replacement. There is still a need for a distribution/production/promotion service layer in music biz.

Or Google Play store, for that matter.

I think the problems run much deeper.

Music is now competing for attention with apps, push notifications, emails, SMS, etc. Listening to recorded music was at one time something to do in and of itself. Today it's something that's done almost exclusively in the background.

Couldn't the same have been said before with the phone industry? The tablet industry?

Didn't they sign an agreement with Apple Records that they would not start a record label?

At one point they had such an agreement, but according to wikipedia, Apple Inc (the iPhone people) bought the trademark rights to "Apple" outright and relicensed them back to Apple Corps (the record people) as of 2007:

http://en.wikipedia.org/wiki/Apple_Corps_v._Apple_Computer

Which presumably means they are free to do basically whatever they want with regards to using the Apple name on music-related goods and services.

When that all settled, Apple Records gave Apple Computers all rights to the 'Apple' name and Apple Computers will license the name back to Apple Records for their continued use. I'm sure this involved a fairly substantial sum of money, but Apple could almost definitely start a competing record label.

I'm wondering if there is more here than meets the eye. The purchase price seems actually pretty reasonable at least by today's valuation standards. Do we know what the profitability is on the current sales?

Wikipedia on this seems to indicate that the popularity is being drive by product placement and branding deals as opposed to actual product quality (which, while high may not be enough ib its own to even justify the "reasonable" valuation. (Also Nike has been quite successful long term with this practice).

I'm surprised Pandora, Spotify, Rdio and the others have started their own labels.

Follow the Netflix model of owning and distributing the content.

In the long run this would cut down the power of the current labels and in turn increase profits at all these streaming services!