WASHINGTON, May 12, 2014 – Apple’s stock (AAPL), after soaring over 50 points as excitement over its impending stock split caught fire, took it on the ear Friday by announcing the kind of acquisition everyone supposedly wanted. The computer-telecom-entertainment giant was allegedly prepared to pay some $3.2 billion to acquire privately-held Beats Electronics LLC, a manufacturer of high-end, top-quality audio headphones backed by Dr. Dre and a fellow named Jimmy Iovine.
What was not to love? Apple gets an inexpensive entrée into another fashionable product category and the human capital behind a music technology they haven’t been particularly successful in.
What happens to the stock, though? AAPL shares promptly gurgled down the watery bowl Thomas Crapper invented as analysts—who have actually been rabidly anti-Apple since the company went public—went on another temper tantrum, claiming this wasn’t enough to “save” the wildly popular company from becoming another Microsoft or going bankrupt. As if.
Typical were comments like those of Piper Jaffray analyst Gene Munster (any relation to Herman?) who asserted, in full Victorian dudgeon, “We are struggling to see the rationale behind this move.” What utter drivel and nonsense. What Munster is really saying is, “I told you this hugely profitable company was run by a bunch of losers, and my baseless pronouncement proves it.”
It’s all part of the analyst lemming game, though, with the dominant narrative being that Tim Cook is no Steve Jobs. While that’s literally true, Cook is also no dope, and Steve did allegedly leave him with a detailed template for World Domination. (Although, perhaps, Cook should consult with Vladimir Putin before he launches his tech endgame.)
But once this kind of snarky analysis sport gets underway, it’s tough to stop it. In politics, the Democrats figured this out a long time ago, which is why everything is the Koch Brothers and the Republican War on Women. Say it loud enough and long enough and people somehow think it’s the truth whether it’s really provable or not.
In like kind, we now have the “Apple is a bunch of has-been losers meme to deal with.” These analysts want people to short the stock and are simply doing their damndest to keep this canard aloft again, the better to keep their books in the black on the backs of mom and pop who know better but are easily scared into selling and proving the analysts’ non-existent point.
What’s the truth about this acquisition, which as of this writing, is not yet a sure thing? Remember: Apple began to prosper once again when the company bought Steve Jobs back via the NeXT acquisition in the late 1990s.
The company wasn’t really interested in the NeXT computers themselves, but in the possibility of re-deploying its well-respected, high-end, Unix-based operating system (OS). As a consolation to Jobs, they figured they’d keep him around in some kind of marginal position. But surprises can and do happen, and in this case, they certainly did as everyone now knows.
The potential Beats acquisition is not in that league, of course, but it could be a pointer as to where Apple is headed next in the product category, given that computers and now smartphones are being rapidly commoditized.
In short, Apple is probably less interested in Beats’ swell Dr. Dre-endorsed headphones than it is in firming up its relationship with that company’s co-founder, deeply-embedded music industry exec Jimmy Iovine.
Apple’s iTunes “own-yer-own songs” model is starting to falter as subscription services like Pandora become more popular. Iovine—who almost certainly will end up on Apple’s board if the deal goes through—may help the company get more deeply involved in music’s next lucrative wave, which will possibly stretch in some way into the realm of video entertainment delivery as well. It’s known as world dominance. Which is what profitability is all about in the end.
Iovine was a good buddy of Jobs and is more than likely well known and respected by Apple’s current board and execs. Apple is a company that has proved twice—in the early 1980s and again in the early 2000s—that carefully hiring the right people is the smartest thing any company, particularly a tech company, can do. Get them in place, give them some incentives, and the magic can really happen.
And since Apple is a unique company—one that has, in fact, profited precisely on its ability to make magic—bringing in a subscription entertainment wiz like Iovine will likely be more than meets a jaded, conformist analyst’s eye.
One local side-note to this story: Washington D.C.-based Carlyle Group (CG), whose stock has been unfairly pounded lately, sank a cool $500 million into Beats just last October. If the sale goes through, they’ll pocket somewhere in the neighborhood of $1 billion in profits on their investment in less than a year.
But analysts are continuing to diss the stock, proving once again, we’d guess, that it’s better to be invited to the best, back-slapping parties than to actually be right for a change. We’re sure Carlyle’s management would agree.