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Apple, Beats and the Schizophrenic Stock Market

When stories first appeared in the mainstream media that Apple was in deep negotiations to buy Beats, a company that builds fancy headphones and other accessories, and runs a music streaming service, for the princely sum of $3.2 billion, there was a media freakout of sorts. Apple’s stock price dropped as analysts wondered just what Apple was up to. Beats, you see, is perceived as a flashy company that sells overpriced and bass-heavy headphones, so what is Apple thinking?

In fairness, Apple’s stock precise increased Monday, perhaps as some rethought their initial negative reactions to the rumored pending deal.

Some suggest that Steve Jobs would never have considered such a move, but it’s also been reported that Jobs was tight with Beats co-founder Jimmy Iovine, a long-time music industry mogul. Evidently Iovine worked with Jobs when Apple released the iPod and built the iTunes Music Store, for example. While it’s clear there have been no official comments, Iovine reportedly also urged Jobs to establish a music subscription service. It’s something Jobs resisted, but now we have iTunes Radio, which has received a so-so reception.

But as customers buy fewer digital music tracks, perhaps Apple is looking for a better music subscription scheme, and Beats Music has gotten high marks for providing a superior user experience. Sure, a membership roster estimated at 500,000 isn’t very much compared to the millions who use Pandora and Spotify, but putting Apple’s marketing heft behind such a venture, and integrating it with iTunes, would surely boost that number real fast.

But what about those allegedly overpriced headphones? Well, I’ve done a little checking of reviews. True, the first Beats Audio products were notorious for heavy bass and brittle highs, the better to exaggerate the impact of hip-hop and other pop music genres. It got lots of attention and high sales, particularly from younger people.

A couple of years back, for example, The Mac Observer’s Bryan Chaffin observed in his review of one of those early models, “Beats headphones reinvigorated the high-end headphone market, but it did so with headphones that can turn any music into a muddy romp through a swampy bottom land of mush.”

Since then, though, it appears the audio engineers at Beats have been revoicing some of those headphones to tame the excesses and provide a more realistic sonic signature. A recent review of the $379.95 Beats Studio Wireless was praised for “excellent sound” and received four stars from CNET. The downsides were, predictably, the price of admission and the fact that “if the integrated rechargeable battery dies, the music dies.” But that’s also true for a Bose “Quiet Comfort” headphone, which is also pricy.

Consumer Reports, a magazine that traditionally doesn’t really get consumer electronics, gave the Beats Executive a high 85 rating, putting it at the top of the heap among the tested noise canceling headphones. The magazine’s reviewers concluded that the Executive had “excellent overall sound with a neutral character, and very good active noise reduction. Bass has good impact and definition, but is very slightly soft. Midrange is even and smooth, and treble is extended. Overall sound is fairly open, with good dynamics.”

To CR, the Executive was the only model to deliver “excellent” audio quality, and was thus rated ahead of noise-cancelling headphones from such makers as SMS, Bose, PSB Speakers, AKG, Koss and Velodyne.

But as I said, the reaction to the Beats has been polarized, though I grant at least some models do produce the sonic excesses dedicated audiophiles would reject out of hand. However, Beats has the buzz, and, with the recent private capital funding along with high sales, has made it a billion dollar company. So a purchase price of $3.2 billion, if that’s truly accurate, may not be out of the question at all.

The published reports suggest, however, that the acquisition is more about Beats Music and getting Iovine and co-founder Dr. Dre on board at Apple. This may help in delivering the entertainment industry contracts Apple needs to move forward in expanding its music subscription offering. Apparently, existing contracts with Beats Music would have to be renegotiated, though nobody who has made this claim has actually seen those contracts and how they are impacted if the company is acquired.

Of course, that hasn’t stopped people from making educated guesses.

In any case, if this deal plays out as the media expects, both Iovine and Dr. Dre will be trotted out at the WWDC in June. Some suggest that Dr. Dre’s recent boast about being the first Hip-Hop billionaire may be more about the company’s current financial status than the result of a deal with Apple.

I would not, however, presume to make any guesses about how this process will play out, if it’s really happening. Some suggest that Steve Jobs would never have gotten involved in such a venture. But he also reportedly urged his successors not to ask what he would do when making a decision. It’s clear Tim Cook has gone his own way in many respects as Apple CEO, and if he and his team truly believe that a deal with Beats is $3.2 billion well spent, maybe they do know something we don’t.

Besides, even if the deal doesn’t quite deliver for Apple, consider how much Google squandered in bringing Motorola into the fold before it was sold off to Lenovo at a fire sale price. Consider the bad acquisitions Microsoft has made. Apple is entitled to a mistake from time to time, but that doesn’t mean a deal with Beats would be a bad thing. As I said, nothing is definite until it actually happens. Nothing at all.