'Beats by Apple' viewed as a culturally compatible corporate marriage

Photo via Paul Stamatiou.

Analyst Steven Milunovich of UBS said in a note to investors on Monday, a copy of which was provided to AppleInsider, that it's somewhat appropriate that the notoriously secretive Apple would surprise the market with its largest-ever acquisition. He said that before investors formulate a strong opinion on the anticipated deal with Beats, he'd like to hear Apple's rationale for the rumored purchase.

At first glance, Milunovich said the rumored $3.2 billion price tag seems reasonable if Beats revenue is about $1.4 billion per year with high margins. He also sees the Beats Music service complementing Apple's "mediocre success" with iTunes Radio, while the headphone designers at Beats could help bolster future Apple products in the wearable devices market.

The analyst said that Apple made a savvy move in the early days of the Mac, earning lifetime users by pushing its presence in schools. In his eyes, the Beats acquisition could do the same for music lovers in a post-iPod era.

"Apple has not promoted the brand of a company it has acquired, but it does have sub-brands: iPod, iPhone, iPad, Mac," Milunovich wrote. "People use the product name knowing Apple makes them. 'Beats by Apple' isn't all that different."

He noted the appeal of Beats to both young users as well as black Americans, given the strong reputation Beats products carry in those demographics.

Finally, Milunovich is also encouraged by the potential addition of Beats Chief Executive Jimmy Iovine to Apple's corporate roster. The analyst said Iovine's focus on user experience fits within Apple's culture, as compared to competitors who typically focus on horsepower or specifications.

When word broke last week that Apple is allegedly in final discussions to acquire Beats, initial reaction was largely negative, with detractors saying that the purchase of a brand such as Beats doesn't fit within Apple's usual business strategy. Critics also contend that the bass-heavy Beats headphones aren't a quality product built to the standard that they expect from Apple devices.

But the rumored deal has also drawn its share of supporters, specifically those who believe the Beats Music service could be a worthwhile addition to Apple's content offerings. Proponents of the alleged acquisition say that the Beats headphone business could provide an immediate benefit to Apple in terms of high-margin headphones, while the Beats Music service could be a more long-term strategic acquisition.

Brining Iovine on as a senior executive at Apple, along with co-founder Andre "Dr. Dre" Young, are also seen as potential plusses for the iPhone maker. It's been speculated that the two could join Apple as part of a so-called "acqui-hire" agreement that would be part of the $3.2 million buyout.