Apple, Inc. Downgrades Dr. Dre's Beats, but the Rapper Still Banks

After reports began surfacing last week that Apple's alleged plan to acquire Beats Electronics was facing some uncertainty,the New York Post is now reporting Apple has sealed the deal, albeit on slightly worse terms.

Beats headphones. Source: Beats Electronics.

The latest on the Apple-Beats deal
"Apple's biggest deal in its history just got a little cheaper," said New York Post writer Claire Atkinson in the latest update. The price Apple will pay for Beats Electronics, first announced in a report by the Financial Times, was initially thought to be $3.2 billion. But Atkinson says that sources are now saying the cost is $3 billion.

What sent the price tag for Beats lower? It may have been the Spotify announcement a few weeks after initial speculation of the Apple-Beats deal that the streaming music service had reached 10 million paying subscribers, easily trumping Beats' allegedly leaked count of 111,000 subscribers.

Beats Music. Source: Beats Electronics.

"That factor may have led Apple's lawyers to value the firm on a slightly lower basis," Atkinson asserted.

But Apple particularly sees value in the company's Beats by Dr. Dre-branded hardware business, Atkinson says. "[T]he company is understood to place a high value on the profitable Beats audio business which retails headphones -- costing up to $450 -- and speakers around the globe." Still, Apple thinks the business is worth $200 million less than initial speculation suggested.

Hip-hop artist Dr. Dre will hardly suffer. His estimated gross portion of the price tag will fall from about $800 million to $750 million, although Atkinson notes that this small difference could make or break his chance to reach a billion-dollar net worth.

Dr. Dre and co-founder Jimmy Iovine will both make an appearance at Apple's Worldwide Developer's Conference this Saturday, Atkinson's sources say.

Beats Music iOS app. Source: Beats Electronics.

More on the price tag
While $3 billion is still considerably more than Apple has ever spent on an acquisition, this is also the largest company and most well-known brand it has ever bought.

It could even be argued that Apple is getting Beats at a bargain price. Considering Beats' best-selling product line is its pricey headphones, it wouldn't be surprising if Beats Electronics boasts a gross profit margin in excess of 25%. On a reported $1.3 billion in 2013 revenue, that could mean Beats' is raking in $325 million in annual gross profit. That would put Beats' $3 billion valuation at about 9.2 times its annual gross profit. Comparatively, Apple's current market capitalization puts it at 8.3 times its gross profit. Just one or two new blockbuster products under the Beats brand could boost revenue enough for Beats to grow into such a conservative valuation. Beats may be a big expense, but at $3 billion, Apple is getting a solid deal.

But nothing is official until we hear directly from Apple. The company is known for trashing plans at the last minute. Given the conservative price tag for the powerful brand, however, a deal would be excellent news. Giving Apple a better road map for success in a few important markets at a reasonable price, it's hard to argue to the contrary.

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The article Apple, Inc. Downgrades Dr. Dre's Beats, but the Rapper Still Banks originally appeared on

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