Apple acquires Beats, loses out on Renesas unit May 29 2014

iTunes vendor pays $3bn for music services, brand and executives; loses to Synaptics in bid for display driver control

By Caroline Gabriel

As expected, Apple has finalized its biggest ever acquisition, paying a hefty $3bn for headphone maker Beats Electronics. This is likely to form the basis of a music streaming service, an area where the iTunes provider has moved very hesitantly in the past. However, Apple has lost out in the attempt to buy Renesas's SP Drivers display controller unit, which would have further increased its control over its iDevices' key components.

The Beats deal sees Apple paying $2.6bn, plus $400m which will vest over time, and the acquisition should conclude in September, with founder Dr Dre and music industry big-name Jimmy Iovine both joining the new parent. They will almost certainly sit at the heart of new initiatives to improve Apple's showing in streamed content, where companies like Spotify, as well as Google's mighty YouTube, dominate.

The iPhone maker has been hesitant in the past, despite a gradual shift in user behavior from downloads to streaming, keen to defend the traditional iTunes model - with good reason, since subscription models and ad-supported free offerings have far less attractive revenues than downloads. Last year it did introduce iTunes Radio, an ad-supported service which goes head-on with Pandora.

Beats also brings Apple its well-branded headphones, something of a return to an older approach of selling premium accessories to boost the value of iDevices; and two very well-known influential executives to bring insider industry insights to the Apple management team.

"Music is such an important part of all of our lives and holds a special place within our hearts at Apple," said CEO Tim Cook in his statement. "That's why we have kept investing in music and are bringing together these extraordinary teams so we can continue to create the most innovative music products and services in the world."

Behind the fluffy words, Cook is starting to take some significantly different directions from his predecessor Steve Jobs - looking to embrace streamed content and cloud services more aggressively (though somewhat belatedly), and showing willingness to spend some of the firm's huge cash mountain on larger acquisitions to bolster Apple's position against challengers. The previous record for an Apple acquisition was held by NeXT back in 1997, when a $400m purchase brought Jobs back into the fold.

The key this time is certainly the bid to take back the high ground in music, which would be seen as worth the $3bn price tag. Apple is still the largest seller of digital music but it is not just the cautious approach to streaming which has eroded its lead. It also faces the danger of losing its 'cool' in a youth-dominated sector, with iDevices and downloads perceived to be the products of an older era.

The Beats Music service, introduced this year, is a small player compared to Spotify, though it recently gained support from AT&T, and will not bring anything Apple couldn't have devised itself, but the key will be the brand and the input from Dr Dre and Iovine.

lovine criticized the streaming experience back in 2012, and said the world needed a better approach to navigating masses of content. He said in an interview: "It needs feel. It needs culture. What Apple has in the downloading world is very, very good. But subscription has an enormous hole in it, and it's not satisfying right now."

Beats' service is estimated to have only about 200,000 users, while its headphones and speakers are said to bring in about $1bn a year. "They are buying into the future and the future is going to be streaming and subscription," Jon Irwin, former president of rival music service Rhapsody, told Bloomberg. "Revenue from streaming and subscription is growing. Files and downloads are shrinking. Everyone has to engage in streaming and subscription."

Last September, Apple launched its own long-awaited streaming option via iTunes Radio but the ad-supported offering gives users limited control over the songs they can hear. If they exclude the ads by paying $25 a year for iTunes Match, which includes cloud storage, they still have to buy individual songs via the iTunes store. This compromise solution is not protecting iTunes from declining sales, with Spotify the kind of site which is stealing its gold. With $150bn in cash, some will believe Apple should have been bolder and made a play for Spotify - valued at about $4bn - rather than Beats.

Beats previously had a close alliance with HTC, which bought a majority stake in the firm in 2011 for $300m but failed to build significant music-based differentiation out of the deal. Amid pressure from other music-focused handsets, notably Sony's iconic brands, HTC sold its stake back last September for $415m and recently formed a partnership with another speakers firm, Harman Kardon, to bring advanced audio capabilities to the One M8 handset.

CEO Tim Cook has signalled that the firm may have to spend some of its cash mountain on larger takeovers as competitive pressures mount. On the most recent earnings call, he said Apple had acquired 24 companies in the past 18 months, adding:

"We are expanding Apple's products and services into new categories, and we are not going to under-invest in this business."

One company which will not be joining its fold is Renesas SP Drivers. Apple was said to be close to acquiring a controlling stake in the firm last month, but has now lost out to Synaptics. The deal would have given it the chance to build its own display chip platform and gain control of another important iDevice component.

Troubled Japanese firm Renesas Electronics is looking to sell its majority stake in SP Drivers, but is now in exclusive talks with Synaptics, a specialist in touchscreen controllers, after Apple negotiations broke down. According to Reuters, Apple had been poised to pay about ¥50bn ($479m) for Renesas's 55% holding and to take on most of the unit's 240 staff in Japan. The rest of the venture is owned 25% by Sharp - which is also expected to sell its share once the initial deal is completed - and 20% by Taiwan's Powerchip.

Renesas SP Drivers is the world leader in drivers and controllers for small and medium LCD displays, with about 33% market share, and it is Apple's only source of LCD chips for the iPhone. So - given the importance of the display to the differentiation of high end mobile devices - it seemed logical that the US firm would seek greater control of this element. As Apple reportedly prepares to increase the size of the iPhone's screen for the first time (to 4.7-inches, say sources), the quality of the display is an increasingly important factor.

In order to control the iDevices' differentiating features, and to keep an iron grip on the supply and price of important components, Apple has invested in various technology suppliers, most notably PA Semi, which helped it create its own mobile processor. It has also taken a stake in an Arizona sapphire plant and owns 10% of its GPU supplier, Imagination Technologies.