I’m starting a new series called simple answers to complex questions. It’s imagined along the same general principles that undoubtedly led to the principle of parsimony called Occam’s Razor. I will delve into many seemingly perplexing questions which likely has tons of experts or even academics commenting and opining on all sides. And will offer a well-reasoned answer with relative philosophical economy or simplicity. This answer may be well researched and presented with data or may be a shot from a gut. But overall it will have the distinctive ring of truth.
So let’s get to it: Why did Apple buy Beats by Dr. Dre, even though on the surface it does not seem to be a reasonable fit.
Simple Answer: Apple bought beats so that it can continue to sell its expensive product to poorer people, continuing its incredible growth.
Explanation: Apple is sitting pretty right now, but there are some worrisome long term trends: Growth is flat lining, iPhone seems to only be attaching to more affluent people (who are fewer in number) and the market is seeing an explosion of Android phones in the lower priced segment of the market. I surmise that Apple would like to keep its premium cache but not have poor people ignore its gloriousness. That is, it wants to eat its cake and have it. This is a stunning proposition – the luxury segment is usually content to be a niche high margin segment, but Apple wants to buck the trend.
<iPhones are bought more by the affluent. Intuitively that makes sense. Courtesy of mapbox.com>
So what is required? Some way to sell a luxury product to poor people. To keep the margin AND the growth. By all accounts Beats products are fairly pedestrian in terms of quality. However they excel at marketing the product via celebrities and music icons (which leverage the relationships of its founders) to a wide swath of the non-discriminating populace. I don’t have proof of this but anecdotal evidence shows that Beats sells a lot of its products to fashion conscious poorer consumers. For these people, it’s a coveted personal accessory. If you think about it hard, you will realize that there are only 2 companies that have this ability to sell overpriced product to poor people based on the brand equity they have developed – Nike and Beats by Dr. Dre. And only one of them is on the market.
Bottom-line, Beats knows how sell luxury products to less affluent people. Even better than Apple can (and it’s pretty good too).
