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How an Apple, Beats Deal Could Hurt Both Brands

NEW YORK (TheStreet) -- A partnership between Apple (AAPL - Get Report) and Beats Electronics makes perfect sense from a brand perspective, providing the companies never actually merge. 

According to a story first reported by the Financial Times Thursday evening, Apple is in talks to buy Beats, makers of the iconic Beats by Dre consumer headphone line, for $3.2 billion, making it far and away the company's largest acquisition to date.

Both companies have built reputations as aspirational brands, positioning their products as elite and higher quality, while pricing them in a range that is still within the realm of feasibility for middle and lower income customers. The products of both companies are status symbols that also happen to be great pieces of technology.

But Beats' brand is personality driven, built on the hip-hop and rock cred of Dr. Dre and Jimmy Iovine. The company takes its cues from the marketing of hip-hop artists, where style is a big part of the equation. When the company launched its streaming music subscription service, Beats Music, earlier this year, it put music business guys Ian Rogers (who got his start managing Web promotion for the Beastie Boys) and former Nine Inch Nails frontman Trent Reznor on the cover.

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The quality of Beats technology is high, but if it were competing only on its technology, it would face stiff competition, from Harmon Kardon (HAR), Sennheiser and Bose in hardware, and from Spotify and Pandora (P - Get Report) in streaming music. But Beats' has a track record of success as a popular brand that defies such apparent competition. They stole the consumer headphone racket away from the established leaders in the space, and made it look easy. While Beats Music only has a couple hundred thousand subscribers right now (rumored), it's only been in operation for four months, and is the only one in the space that is a pure subscription service.

Beats succeeds because it is a fashion statement -- it's hip to own it. That hipness relies heavily on its music industry leaders.

Apple's history, meanwhile, is as a singluar-vision company, not a conglomerate. They have one brand under the Apple logo. Another logo owned and distributed by Apple is a new thing and could easily dilute that brand and distract its leadership.

It's true, the companies need each other. Apple has a dearth of high-end audio gear and its efforts in the streaming sector so far have been underwhelming. From that perspective, the deal makes perfect sense. Beats headphones, speaker units and automobile systems complement Apple's systems in an area where Apple is sorely lacking. Beats Music can be a subscription service upgrade from a free iTunes Radio. Existing streaming subscribers could be rolled into Beats Music, bumping the strength of Beats considerably. 

Apple needs a viable, exclusive subscriber service to help build revenue as its iTunes download sales slow. Beats Music needs a free service that allows users to upgrade -- that "freemium" model has become the standard of the streaming music space and will help Beats Music to faster growth of its subscriber base. 

All good. But there's a real risk involved: If Apple buys Beats and tries to absorb its brand, recasting it under the Apple logo, it pretty much wrecks the value of the Beats brand. On the other hand, if Apple buys Beats and tries to keep it independent, it could erode its own brand and challenge investors to accept a new vision of the company as a multi-pronged conglomerate in the making.

-- Written by Carlton Wilkinson in New York

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