Why Apple's Beats Deal Is a Sound Strategy

NEW YORK (TheStreet) -- It seems fitting that only a couple of weeks after posting a solid beat in its fiscal second-quarter report, Apple (AAPL) is now interested in Beats Electronics. This, according to the Financial Times.

In a story Thursday by FT's Matthew Garrahan and Tim Bradshaw, Apple is said to be "closing in" on a $3.2 billion deal for the headphone maker, which would make it Apple's largest-ever acquisition. The deal is expected to be announced as early as next week, although neither company has confirmed they've even had discussions.

Given Apple's track record of having made only small acquisitions, typically those that are less than half a billion dollars, investors and analysts are stunned. Not to mention, at $3.2 billion, Apple is paying a 60% premium above the appraised value for Beats, which, according to Forbes, was worth no more than $2 billion.

With Apple's cash hoard of roughly $151 billion, money is no object. The more pressing question is what does this mean for iTunes and iTunes Radio? Recall, iTunes Radio, which was always referred to as having "features similar" to Pandora (P) and Spotify, was Apple's entry into the realm of music streaming. Is this deal an admission that iTunes Radio was a failure?

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Piper Jaffray analyst Gene Munster doesn't seem impressed. While saying it "sounds bad," Munster said beyond the brand, Beats doesn't offer Apple any advantage in terms of intellectual property. He struggles to see the rationale. He believes Apple's cash would have been better served going after (among others) Twitter (TWTR) or Yahoo! (YHOO). But neither have the hardware or the streaming component, which seems to be key factors in this deal.

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