You are going to hear that a lot today when people peel back the onion of the possible $3.2 billion deal to buy Beats Electronics.
I think they won't, but I also know that this deal would put pressure on Harman's stock, even though it just reported an amazing quarter and is one of the best-performing stocks of the era.
The initial stories about the potential acquisition are highlighting the streaming music service that Beats offers with some sort of patented technology from which I am sure audiophiles can make hay. The thinking is pretty easy to follow: Apple iTunes numbers were actually down year over year -- not just growing more slowly -- and that's because it is losing mindshare to those who want to rent music via Spotify and Pandora (P). We know the late Apple founder Steve Jobs believed that people wanted to own, not rent, music. But times change and people's habits change, and Jobs looks like he was wrong on this one.
So if Apple buys Beats, it gets some cool headphones that it already sells at its stores, and it can integrate Beats into its operating system.
But if you go to the Web site for Beats and scroll down, you will see that Beats is part of a package for the Fiat and Chrysler higher-end vehicles. So people are going to be speculating that Apple wants to use this back door to get into the incredibly lucrative car infotainment business. You have 250 million cars on the highway in the U.S., and each comes with a system that's got a lot of technology in it that revolves around infotainment. The dominant player in the space is Harman, which makes systems for just about every car company, including Chrysler.
Last month, at the New York International Auto Show, Apple introduced CarPlay, a system that allows your iPhone to work in conjunction with, or to duplicate, some of the functions that Harman provides as part of its infotainment system. Harman has always had a cohort of short-sellers circling it, and we saw a lot of shorting in Harman when Apple was on the verge of displaying CarPlay at the auto show. But once it came out, the sellers covered, as it was viewed as too limited to really challenge Harman, which has integrated itself into the very sinew of cars after initially being seen as just a speaker company.
So, now the question becomes: Will Beats be "just the speaker company" that combines with Apple to eventually challenge Harman's hegemony in the auto business? Could that be the hidden goal behind Beats beyond the headphone and subscription businesses?
Now, we don't know whether that's the case. But we do know that Beats will no doubt team up with Apple to develop an iPhone that will rival the brand-new HTC Android system, which uses a Harman system that got the same high-end sound equivalent from some of the best Harman speakers. It's meant to combat what many feel is the crimped and less-than-stellar sound that currently comes out of your cellphone. It could be a defensive move that's very much needed, given that Sprint (S) just started featuring the Harman phone at it stores, and it could take market share away from the iPhone.
So it makes sense that Apple intends to square off against Harman both in the car and in the handheld device.
There's only one real weakness to this potential controversy. Apple is reportedly set to pay $3.2 billion for Beats. Harman is only a $7 billion company. Apple could -- and should -- pay $10 billion to get Harman, which would then integrate everything Apple wants into pretty much every car on the road, which is where Harman's headed.
That, alas, would be a better deal. So would, for that matter, just going and buying Pandora for $6 billion, a nice premium to the $4.5 billion that Pandora currently trades for. Yes, $16 billion is a lot more than the $3.2 billion that Apple might shell out for Beats. But with it you get the streaming system and the potential infotainment system for every car on the road.
Just makes a heck of a lot more sense to me than trying to dislodge Harman. I say let Harman shares come down off the machinations associated with this deal. And then buy it -- because if Apple wants in, why wouldn't one of Apple's rivals want to make a similar move?
Yep -- don't short Harman. Buy it on the pressure this deal will generate. Because as powerful as Apple is, you can't topple the business that Harman has built over the years with pretty much every auto company out there, including the only partner Beats currently has in the business -- the Fiat-Chrysler nexus.
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, was long AAPL.
Editor's Note: This article was originally published at 6:41 a.m. EST on Real Money on May 9.
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