Apple Seen Focused on Streaming More Than Headphones With Beats Buy

NEW YORK (TheStreet) -- After Apple (AAPL) announced its long anticipated acquisition of Beats Electronics, JPMorgan suggested that Apple made the deal primarily to boost its sagging digital music business. 


WHAT'S NEW: Last night, Apple confirmed that it has agreed to buy Beats Music, which operates a streaming music service, and Beats Electronics, which makes and sells electronic music products such as headphones and speakers, for $3B.

ANALYST REACTION: In a note to investors earlier today, JPMorgan analyst Rod Hall wrote that the deal "is really about what Apple can do with Beats Music" to revitalize its own iTunes music business. Based on Apple's SEC filings and other data, Hall believes that iTunes content sales fell by about 8% last year versus 2012 and may have tumbled 25% in the second half of 2013 from the same period a year earlier. Meanwhile, Hall wrote that Beats Music is "innovative," as it's easier to discover new music on that service than on competing offerings from Pandora (P) and Spotify. Pointing out that Apple mentioned Beats' streaming music business in its press release before the electronics business, the analyst predicted that the tech giant may look to sell the electronics business. Hall kept an Overweight rating on Apple. Meanwhile, PiperJaffray analyst Gene Munster wrote that Apple acquired Beats for several reasons, including the opportunity to bring Beats co-founders Jimmy Iovine and Dr. Dre to Apple to work on content. Munster also mentioned Beats' streaming music service as a reason for the deal, but he thinks Apple is also interested in using its distribution channels to boost Beats' electronics business. Meanwhile, Munster thinks that Apple could make other, larger acquisitions going forward, particularly around the area of Internet services outside of content. He kept a $640 price target and Overweight rating on Apple's stock.

WHAT'S NOTABLE: Financial Times first reported on May 8, citing people familiar with the negotiations, that Apple was in talks to acquire Beats. More recently, and again citing sources, Financial Times said Apple plans to unveil a "smart home" platform at its upcoming Worldwide Developer Conference.

PRICE ACTION: In early trading, Apple rose about $6, or 1%, to $630. Shares of Pandora, which also offers a streaming music service, fell 10c, to 0.4%, to $25.19.

Reporting by Larry Ramer.

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