Soundbites 2014: How Apple’s bite out of Beats will affect its new audio brand rivals at retail

Welcome to our ongoing Soundbites series, which takes an in-depth look at the Australian audio market, finding out what the leading brands and suppliers are up to and looking at the best new products available.

(Part I: Yamaha)
(Part II: Parrot)
(Part III: Convoy International)
(Part IV: Sennheiser)
(Part V: Directed)

Analysis

Shortly before opening the doors this morning, the staff at Apple’s flagship Retail Store on George Street in Sydney gathered in a blue-shirted huddle to receive encouragement, instructions and motivation for the day ahead. It is unknown if the head Genius informed this teeming mass of youthful exuberance that overnight Apple had finally officially announced the acquisition of Beats after weeks of confident speculation.

The huddle broke up and these sales staff, the coolest and hippest you’ll find selling consumer electronics, dispersed to their stations to greet the first rush of customers. Shortly after 9am, there must have been 10 servers for every customer, and walking up the steps to the middle level, which houses Apple’s beautifully merchandised and carefully chosen third party brand accessories, one is greeted with a friendly smile and an offer for help over and over again.

Atop a classically Apple wooden table rests eight iPhone 5cs, each connected by 3.5mm jack or Bluetooth to upmarket headphones by Beats, Bose, Parrot, Bowers & Wilkins or Bang & Olufsen. This split isn’t even: there are three Beats, two Bose and one each of the rest. Apple has not bothered to display its own range of earpods.

In a friendly chat to the woman working this table, it is revealed that she is aware of the Beats purchase but that she doesn’t necessarily think these are the best headphones for everyone. The bass is too pronounced and this compares unfavourably with the Bose pair, currently selling for just under $300, which has superior treble tuning. Apple’s default white earphones, ubiquitous in the days before the Dr, which come standard with every iPhone and iPod, are also very good and much better than the $29.95 pricetag suggests.

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There is an element of forced exercise at this Apple store and 20-metre walk to the other side of the cavernous showroom leads to the speaker section, which is replete with UE’s excellent Boom speaker, Beats’ Pill in small and large, Bose Soundlink, Bowers & Wilkins Zeppelin Air and some incredible Harmon/Kardon Airplay models that would surely make even audiophiles drool.

Apple doesn’t market speakers, preferring instead to leave this high value, high margin products to the experts. It certainly retails them proudly, and the range available in store is dwarfed by the flourish of brands available online. In addition to the ones mentioned, online shoppers can purchase Jawbone, JBL, iHome, Braven, Edifier, XtremeMac, Native Union and many more besides.

Vendors have said previously that it is a real coup to be stocked by Apple, either in-store or online; that it is a badge of honour, a recognition of superior branding, design and performance. Media releases are sent out announcing such retail agreements. It’s hard to know exactly what volume Apple is retailing through its bricks and clicks channels; certainly nowhere near the tsunami of sales processed by JB Hi-Fi or Harvey Norman, but the avoidance of discounting would boost its value share and Apple’s ability to hold up average selling prices and retain margin would make it a highly prized asset. Balance sheets and brand equity are strengthened.

Tim Cook, Apple’s CEO, called the tech giant’s $3 billion acquisition of Beats a “no-brainer” but it has left plenty of analysts, journalists and bloggers scratching their heads. If it’s about hardware, surely Apple could start churning out speakers and high-end headphones with beautiful design points and acceptable audio quality and, in time, carve out a slice of the market, just as they have with smartphones, tablets and MP3 players. If it’s about subscription music, an area in which Beats is a fledgling player against the overwhelming might of Spotify, why not just expand iTunes to include a monthly ‘rental’ fee product next to the outright music ownership option; similar to how Apple introduce iTunes Radio to nullify Pandora’s threat? If it’s about people, well, Dr Dre is a very talented performing artist and producer but he’s not an engineer; he’s no Fritz Sennheiser. In a fantastically vague boilerplate quotation, Cook said it was about all of this but also hinted it was about none of this.

“Music is such an important part of all of our lives and holds a special place within our hearts at Apple,” he said. “That’s why we have kept investing in music and are bringing together these extraordinary teams so we can continue to create the most innovative music products and services in the world.”

Cook was further quoted in the New York Times as saying, “These guys are really unique. It’s like finding the precise grain of sand on the beach. They’re rare and very hard to find”, although that is patently untrue. Beats is the least rare brand in audio and anyone is easy to find when you are prepared to cut a cheque for $2.6 billion today (with an extra $400 million in stock options).

The fear at the third party suppliers wholesaling to Apple will be that their exposure will be limited to fewer models, so to make Beats more prominent, voluminous and desirable. It is very unlikely that Apple would derange any brands because of this acquisition — it still wants to offer a wide variety, and so it should, as the margin on some of these products is phenomenal — but some of the smaller players mentioned in this story would have come to rely on Apple’s 21 (and growing) retail outlets and online presence for a fair chunk of their sales budget.

It is true that these same players have privately complained that Apple tends to hide its accessories ranges away in a nook or cranny, and in Sydney its one floor up from street level (in Berlin, it’s an annex as far as far away from the front door as possible), so there may be renewed hope that Apple now having a house brand, so to speak, will result in the audio category as a whole being pushed more to the front and more actively promoted. As it stands, a consumer can purchase an iPod, iPhone or iPad without observing an accessories range and anecdotal evidence suggests many consumers don’t even know Apple retails other brands. This is surely set to change.

One of the interesting tidbits from the Australian audio industry — something most consumers wouldn’t know about — is that while there are brands galore, there are so few distributors/wholesalers. Beats is currently distributed by Ingram Micro, which also distributes myriad AV and IT brands, while Powermove in South Australia has an impressive cache of labels and Convoy International rounds out the best-known brands. There’s also Directed Australia, Crest Electronics and Blonde Robot. Pretty much every audio brand you can name is distributed by one of these six suppliers.

It’s hard to say who holds the balance of power in these relationships; certainly when Apple is wholesaling into its retail partners it likes to hold the upper hand, managing to keep discounting to a minimum and offering, according to well placed sources, a measly 8 per cent margin. While there would be some discomfort among these vendors that they are now competing more directly with Apple — imagine if Apple sold Samsung smartphones alongside its iPhones — most will argue that the trade-off is a much sharper focus on headphones and Bluetooth speakers, which could propel this high-growth category to even greater heights.

Next in our Soundbites series, we ramble with Amber

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