SunTrust Delves Into The 'Attractive' Factors And Impact Of Apple's Acquisition Of Beats

In a report published Thursday, SunTrust analyst Robert Peck commented on Apple's (NASDAQ: AAPL) plans to build an interactive streaming service and the impact on Pandora Media (NYSE: P).

”What Apple Wants With Beats”

Peck emphasized two factors that make Beats attractive to Apple including the hardware and interactive music streaming.

The analyst wrote, “Apple sells the music and the device but does not sell (in any meaningful way) the enabling headphone. That TAM goes to Beats, Bose, Sony, Skullcandy, and others.

With Beats, Apple gets a premium product likely with comparable margins and synergies in distribution/points-of-sale (Apple stores have sold Beats) and likely supply chain. Beats had ~$1.2B in revenue in 2013 (WSJ citing Carlyle exec), thus Apple is paying 2.5x trailing revenue for the hardware business (Apple trades at just over 3x). In terms of low hanging fruit, Apple can quickly expand Beats presence in international (mainly U.S. at current).”

SunTrust added that with Beats, Apple has the “full spectrum” with an interactive streaming device. With iTunes for digital purchases, iTunes Radio for free ad-supported non-interactive streaming and Radio Match for subscription based non-interactive streaming, Beats concludes the spectrum.

Pandora Impact

Shares of Pandora are currently down ~0.5 percent on news of Apple's acquisition of Beats for $3 billion. Amidst investor fear, Peck sees “limited” impact to Pandora. The analyst emphasized that Pandora's offerings are comparable to iTunes Radio and Match, and does not compete in the interactive category.

Peck remarked that Apple could narrow the user experience growth if Apple can extend Beats' to its non-interactive category and if the headline of the acquisition (along with marketing) “can woo users to Apple's non-interactive iTunes Radio services.

Spotify in Danger

SunTrust highlighted that Spotify is at risk due to Beats' “better” music recommendation and Apple's brand and bundling.

The analyst commented, “Beats has one of the better music recommendation engines (Spotify has Echo Nest) and with Apple's brand, marketing muscle, hardware (bundling), carrier relationships (subsidies), and global reach, we suspect Apple will challenge Spotify's leadership in interactive and we suspect with lower content costs -- Beats' management's relationships and content agreements with the labels are likely an important piece of the acquisition for Apple.”