Microsoft Makes Office Free

This week, Microsoft did what was unthinkable just a year ago. It made its Office apps free for everyone (premium features still require an Office 365 subscription, but those features are for advanced users which most are not). This is important for the following reasons:

A. They needed to compete with free services from Apple and Google. While the document editing services of those competitors are getting better, Microsoft Office is still king. This move to make Office free just confirms it. 

B. Indoctrinate the young. Microsoft needed to get young people using their products from an early age, so that they may become lifelong Microsoft users. Without a free tier, these young users would be indoctrinated into Apple's and Google's ecosystems instead, which would be terrible for the future sales of Microsoft products. Hooking these young people early is an investment for the future, when they grow up and have disposable incomes to purchase other Microsoft products. 

C. Separate the consumer business from the enterprise business. Ben Thompson put it best:

On the consumer side, Microsoft hopes to make money from devices and advertising: they sell Surfaces, Lumias, and Xboxes with differentiated OS’s, hardware, and services, and they have ad-supported services like Bing and Outlook. The enterprise side is the exact opposite: here the focus is 100% on services, especially Azure and Office 365 (to use the Office iPad apps for business still requires a subscription).

Microsoft needed to clearly delineate its two major businesses - one aimed at consumers, and the other at enterprise. Offering the Office apps for free makes their consumer business stronger. In turn, these consumers will expect the same services from their employers (many large businesses already pay for Office 365, but this is about those who don't, such as small to medium sized companies).

Overall, this is an excellent move for Microsoft. As of this writing, Microsoft Word is third most downloaded app in the App Store. The investment has already started to pay off. 

Recommendations for Twitter

Preface: The following essay was written for my Business Policy and Strategy class, so excuse the formal language - it's supposed to mirror a report a consultant would normally produce for a client. The report details some of the problems I see at Twitter, and well as recommendations to fix those issues. The essay is divided into three main sections: a company overview, the issues, and my advice to fix them. 

Overview

Twitter is a social networking service that launched in 2006, which was around the same time smartphones began to penetrate the U.S. consumer market. Unlike other social networking sites at the time, Twitter restricted users to sending short 140-character messages, called “tweets”, using SMS or the internet. Initially catering to technology enthusiasts and pundits, Twitter’s popularity rose when the founders advertised the service at SXSWi, a film and music conference filled with celebrities and prominent journalists. Explosive growth followed, leading the company to go public in 2013. As of July 2014, Twitter has approximately 275 million users and is competing with other social media companies for user attention. The company’s growth, however, has dramatically slowed in recent times, and it is no longer virally spreading. In addition, excessive administrative, infrastructure, and sales costs have cut deep into Twitter’s pockets, making the company post continuous net losses. The last, and perhaps most fundamental issue is the company’s unfocused executive team - one which does not understand its own service. 

Issues at Twitter

Slowing Growth

The business model for social media companies is entirely immature. Strategies to increase user growth, for example, will not be found in MBA textbooks or undergraduate business school classes. Thus, social media companies must improvise, research, and develop strategies as they go. Thus far, successful social networks such as Facebook, LinkedIn, Instagram, Tumblr, and Twitter have spread and engulfed the world only through one strategy - growth. For each of these services, growth is achieved by signing up as many new users as possible. By definition, a social network requires users to provide any value to those same users, since a social network is nothing without its community. 

Consequently, every social media company loves to brag about its growth statistics, and Twitter has not been able to do so recently. While the service reported 271 million monthly active users (MAU’s) in Q2 2014, year-over-year growth has been slowing for the past few years. For social media companies, this is anathema, and leads to eventual extinction because their business is entirely predicted on its users. The results of Twitter’s declining growth are twofold. First, Twitter will not be able to generate as much revenue, because advertisers are less likely to purchase ads on declining services. Continued slow growth will also necessitate Twitter to charge lower ad prices from these advertisers, further lowering revenues, in order to keep them from flocking to more successful, growing social networks such as Instagram and Snapchat. Second, less and less users are likely to join Twitter when they see that their friends are not on the service, which leads to a vicious cycle of continuously shrinking growth, followed by decline. Growth was how Twitter became successful in the first place, and how it continues to be a viable social network. The slowed growth in recent times is a dangerous red flag that may lead to the demise of the social media company, just as many other companies have faded before it.

Excessive Costs 

While it is true that profitability is an industry problem, Twitter is now a public company and must return value to investors. Those investors, however, have never seen Twitter post a profitable quarter since its IPO. Being a young company that only went public in 2013, many investors give Twitter the benefit of the doubt and expect profitability later. But as an industry analyst who follows the technology industry closely, I can assuredly say something is amiss at Twitter - and one must only look at their income statement. The company spent $1 billion in SG&A on a sales revenue of $665 million in 2013, losing more money on one line item than the total of its revenues. This is not at all surprising, as the company has been on a hiring spree, leaching designers and engineers from tech giants like Apple, Google, and Microsoft. Although this new talent is great, it’s extremely costly, as the company undoubtedly pays employees more than the tech giants to get them to leave for Twitter. It is normal for a company to increase SG&A spending as it grows, but costs should be scaled with revenues, which is simply not the case at Twitter.

Executive Team

Since inception, Twitter had a rocky road with its management team. Management turnover in the past four years is one for the books: the company started with Jack Dorsey in 2007, replaced him with Evan Williams in 2008, and again replaced him with the current CEO, Dick Costolo, in 2010. Besides the CEO position, most other executive positions similarly go through a lot of shuffling at Twitter. This butting of heads is not a good sign, implying that top leadership cannot agree on where to focus the company. Indeed, the company spent a record breaking $594 million on R&D, a 400% increase YoY, likely to find better ways to monetize the service and gain more users. As an outsider looking in, it appears that the executive team is not sure where to take the service, and is thus investing in R&D to find new outlets. This is hurting the company’s profitability, but also employee morale, which further increases employee turnover.

Advice for Twitter

Increasing Growth

The service that Twitter offers is truly exceptional, and is like no other social media service out there. Political revolutions have been platformed on Twitter. Whenever an earthquake strikes, you can be sure to hear about it on Twitter before any television news network. Musicians, politicians, and statisticians equally make use of Twitter, talking with their supporters and communicating their ideas in a public forum. The issue for Twitter is stuttering growth, which is the result of a confusing onboarding experience and a lackluster design. 

When a new user wants to sign up for Twitter, they are presented with an awkward homepage that doesn’t clearly communicate the value proposition of the service. Once the user is registered, Twitter recommends he follow some popular accounts, from categories like music, sports, and technology. The result for the user is a timeline of tweets that does not actually fit the needs of the user well. This approach is fundamentally broken, and it is no wonder growth has been slowing, as the late-adopters cannot understand this ambiguous sign up process.

First of all, Twitter should redesign its homepage to better communicate its truly phenomenal service. The homepage background pictures should be removed, and replaced with a simple background, similar to the one Facebook uses. This will remove the clutter and bring focus to the site. Next, instead of three obscure sentences that describe Twitter, the designers should use bullet points; they are more succinct and easier to digest. Most importantly, the content of those bullet points should be the value proposition. Something along the lines of: “Twitter is where you get the latest news first. Twitter is where you talk to your favorite celebrities. Twitter is how share your experiences”. The goal of these simple phrases to create a tangible idea of how Twitter can be used by regular people, rather than the abstractions Twitter uses currently. 

Twitter should also redesign its mobile applications for straightforwardness. Even as an experienced Twitter user, I find the current apps impenetrable in their design. Replies to other users should be designed to look like text messages, since that is what people are familiar with. In other words, replies should be viewed in a sequential manner and flow by time stamps. Most people use social networks on their smartphones, which is why applications are most the important element Twitter should get right. Redesigned applications, coupled with a simplified homepage will improve the onboarding experience and strengthen user growth.

Managing Costs

Twitter is a publicly held corporation, which means that shareholders expect to be paid back for their investments through company profits. These profits can also be reinvested into the business in order to build stronger competitive advantages like service uptime. As previously mentioned, Twitter spends disproportional amounts on SG&A expenses relative to its revenues, which results in a significant net loss every quarter. This is not a viable business strategy and must be quickly remedied. 

While layoffs are never a popular option, that is what Twitter must do to manage costs. The company employs 3,300 employees, which translates to roughly 83,300 users per employee. For reference, Facebook, which is Twitter’s closest competitor, employs 6,800 employees, which comes out to about 184,000 users per employee. In the most basic terms, Facebook employees are roughly 220% more productive than their Twitter counterparts, which is a sign that Twitter needs to reduce its workforce. Just recently, Microsoft laid off 15,000 employees as part of a restructuring plan whilst growing revenues, so this method is not as drastic as it sounds. In addition to SG&A expenses, Twitter must also manage its cost of goods sold. This can be done by better scaling its infrastructure in order to reduce per-user costs. While this is an extremely technical undertaking, it is one that Twitter must commit to. As Twitter rolls out new features and gains more users, infrastructure costs will only increase, and the company must be able to scale its costscheaply. 

Executive Overhaul

Dick Costolo has been the CEO of Twitter since 2010, and YoY growth and profitability have been declining with each year. Many industry analysts have been extremely critical of Costolo and his executive team, mostly because management is unfocused and unsure of where to take the product next. The most alarming sign of this executive myopia is the lack of dogfooding by leadership. I went through the Twitter account of each person on the executive team, and nearly all are rarely active on the service. This lack of dogfooding in top management indicates that they have little idea of what the service is and where to take it. 

Consequently, the executive team should be replaced with leadership who actually uses the service on a constant basis, similar to how a normal user would. I would recommend the board of directors to begin this executive reshuffle by searching for a new CEO from within the company first, before looking for outside talent. Twitter has many extremely capable employees at the midlevel, some of which could easily assume the CEO position. Whoever this new CEO is, they must be an active user of Twitter and have a vision for the company. This new CEO must also choose new executive talent to replace the old, in order to help steer the company in the right direction. Again, inspiration for this kind of corporate overhaul can be found at another company, Apple. After assuming reins of Apple in 2011, CEO Tim Cook made major changes in the executive team, replacing the SVP’s of iOS, retail, and other major departments with leadership he saw fit. Apple has had record-breaking quarters since. Once Twitter’s management begins dogfooding its own service, they will learn what it’s like to be a normal user. This will allow them to better evolve the product according to user needs.

Coda

Twitter is a phenomenal service with an amazing potential that is mired by slowed growth, excessive costs, and a lackluster executive team. Fortunately, all of these issues can be fixed. Slowing growth can be reinvigorated by an improved onboarding experience as well as simplified applications that can communicate the Twitter value proposition better. Layoffs will be necessary to reduce SG&A costs and normalize the company workforce to benchmark levels. In addition, per-user cost of goods sold should be brought down through improved scalability, which is of key importance as the service attracts more users. Finally, an executive housecleaning should be made, instituting new leadership that is not only a user of the service, but also has a vision for its future. A company has little chance for success without a leader who can steer a company toward a specific goal. 

These recommendations will turn Twitter into a profitable and successful social network. With a clear value proposition and redesigned applications, growth will rise again and may finally compete with that of Facebook. This will generate higher revenues, as Twitter will be able to charge higher prices from advertisers. In combination with a lower cost structure as a result of layoffs and scale, the company will finally be able to earn profits that can be reinvested into the business. This will only be possible with a new CEO and his handpicked management team, who will provide the company with a vision for the future. 

Twitter External Analysis

Preface: I was tasked with writing an external analysis for my Business Policy and Strategy class, and I chose to do it on Twitter. Below is precisely that. If you are interested, it's also available in PDF format.

Twitter Overview

    Twitter is a social networking service that launched in 2006, which was around the same time smartphones began to penetrate the U.S. consumer market. Unlike other social networking sites at the time, Twitter restricted users to sending short 140-character messages, called “tweets”, using SMS or the internet. Initially catering to technology enthusiasts and pundits, Twitter’s popularity rose when the founders advertised the service at SXSWi, a film and music conference filled with celebrities and prominent journalists. Explosive growth followed, leading the company to go public in 2013. As of July 2014, Twitter has approximately 275 million users and is still in the growth stage of the industry life cycle.

1) Risk of Entry by Potential Competitors

Economies of Scale

    Twitter is a web service, and it is powered by thousands of servers that allow millions of devices to send and pull requests for content, which in Twitter’s case is tweets that may include either text, images, or videos. While the details of the company’s server and web hosting costs are not public information, it is highly likely that the company has achieved economies of scale on their web infrastructure. Because of their immense web traffic, the company probably has deals with server, web hosting, and other internet infrastructure vendors for quantity discounts. It is unlikely potential competitors would be able to strike such deals, as their traffic would not be near Twitter levels when they launch, thereby reducing the risk of entry by potential competitors.

Brand Loyalty

    In addition to achieving economies of scale, Twitter also possesses a lot of brand loyalty. The Twitter logo is found on many company advertisements on television, sports commentators ask viewers to follow them on Twitter, as do celebrities and notable politicians. Most notably, this is often done voluntarily without the need for Twitter to advertise or solicit for their logo to be placed on the adverts. As a result, it would be extremely difficult for a competitor to come along and sweep Twitter users away, as the service is favored immensely by the community. This loyalty will reduce the risk of entry by potential competitors. 

Absolute Cost Advantages

    In November 2013, Twitter went public on the NYSE with a market capitalization of $24.5 billion (is it worth $32 billion as of 09/14/14). As a public company, Twitter has access to cheaper funds, and is able to finance more Research and Development and Sales and Marketing spending. In addition, the company can invest more money into its infrastructure and mobile applications, making it even harder for competitors to match Twitter’s absolute cost advantages. For this reason, the risk of entry by potential competitors is further lowered. 

Customer Switching Costs

    Twitter is infamous for severely restricting access to its service and API to other application makers, making it very difficult to switch to another service or application. In fact, until recently, users of the service could not export their tweets even for archival purposes. Thus, it would be difficult for a Twitter user to import their past tweets into a competitor’s service due to the restrictions the company places on your content. Users of Twitter would also be hesitant to abandon the service after using it for years, as they have accumulated many followers and tweets on it, making it a powerful entry barrier to competitors. 

Summary for Risk of Entry by Competitors

    With respect to Porter’s Five Forces Model, it is our conclusion that Twitter faces a low risk of entry by potential competitors due to the aforementioned barriers. These barriers could not be overcome by App.net for example - a Twitter competitor that could not gain the traction to compete in any considerable way. It is also worth noting that the risk of competition is higher for Twitter from well established competitors, as they have the economies of scale and financial capital to compete with Twitter.

2) Rivalry Among Competitors 

Industry Competitive Structure

    The social network industry has been incredibly competitive in the last decade, with the rise of Myspace, Facebook, and now Twitter. In addition to these three technological behemoths, virtually thousands of other social networks have sprouted to compete in the arena for user attention. And yet, while the social media industry is extremely fragmented, Twitter has not yet faced any worthy competition in the last eight years of its existence. This is thanks to the above entry barriers that the company commands. 

Industry Demand

    The user demand for social networks is a difficult topic to tackle, since the definition of a social network is not entirely clear. For example, users are given the option to make their Twitter accounts private, essentially turning the social network into an antisocial one. That said, as a whole, as more people all over the world are purchasing mobile devices with internet access, the amount of users social networks such as Facebook and Twitter are gaining is steadily increasing every year. For this reason, we believe that this growing industry demand somewhat offsets the rivalry between the various social networks, lowering the risk of competitor rivalry. 

Cost Conditions

    Cost conditions for Twitter are based in majority on fixed costs, since each additional user requires a negligible amount of server load. Given that Twitter is a free service that is monetized by ad revenue, the company makes more money with more volume, spreading the fixed costs over a larger user base. Competitors that would like to enter the tweeting space, as a result lower user counts, would have higher fixed costs per user and thus not be as profitable. This further lowers the risk of competitor rivalry for Twitter.

3) Bargaining Power of Buyers

    In Twitter’s case, the buyers are companies and individuals who purchase ads on Twitter. Because the quantity of social networks and internet advertising placements is so large, the bargaining power of buyers is high, since they can switch to any other service such as Facebook, or Google AdWords. This can heavily reduce Twitter’s revenues, making it an extremely high risk element.

4) Bargaining Power of Suppliers

    Twitter’s suppliers are its users, who can switch to any substitute service (see analysis below) for free, but that switch brings with it intangible switching costs such as lost followers and prior tweets. That is, Twitter is dependent entirely on its suppliers, since they supply both the content and the impressions, which is how Twitter generates ad revenue. Because of this, the bargaining power of suppliers poses a high risk.

5) Substitute Products 

    In the social networking space, there is almost no limit for substitutes. Facebook, Instagram (now part of Facebook), Snapchat, App.net, Tumblr, LinkedIn, Quora, Foursquare, and Twitter all compete for user attention, but in different ways. Probably Twitter’s main competitor, Facebook allows users to post “statuses”, which are similar to tweets except they have no character limit and allow for more features. At the end of the day, the limiting factor is the users’ time, since a user can give only a certain number of hours per day for social networking, making the risk of substitute products very high for Twitter, unless it is able to distinctly differentiate its product.

6) Complementary Products

    Complementary to Twitter are 3rd-party mobile applications such as Tweetbot, Tweetdeck, and various other services that add to Twitter’s features. These complementors add value to Twitter, and by proxy, Twitter’s users. Most competitors to Twitter do not provide such an extensive API for 3rd-party’s to work with, making the risk from complementors weak for complementary products.

Macroeconomic Forces

    There is a slew of macroeconomic forces that affect Twitter, namely privacy and government regulations. With the recent NSA leaks, user privacy has been on the forefront of tech news. How Twitter reacts to government data requests and how secure it keeps user data are important given the public demand for privacy. Twitter must walk a fine line between government requests and user demand for privacy. 

Conclusion

    In the past, Twitter has been very accommodating to the demands of users, and much less so to the demands from government. While this is great news for users, it’s worth questioning whether the political forces will impose stricter regulations on Twitter, thereby upsetting users and profitability. It will also be vital for Twitter to handle user privacy with the utmost privilege, given the amount of data leaks and hacks in the past months. This is because in the last few years, security and user privacy has been on the social radar, demanding internet services to fortify themselves against breaches. How Twitter handles these demands will be a powerful asset, or a destructive liability, for the company.

The Intelligent VC

If you read this blog, you’re either well-versed in consumer technology, or you accidentally stumbled into it, in which case please stay. This post was spurred as I was reading a classical investing book, the very same that taught Warren Buffet how to make his $58 billion. I’m referring to The Intelligent Investor. As history has taught us, we’re not very good at remembering history. What this book does is point out, in retrospect, poor investment decisions made during the last century, and how to avoid, or at least mitigate, further bad decisions. As the title of the book suggests, it’s aimed at investors (even unintelligent ones). This post is aimed at VC’s and technology stock speculators. 

Below is a direct quote from the book (emphasis mine):

Air-transport stocks, of course, generated as much excitement in the late 1940s and early 1950s as Internet stocks did a half century later. Among the hottest mutual funds of that era were Aeronautical Securities and the Missiles-Rockets-Jets & Automation Fund. They, like the stocks they owned, turned out to be an investing disaster. It is commonly accepted today that the cumulative earnings of the airline industry over its entire history have been negative. The lesson Graham is driving at is not that you should avoid buying airline stocks, but that you should never succumb to the “certainty” that any industry will outperform all others in the future. 

The pitfalls have proved particularly dangerous in the industry we mentioned. It was, of course, easy to forecast that the volume of air traffic would grow spectacularly over the years. Because of this factor their shares became a favorite choice of the investment funds. But despite the expansion of revenues—at a pace even greater than in the computer industry—a combination of techno- logical problems and overexpansion of capacity made for fluctuating and even disastrous profit figures. In the year 1970, despite a new high in traffic figures, the airlines sustained a loss of some $200 million for their shareholders. (They had shown losses also in 1945 and 1961.) The stocks of these companies once again showed a greater decline in 1969–70 than did the general market. The record shows that even the highly paid full-time experts of the mutual funds were completely wrong about the fairly short-term future of a major and nonesoteric industry.

Growth, expansion, disruption - these are words that VC’s throw around to describe blossoming companies that will take over the world. Not now, but in the future. Google, Facebook, Twitter, and Yahoo are just some of the largest tech companies that are built upon this growth factor. They need it to thrive, since revenues are predominately built upon advertising.

Another quote, from Maciej Cegłowsk, the creator of Pinboard:

Advertising is like the flu. If it’s not constantly changing, people develop immunity.

Keep the above quotes in your head as you read the things below. 

VC’s invest in tech startups for one reason, and one reason only: to get a return on their investment. They invest a few million into a startup for a certain percentage of the company > if the company is lucky it goes public > VC firm profits and reinvests in a new startup. Rinse and repeat. Guess how most of these companies get paid? That’s right. It’s internet advertising. Sponsored search results, promoted tweets, trending topics, you’ve seen all these things before. 

Companies that are dependent on advertising make revenues and profits only if their user base grows. Their stock price is directly correlated to growth as well. Once growth levels off, reality kicks in, and Wall Street penalizes low performers. Twitter knows this problem all too well. Their growth has halted (with no doubt due to that bewilderingly mystifying homepage). And look what has happened to their stock (spoiler: you wouldn’t want to have your life savings invested in $TWTR). 

Twitter Stock Price

Google and Facebook are still managing to grow their user base, but believe me, it won’t last forever. Facebook is already trying to diversify its sources of income, first with the comically huge purchase of Whatsapp for $19 billion, and then Oculus Rift for $2 billion. Whatsapp is dependent entirely on advertising. Oculus Rift is an investment for the future, and currently unprofitable. Neither acquisition brings with it tangible resources (equipment, land, inventory, accounts receivable), only potential growth. There’s that word again, growth. 

These companies are doing the only thing that they know how to do, which is to grow their users. More eyeballs, more advertising revenue. From early in the companies life, VC’s have always pushed for growth, and then after becoming public companies, Wall Street urges for the same thing. This investment mentality won’t end well.

Growth isn’t bad, but when the business model is advertising, there is an inherent limit. It might takes years to reach, but it will be reached. VC’s should stop preaching growth and start encouraging profitability early in the startups life. Not that your startup needs a VC to begin with. There are plenty of successful startups that did it all alone without advertising, unnatural growth, and rather, just by a desirable product and hard sweaty work (for example, Basecamp).

Beats by Apple

As I'm sure you know, the last few days at the Apple rumor-mill have been quite industrious. Lots of milling work to be done, I suppose. What I'm talking about of course is the Beats acquisition by Apple. At the time of this writing, the purchase wasn't confirmed, but according to sources "in the know", the deal will happen, which is why I feel some sense of comfort writing about it before it's official. 

The Beats acquisition for $3.2 billion is a helluva huge deal - the largest in the history of Apple, which is why it's particularly interesting to pundits and analysts alike. It's worth pointing out that Apple, classically, makes smaller acquisitions, mostly because Apple has a very unique culture that large, established companies cannot easily synergize with. Now, I don't know the Beats corporate culture, organizational structure, or any of the touchy-feely environment details, which is why I will steer clear of the subject. What I do know, however, is that Apple decided that either the culture is similar to its own, similar enough not to matter, or maybe even, it's different enough to be a sub-brand. Realistically though, even Apple doesn't know the answer to that yet, and only time will tell. 

So what exactly are 3.2 Instagram's getting for Apple? 

A Hardware Business

Beats by Dre are crappy headphones, and I'm being polite here, since any audiophile will use much more indecorous language to describe them. But that doesn't matter, because they sell millions of units, much like NYC hotdogs: the terrible quality is overpowered, somehow, by a customer desire for some tubed meat. Unlike NYC hotdogs, Beats headphones actually look really good, especially when you compare them to other prosumer headphones from Sennheiser, Bose, and Sony models. Most people don't need pristine audio quality. Rather, they just care what sounds good. And by all accounts, Beats headphones sound good. They look great too. They sell millions of units. They command a coolness factor. They made two earmuffs on your head sexy to wear in public. On the business side, the Beats hardware business is very profitable, since they use cheap materials that are converted into high consumer prices. The supply chain (getting them to stores around the world) is probably the hardest problem for the business, and we know Apple under Tim Cook excels at that. In terms of Return on Investment, the Beats hardware business  pays for itself many times over.

Goodwill

Consumers love Beats. They don't love the iPod (anymore). They never loved iTunes. When most people hear iTunes, they associate it with syncing your music through a USB cord. Is that really the brand Apple wishes to cultivate for the future? It isn't. Beats is the new iTunes. I fully expect within 1 - 2 years for iTunes to go the way of the dodo, to be replaced entirely by Beats. Beats is the new music service by Apple. I suspect they will kill off the bloated confusion that goes by the name of iTunes, and release a simpler, music focused Beats app for Mac OS X, iOS, Windows, and eventually Android. It will be focused on streaming, but of course purchasing music will stay around for those who want it. 

Apple had a few options here. One, they could have created internally a brand new music brand, which is always a risky, especially with intangible services that succeed based on the consumer reaction to it. R&D would take money and time (money isn't a problem, time is), heavy advertising would cost a good chunk, and success is not guaranteed. 

Option two. Purchase a music streaming service. The most logical option would be Spotify, since they are the number one service in the business. But that wasn't an option at all. Spotify would probably cost too much (and wouldn't sell), has over a thousand employees, and is headquartered in Stockholm, Sweden. The last point is likely the largest deterrent. Apple would not purchase a company with thousands of employees that isn't based in the United States, unless it's for manufacturing reasons.

Rdio was another possibility, but that would be purely for their streaming service since it isn't a brand. Most people have never heard of Rdio. Apple could have picked it up for cheap too, since the company has been losing subscribers for the last year and is in questionable condition. At first I thought this would be a better purchase than Beats, since the Rdio design aesthetic was so similar to iOS 7 before iOS 7 was released. But after further thought it would be a pointless acquisition that Apple actually could develop internally rather quickly. 

In fact, Beats was the only brand that had everything Apple didn't. It came with a cool hardware business. It came with a streaming service. And finally, it came with connections. Jimmy Iovine is a brand on his own, as is Sir Mister Dr. Dre. If anybody can sell cool, it's these two. They can guarantee all the licensing arrangements Apple could have wished for, which was always a pain point for iTunes. Beats is what we call trifecta. 

Success Isn't Guaranteed

But it's sure as hell likely. Beats is already a well known and liked brand. The main thing for Apple now is to not diminish it. Let it thrive as its own thing. Beats is the reinvention of iTunes, and the hardware business is just added profits. Music industry connections have also been acquired, so all legal rights should be easier to negotiate. There's only one thing left, that is - Apple has to make the deal official.