Earlier this year Apple Inc. purchased Beats Music and Electronics for $3 billion. Beats is a streaming service that does not offer downloads like Apple’s iTunes. Apple charges $10 per month for the service. It is one of the company’s emerging issues.
The company has now re-evaluated its business model and found that the $10 monthly price tag is too high. Re/Code Co-Executive Editor, Kara Swisher feels that the majority of streaming customers are unwilling to pay the $10 monthly premium. With competitors like Pandora and Spotify, Apple is negotiating with major music companies to reduce costs to stay competitive in this market with its limited pool of customers. While recording companies may not be receptive to the cost reduction idea, Apple feels that this is the only way the streaming industry will grow. Recording companies will also benefit in the long run.
While effective streaming revenues are not a major issue to the company’s bottom line, a larger iceberg lies ahead. It could find itself liable for $8 billion in back taxes to the European Commission (EC).
These taxes would be due because of the deals the technological giant engaged in with Ireland. What has become a major issue for the Obama administration is the attempt to stem the increasing tide of companies incorporating themselves to avoid the high U.S. corporate tax rates.
The EU began investigating the iPhone maker in June after a U.S. Senate committee accused them and other American companies of shielding billions of dollars in taxes by entering into inappropriate deals with the Irish government. According to the EU, all companies must be treated equally and disapproves of special deals for tax evasion purposes. If improprieties are found, the company would have to pay a record fine of billions of euros and be subject to an increased tax rate going forward.
While the corporate tax rate in Ireland is at 12.5 percent, which is less than half that of the U.S., claims have been made by the Senate committee that Apple negotiated a rate of 2 percent with the Irish government. While these claims were rejected by the Irish business minister, he did state that loopholes used by the company have been closed. Beginning in 2015 companies will have to declare a tax residency. No longer will they be allowed to establish a “paper only” headquarters. Tim Cook, Apple’s CEO not surprisingly, stated that the company has met all of its tax obligations.
On another front, Deutsche Bank has downgraded the Apple Inc. stock (NASDAQ: AAPL) from a buy to a hold. In doing so it lowered its target price for the stock to $102 per share. In support of the downgrade analyst Sherri Scribner stated that the high expectancies for iPhone sales will make it difficult for the company to exceed expectations. The company has also announced all of its new products to the year’s end. New sales expectations, she feels, are higher than model estimates. The stock is currently selling in the $99 range with almost 37 million shares changing hands.
Apple Inc. is still a solid corporation and these emerging issues could make it more difficult for the company to do business going forward. Increased taxes would certainly affect the bottom line, while market downgrades will ultimately make it more expensive for the company to raise capital.
By Hans Benes
Image courtesy of Ilia Junehug – License