News broke late last week Apple is in the final stages of purchasing Beats Electronics. The company, fronted by rapper and producer Dr. Dre and headed up by music mogul Jimmy Iovine, sells high-end headphones and, more recently, launched its own branded streaming music service. If the purchase goes through, and its expected to as soon as this week, it would be the largest acquisition in Apple’s history.
Beats headphones are popular — often donned by celebrities the world over — and extremely profitable. Beats Music has reportedly also managed to gain as many as 200,000 paying subscribers since its launch earlier this year. But quite why Apple would choose to acquire the company, let alone for the $3.2 billion reported to be on the table, is still unknown.
Personally, I’m stumped — I don’t know the answer. Luckily, many in the industry have weighed in with their thoughts on the potential deal.
Despite many questions surrounding the appropriateness of an Apple-Beats buyout, Bloomberg’s Adam Satariano argues that the two companies aren’t the strange bedfellows as some might have you believe, highlighting the two companies’ deep ties to one another, the relationship between Iovine and Steve Jobs as well as going as far as to say that Dr. Dre and Apple’s Eddy Cue are on good terms:
Beats co-founder Jimmy Iovine, a longtime producer and executive, was friendly with Apple co-founder Steve Jobs and is a big supporter of the company’s efforts in music. Apple, meanwhile, has cultivated extensive relationships in the music business and its iTunes team is populated with former radio promoters, music writers and other industry veterans. The familiarity may help Apple more quickly reap the benefits of a deal once it’s completed.
Bobby Owsinski of Forbes thinks the purchase is mostly about Beats Music, stating:
Apple sees music downloads from its iTunes store diminishing, and if it reads any of the reams of research on the subject, knows very well that downloads may be more endangered than the CD. Apple dipped its toe into the streaming waters last year with iTunes Radio, which seemed like a half-hearted effort at the time and even more so now, as the subscription numbers have never really taken off and have been stagnant for the last two quarters.
That said, a non-interactive service like iTunes Radio doesn’t appear to be where music’s future lies, at least financially. Pandora already has a huge lead in this part of the market, but relatively few paying subscribers. It’s thought that eventually most users will want to move to an interactive service like Spotify where they get more choice over what they’re listening to, which is where Beats Music is and iTunes would eventually like to be.
Hannah Karp of The Wall Street Journal again cites Apple’s ambitions in streaming music as the main incentive to buy Beats:
But as digital music sales slow and music fans warm to the idea of renting access to music rather than owning it, Apple finally appears willing to invest in the music industry’s next model—one that could cannibalize its download sales.
Sam Gustin of TIME thinks Apple is taking aim at streaming services like Spotify with its Beats acquisition and believes that Apple failed to anticipate a major cultural shift towards music streaming:
The era of digital downloads is coming to an end and Apple is still without its own streaming music product. That’s why it looks poised to buy Beats for $3.2 billion, which would be its biggest acquisition ever
Micah Singleton of The Daily Dot puts Apple’s money on Jimmy Iovine and the value he could bring to Apple in terms of his connections in the music and film industries. His presence at Apple could enable future content deals to run more smoothly, something Apple has struggled with in recent years, which would be invaluable or the company:
What you can count on is Jimmy Iovine being Apple’s Hollywood liaison. Iovine can get deals done that Apple executives cannot. Hollywood runs on relationships, and thanks to running one of the biggest labels in the world and producing films and TV shows, Iovine has relationships with executives across the industry. Iovine may be tasked with reinventing iTunes at first. But when it’s time to make those content deals for the long-rumored Apple TV, you can expect Iovine to be in the room.
Writing at BuzzFeed, Peter Lauria also agrees that Iovine is key to the Apple-Beats deal:
He was one of the first industry executives to anticipate the download business’s decline and advocate for subscription and streaming services as music’s future. While Apple has been talking up iTunes in recent earnings calls, in the last one saying that it had brought in $2.6 billion in revenue in the first quarter this year, up 9% from the same quarter a year ago and hitting an all-time record, sales of apps have been the driving force of its growth. According to the source, Apple is buying Beats in part to bring Iovine on board to “revamp and run its whole music strategy.”
Peter Kafka of Re/code believes that Apple is interested in Beats Music in the long term but should stand to benefit from their prominence in hardware and cultural influence for now:
The best way to think about Beats, for now, is as two separate deals. In one, Apple gets an electronics maker that has trained lots of people to spend money on headphones with high price tags, even though some audiophiles don’t think highly of them. Industry sources peg Beats’ electronics sales at more than $1 billion a year.
Marrying that business with Apple’s established design and product operation, overseen by Jonathan Ive, could give Apple a new series of product lines and/or new channels to push out new products like the rumored iWatch.
It’s likely that Apple is more interested, long-term, in the potential of Beats Music, the subscription streaming service.
Beats could be the last piece of the wearables puzzle for Apple according to The Verge’s Sean Hollister. Acknowledging Iovine’s connections and Beats’ powerful brand, Hollister feels bringing the company on board is not for its existing product offerings, but to perhaps aid with something entirely new like the iWatch.
What Apple needs to make a wearable product successful isn’t just superb technology, or fantastic manufacturing and distribution. The company’s core strengths aren’t enough. It would need the iWatch to be seen as a fashionable luxury product, one worn by influencers. Beats has those in spades. The streaming music deals may not transfer, but Apple could retain the celebrity cachet.
While Beats may not be as universally popular as Apple itself, it could do what one of the world’s most profitable companies might not risk on its own: convince people that a potentially controversial, optional piece of technology is worth spending top dollar to purchase. $3.2 billion may be a small sum when you consider the price of failure. My hunch is that if Apple is buying Beats, it’s because Apple is ready to announce the iWatch. It just needs Dr. Dre and Jimmy Iovine to wear one.
Why do you think Apple would want to purchase Beats Electronics and what would justify the $3.2 billion price tag? Headphones, streaming music, talent, branding or something else entirely? Let us know in the comments or tweet me at: @TiP_AdamO.