Rumors are flying about the imminent purchase of headphone maker and streaming music service Beats Electronics by tech giant Apple AAPL +1.24% for a reported $3.2 billion, which has caused a lot of head scratching in both the tech and music communities. Should this deal come to pass, a number of questions come to mind.
Why Is Beats A Fit for Apple?
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.
Beats Music provides a ready infrastructure for Apple and already is integrated with mobile partner AT&T T +0.36%. Plus, if it’s true that the company has accumulated between 10,000 and 20,000 subscribers (which can’t be verified since Beats doesn’t report these numbers), that’s actually a huge jump over every other service already in terms of paying subscribers. Even if the subscription numbers aren’t quite to that level, it’s still pretty good for a service that only just launched and is yet to be available outside the US.
Why Is Beats Not A Fit?
A good deal of the purchase price of Beats is based on the consumer electronics market share that the company now enjoys. Consumer electronics are the heartbeat of Apple too, but the one thing that is an integral part of its brand is a superior quality product. Unfortunately Beats headphones are more of a fashion statement and are nowhere near the overall quality one would normally associate with Apple, so you have to wonder how the electronics portion of Beats even fits into the equation of the deal. Beats does have plenty of urban appeal thanks to hip hop producer and co-founder Dr. Dre, but its not like Apple has been lagging in this area, so you’d have to figure that’s not a factor either.
Apple has some brilliant audio minds (Tomlinson Holman, who’s in charge of the company’s audio direction, is one of the world’s foremost audio scientists and inventor of the THX theater audio we all enjoy as well as one of the creators of 5.1 surround sound) and you can’t say the same for Beats, so it wouldn’t be buying the company for its engineering skill.
There’s some speculation that Beats co-founder Jimmy Iovine and Dre would come along with the Beats acquisition to help Apple’s music initiatives of the future, but does this make sense? Neither exactly fits the Apple culture, and while Iovine is certainly a forward-thinking music industry mover and shaker, why would he even be interested after the big payday that would come from the acquisition? There’s a big difference from owning the company and being responsible for its direction to being just a piece in a larger one, and most creative types aren’t that fond of the structure involved with real corporate (meaning not an entertainment company) life.
Why Now?
Apple could have swooped in and purchased Beats much sooner for a lot less money, but you get the feeling that they weren’t totally sold on either the technology or the business model of the music service and needed some proof before it would make a serious offer. If the rumors are correct, it didn’t take long for that to happen; a mere three and a half months after the Beats Music service launched.
That said, Apple is quite aware that its leading position in digital music is slipping, with Spotify making major market inroads and new streaming service competition from Amazon and Google GOOGL +2.36% on the horizon. Apple certainly has the resources to launch its own service, but you get the feeling that might take too long to come to fruition if left to the company’s internal devices. It would seem that Beats, or one of the other streaming services reported available, is a way to get into the market more quickly than with a home-grown product.
Keep in mind that Apple doesn’t need Beats or iTunes for the revenue that music generates. Although that’s significant, the real money for the company has always been from selling hardware. The strategic place that music holds is that it has been an essential key to selling that hardware in the past. That’s not so much the case anymore though, as consumers don’t buy a new device just to stream music on it, unless of course Beats has a new unknown consumer device in the works that might drive that.
Was This Really The Beats Exit Strategy All Along?
The timing of this transaction feels odd in that Beats Music only recently launched in late January, making one think that perhaps the grand plan of Iovine/Dre was to prove the music service as viable, then sell to Apple at some point down the line. Iovine reportedly held talks with Apple execs before the service even launched, which makes one wonder if a tentative deal was in the works even then. Perhaps Apple was given a chance at the purchase before The Carlyle Group extended its most recent round of capital to the company, which now might have cost the company twice as much by waiting.
If Apple’s acquisition of Beats goes down as reported, it will remain a deal that is both obvious and curious at the same time. As with many tech acquisitions, it may take time before the results become clear, which gives us plenty to speculate on in the meantime.
