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Apple buys Beats

By | Published on Thursday 29 May 2014

Beats Electronics

Not since Homebase bought Texas Homecare in 1995 has there been so much excitement over an acquisition.

Yes, it’s true, Apple has done the deal, inked the line and shaken a few hands, and is now the proud owner of a box full of Beats: shitty headphones, fledgling streaming platform, celebrity endorsements and all. Well it will be by quarter four. Boot up your Mac Classic, don your most ridiculous looking pair of Beats headphones, and let’s collaborate on a weak gag about not forgetting about Dre.

The news that an Apple/Beats deal was imminent having broken earlier this month, Apple Inc confirmed last night that an agreement had now been reached. The IT giant will pay $3 billion for the headphone and speaker maker, and it’s young streaming service Beats Music, breaking down as a $2.6 billion upfront payment and “approximately $400 million [in stock] that will vest over time”. As part of the deal Beats founders Jimmy Iovine and Dr Dre will join the Apple company.

Confirming the arrangement last night, Apple CEO Tim Cook told reporters: “Music is such an important part of all of our lives and holds a special place within our hearts at Apple. That’s why we have kept investing in music and are bringing together these extraordinary teams so we can continue to create the most innovative music products and services in the world”.

Meanwhile Iovine added: “I’ve always known in my heart that Beats belonged with Apple. The idea when we started the company was inspired by Apple’s unmatched ability to marry culture and technology. Apple’s deep commitment to music fans, artists, songwriters and the music industry is something special”.

Opinion is rather divided on whether this is a genius move by Apple, or a sign that the company is losing its way, panicking at the decline in download sales on American iTunes last year, depressed by the lacklustre consumer response to the iTunes Radio service, no longer able to innovate internally, and therefore just grabbing the coolest looking streaming service on the block. Certainly bringing such a high profile third party brand into the Apple family is unusual for the firm, though there is nevertheless some logic to the deal.

Of course, we don’t know what the key motivating factors were for Cook’s team – though most people reckon it was the streaming service rather than the much more substantial Beats headphone business that was the main attractor.

That said, bringing the Beats headphones and speakers into the Apple portfolio, and into Apple’s online and high street stores, does make a certain amount of sense. While long-term Apple snobs (like myself) might look down on Beats’ technologies, with the younger tech consumer that Apple arguably needs to better engage, Iovine and Dre’s brand not only enjoys loyalty, but quite a bit respect too.

But many have noted that Apple’s statement last night listed Beats Music before the hardware business, and Cook’s accompanying memo to staff waxed lyrical about the streaming service, noting that “we think it’s the first subscription service to really get it right”. And ‘it’ presumably doesn’t refer to paying mega-bucks to Ellen DeGeneres to gurn at the camera shouting “look at me, I’m streaming, how modern am I?”

But whatever ‘it’ is, the current Beats subscriber base can’t be what Apple is interested in, because in the wider scheme of things it’s tiny, so the tech giant must have been attracted to the catalogue, the technology, the curation approach or, possibly most likely, the team.

Iovine is both old school and new school, both major label man but also mate to the stars, so perhaps Cook reckons that his new colleague can bridge the gap that needs to be bridged to help his company lead the way as digital music shifts from reworked retail to reworked radio, with all the challenges on both the rights owner side and the consumer side that that shift brings.

In his staff memo, Cook wrote: “Jimmy has been on the cutting edge of innovation in the music industry for decades, including as a key partner for Apple in the launch of the iTunes Music Store more than ten years ago. He has produced or collaborated with some of the most popular artists in history, and been an important contributor to the success of the iTunes Store”.

Beyond exploiting Iovine’s contacts, the potential of bundling may also be behind Cook’s grand plan for a Beats/Apple alliance. Even if Iovine and Team Beats do have the best streaming platform on the market, and the right industry contacts to move it forward, they still face the same challenges of everyone dabbling in the subscription service space: the fact it’s not been proven there is mass-market interest in a ten dollar a month music set-up, and the big upfront costs and low profit margins of the streaming business.

But lock the content to the hardware – so an iPhone/Beats phone/unlimited music for life combo with some iCloud goodness thrown in – and maybe the ever so tight margins can be loosened a little. And while such content/device combos have never really worked in the past, with Apple’s infrastructure, Beats’ celebrity friends, and the two brand’s existing profile, perhaps their bundling plan can succeed in grabbing at least the premium end of the mass-market, leaving the musos for Spotify and the freetards for YouTube.

So maybe the barmy big bucks Beats deal isn’t so barmy after all. Providing Iovine can fit himself in to Cupertino culture, and the Apple/Beats bundling strategy can work where others have failed. Neither of which is assured, but there’s definitely some potential there.