Apple is striking a new chord with a $3 billion (€2.2bn) acquisition of Beats Electronics, a headphone and music streaming specialist which also brings the swagger of rapper Dr Dre and recording impresario Jimmy Iovine.
Today’s announcement comes nearly three weeks after deal negotiations were leaked to the media.
It is by far the most expensive acquisition in Apple’s 38-year history, a price that the company is paying to counter a threat posed to its iTunes store.
The price consists of $2.6 billion in cash and $400 million in Apple shares. The deal is expected to be completed before the end of September.
With $1.1 billion in revenue last year, Beats is already making money and will boost Apple’s earnings once the new fiscal year begins in October, Apple chief executive Tim Cook said in an interview.
“We have known these guys forever,” Mr Cook said of Mr Iovine and Dr Dre. “We’ve dated, we’ve gone steady and now we are getting married. This relationship started a decade ago, so we know there is an incredible cultural fit. These two guys have a very rare set of skills. It’s like finding a particular grain of sand on the beach. It’s that rare.”
Mr Iovine (61) and Dr Dre (49) will both become key executives in Apple’s music divisions, though Mr Cook said their roles have not yet been determined yet. He said Beats’ music streaming service was the main selling point in the deal.
The growing popularity of music streaming services such as Pandora and Spotify has been reducing sales of songs and albums, a business that iTunes has dominated for the past decade.
US sales of downloaded songs slipped 1 per cent last year to $2.8 billion while streaming music revenue surged 39 per cent to $1.4 billion, according to the Recording Industry Association of America.
Although Apple broke into streaming with the launch of iTunes Radio last September, the service has not been as popular or as lucrative as the company expected, according to sources.
Apple is counting on the Beats acquisition to boost its cachet with teenagers and younger adults while trying to remain a leader in digital music — an industry that looks very different from when Apple reshaped the scene with the 2001 debut of the iPod.
“Apple suddenly has regained its cool,” said Sony Music chief executive Doug Morris, who was one of the first recording executives to embrace iTunes at Mr Iovine’s urging more than a decade ago.
Beats was founded in 2008 by Dr Dre, now a hip-hop producer, and Mr Iovine, a long-time recording industry executive who is currently chairman of Universal Music Group’s Interscope Geffen A&M Records. It now dominates the luxury headphones market. Its equipment also has been a big seller in Apple’s stores.
Operating from its headquarters in Culver City, California, Beats commands 62 per cent of the $1 billion American market for headphones priced above $100 , according to NPD Group. The gear, which emphasises bass, has also been endorsed by several star athletes, including San Francisco 49ers quarterback Colin Kaepernick and New Jersey Nets forward Kevin Garnett.
Beats Music, the music streaming subsidiary of the electronics maker, has more than 250,000 subscribers, according to Mr Cook.
The purchase marks Mr Cook’s biggest strategic break from the way the company was led under co-founder Steve Jobs, who died in October 2011. Mr Jobs favoured smaller acquisitions and did not believe subscription music plans would be popular.
Before Beats, Apple’s biggest acquisition had been its $400 million purchase of NeXt Computer, a company that Mr Jobs founded after being ousted from Apple in the 1980s.
Mr Cook said he never considered what Mr Jobs would have thought about the Beats acquisition. Mr Jobs “told me to do what was right,” Mr Cook said. “And I am 100 per cent certain this is what is right. This is one of those things that we will look back upon and say it was meant to be.”
Sony chief Mr Morris, who considers Mr Iovine to be his best friend, believes Mr Cook is making a smart move which will give Apple even more credibility in the music industry.
“It’s a game changer because Jimmy is that kind of guy who can change a game,” Mr Morris said. “I am not saying he is Steve Jobs, but he is a guy with new ideas and he really knows how to build the bridge between music and technology.”
But some analysts question whether Beats will be a good fit for Apple, which makes most of its money selling hardware such as iPhones and iPads.
Forrester Research analyst Frank Gillett said Apple would have been better off developing its own headphones in-house and expanding into music subscriptions through iTunes.
“It’s hard to understand why Apple would have to spend 3 billion dollars on a nascent streaming service and a line of bass-heavy headphones,” he said.
Yukari Iwatani Kane, the author of Haunted Empire, an inside look at Apple since Mr Jobs’ death, also sees a disconnect.
“Culturally, Beats is the complete opposite of Apple,” he said. “It’s known for being loud and bold and in your face. It doesn’t fit with Apple’s understated, discerning brand.”
With $150 billion in cash, Apple can easily afford taking a risk on Beats.
PA
