Why Beats is Mu­sic to Ap­ple’s Ears

Ap­ple goes for its big­gest ac­qui­si­tion ever, buy­ing Beats for $3 bil­lion. It could also be chang­ing tracks now, adding sub­scrip­tion-based mu­sic ser­vice to its vast store­house of dig­i­tal mu­sic

The Economic Times - - World View - Brian X Chen

Ap­ple, which turned dig­i­tal mu­sic into a main­stream phe­nom­e­non, said that it was buy­ing Beats Elec­tron­ics, a ris­ing mu­sic brand, for $3 bil­lion, in a move that will help it play catch-up with ri­vals that of­fer sub­scrip­tion-based mu­sic ser­vices.

Ap­ple and Beats ex­ec­u­tives said the com­pa­nies would work to­gether to give con­sumers around the world more op­tions to lis­ten to mu­sic. The Beats brand will re­main sep­a­rate from Ap­ple’s, and Ap­ple will of­fer both Beats’s stream­ing mu­sic ser­vice and pre­mium head­phones.

Ap­ple said iTunes, which sells songs and al­bums and of­fers a stream­ing ra­dio ser­vice, would be of­fered along­side the Beats mu­sic ser­vice.

The Beats deal brings Jimmy Iovine, a long­time mu­sic ex­ec­u­tive, and Dr Dre, the rap­per, to work un­der Eddy Cue, Ap­ple’s ex­ec­u­tive in charge of in­ter­net ser­vices. Dr Dre and Iovine, who founded Beats in 2006, join a list of prom­i­nent ex­ec­u­tives Ap­ple has added to its ros­ter, like for mer Burberry CEO An­gela Ahrendts.

In an in­ter­view at Ap­ple’s head­quar­ters at Cu­per­tino, Ti­mothy D Cook, Ap­ple CEO, re­peat­edly em­pha­sised the talent that Dr Dre and Iovine would bring to Ap­ple. He also praised the Beats mu­sic ser­vice, which cre­ates playlists for sub­scribers.

“These guys are re­ally unique,” Cook said. “It’s like find­ing the pre­cise grain of sand on the beach. They’re rare and very hard to find.”

Ap­ple is pay­ing for the deal with $2.6 bil­lion in cash — hardly a dent in the com­pany’s huge cash pile of more than $150 bil­lion — and $400 mil­lion in stock. The com­pany ex­pects the deal to be ap­proved this year.

For Ap­ple, the ac­qui­si­tion of Beats, ex­pected for weeks, largely fol­lows a fa­mil­iar pat­tern. Ap­ple has his­tor­i­cally bought tech­nol­ogy out­fits that have re­sources and talent that it can blend into fu­ture de­vices and on­line ser­vices. Beats fits that cri­te­rion.

But the Beats deal is also dif­fer­ent. Un­til now, Ap­ple, the rich­est tech com­pany in the world, has avoided bil­lion­dol­lar takeovers in favour of smaller deals. The Beats deal is its largest ever. Ap­ple de­clined to dis­close plans for prod­ucts it will make with Beats, so it will take time to see how the ac­qui­si­tion ma­te­ri­alises. In the mean­time, it will raise ques­tions about why Ap­ple, the pioneer of dig­i­tal mu­sic, is buy­ing a mu­sic com­pany in­stead of ex­pand­ing its own prod­ucts. The growth of Ap­ple’s iTunes Store is be­ing hurt by com­pa­nies like Spo­tify and Pan­dora, which al­low people to stream mu­sic freely with ads or with a paid sub­scrip­tion. “Ap­ple was at the front of that curve, and if that’s the rea­son for the ac­qui­si­tion, it would lend cre­dence to the view that maybe they’re not ahead of the curve any­more,” said May­nard Um, a fi­nan­cial an­a­lyst at Wells Fargo.

Cook called the deal a “no-brainer.” He said Ap­ple had bought 27 com­pa­nies since last year but that did not mean Ap­ple had to buy those com­pa­nies. “Could Eddy’s team have built a sub­scrip­tion ser­vice? Of course,” he said. “We could’ve built those 27 other things our­selves, too. You don’t build ev­ery­thing yourself. It’s not one thing that ex­cites us here. It’s the people. It’s the ser­vice.”

Iovine said that he and Dr Dre had long ad­mired Steve Jobs and Cue at Ap­ple. “We met with the guys, and what we re­alised is they get it,” Iovine said at the Code Con­fer­ence in Cal­i­for­nia. “They have feel. They un­der­stand cul­ture.” In 2002, Jobs, then the Ap­ple chief, be­gan per­suad­ing record com­pa­nies to sell their mu­sic on­line. Over the years, he dis­missed many calls for Ap­ple to of­fer mu­sic sub­scrip­tion ser­vices be­cause he be­lieved that con­sumers did not want to rent songs. Now the tech­nol­ogy in­dus­try has made a sharp shift. People con­sume mu­sic, games and video on the go on their smart­phones. In the fourth quar­ter of 2013, 52% of Amer­i­can smart­phone own­ers used apps for stream­ing mu­sic like Pan­dora. At the same time, much has changed for Ap­ple. The com­pany is no longer an un­der­dog but the leader of the tech in­dus­try, with a lot of money to spend. Steven Milunovich, a fi­nan­cial an­a­lyst for UBS, said he thought the bulk of the ac­qui­si­tion might have been de­voted to hir­ing Iovine to han­dle big me­dia ne­go­ti­a­tions, as Jobs did for iTunes mu­sic in the past. Cook­saidDrDre,bornAn­dreYoung, and Iovine would work with Ap­ple on the next gen­er­a­tion of mu­sic of­fer­ings. He said they would be work­ing on “prod­ucts you haven’t thought of yet, and see­ing around the next cor­ner to ar­tic­u­late the way to take mu­sic to an even higher level than it is now.”

The New York Times

FOUR IS COM­PANY: (From left) Mu­sic ex­ec­u­tive Iovine, Ap­ple CEO Cook, rap­per Dr Dre, and Ap­ple’s ex­ec­u­tive in charge of in­ter­net ser­vices Cue. As part of Ap­ple, Iovine and Dr Dre will work un­der Cue

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