Apple Buys Beats

Apple needs to get a grip again on the music industry. The growth of iTunes has been compromised by the rise in popularity of streaming-services like Pandora and Spotify. For instance, U.S sales of single downloads, where Apple is leader, fell by 6% last year while album downloads were flat.¹ iTunes radio does not seem to matter much or make up the difference either. Its 40 million users fly under the radar and are not as engaged as Pandora’s 70 million active consumers; Pandora has at least three times more accounts than iRadio. Meanwhile, Spotify has 10 million paid subscribers worldwide and is a big investment prospect in Wall St.  Overall, the tide seems to be shifting away from Apple’s gravitas in the business.

Fortunately, the company enjoys the highest cash reserves of any and recently even split its stock to appease shareholder unease for poor dividend payments. Late in May it finally puts its cash to work and surprised the markets with its greatest acquisition ever since its buyout of NeXT computers in 1996 for 400m. It put down $3 billion for Beats Electronics ($2.6bn in cash and 400m in shares that will vest over time), and in so doing brought Beats co-founders Jimmy Iovine, a music mogul, and Dr. Dre, a rapper, squarely into Apple’s executive cadres.

For the music business layperson, the deal is likely to make sense intuitively, although Apple’s high valuation may surprise. Beats’ streaming service currently has over 250,00 paying subscribers and makes Apple a stronger player in that market. But it is the creative talent and music foresight of Dr. Dre and Jimmy Iovine that interests this world giant of tech. A deal like this has to make sense for the brand and fit in with its culture. Apple CEO Tim Cook could say that the merger helped Apple bridge the divide between Silicon Valley and Hollywood. Indeed, Cook seems to be staffing the next generation of Apple leaders by continuing to build on Steve Job’s famous dictum that, in a post PC era,   “technology married with liberal arts, married with the humanities… yields us the result that makes our heart sing”.²

That Beats is brand-savvy too can be seen from its history in the headphone business. Before Beats, companies like Skullcandy and Bose dominated the market. Bose headphones weren’t fashionable, however, and Skullcandy sold cheap and did not cater to high-end audio. Beats headphones changed all that and fused audio, fashion, and music industry glamor in one product. This year, six after launching, Beats controls over 60% of the headphone market.³

Beats inroads into fashion and new lifestyle trends are noteworthy. Celebrity endorsement came right out of the box with co-founder, Dr. Dre and the headphones were promoted early on in his music videos and productions. Then Oscar De La Renta and Fendi bought into exclusive lines, while Interscope artists received their own custom set of headphones and helped further promote the brand. Professional sports figures were also targeted with free pairs. Soon Beats became a status symbol, and a techy decoration, for a younger generation. Soon, Apple started carrying Beats products in their store as an alternative to their original but now staple ear buds, whose performance was often perceived as sub par.

It may be early to judge the merits of the merger, but there are a number of positive outcomes already for both companies and the industry. Apple gains more traction in the streaming market and a better foothold into higher end audio, perhaps a looming frontier as broader bandwidth becomes inevitable. Beats Electronics surely shares the vision.  Both results are good for the music business.

But there is a danger of missing another watershed moment here. For the first time ever, Apple has hired marquis talent from a business which it previously left alone. If the tech giant is recognizing that it can no longer move forward with music unless it enlists industry greats into its ranks, the primacy of technology over music can no longer be taken for granted—and this is the best of news. On the other hand, if the event were the beginning of an exodus of music industry greats towards technology businesses it could compromise even more the fragile autonomy of the trade.

By William Kiendl and Aidan McMurry

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