Widespread media reports last week suggest Apple is close to sealing a $3.2 billion deal for Beats Electronics, a headphone manufacturer and music streaming service. Here's why.
Tim Cook is about to put his stamp on Apple via a $3.2 billion acquisition of Beats Electronics, a popular high-end headphone manufacturer that also owns an upstart subscription music service. Last week, The Financial Times reported on the talks, which were then confirmed by a number of other media outlets.
Apple has never made a billion dollar acquisition before, its largest being the $400 million deal for NeXT that brought Steve Jobs back to the company in 1996.
Apple was a very different company then, though. It was less than a year from bankruptcy and was burning cash. Today, Tim Cook commands a $150 billion war chest that will barely take a dent from a three billion dollar splurge on Beats.
Nevertheless, it is a massive shift in character for Apple, which has thus far chosen to acquire smaller companies in return for talent and unique technologies. In a recent conference call, Cook said Apple had purchased 24 companies over the past 18 months, but the company has traditionally demurred when asked about its acquisitions.
Cook did say that Apple was "on the prowl" for more potential acquisitions, but that he was only interested in ones that made strategic sense.
How does Beats fit into Apple's strategy?
At first, the $3.2 billion price tag is comparable to what Google paid for Nest recently. To be perfectly honest, I'm a little disappointed that Apple didn't buy it, but remaking boring in-home devices isn't exactly in Apple's wheelhouse at the moment. Instead, Nest with its smart thermostat and smoke detector products is a great fit for Google's "save-the-world" moonshot strategy.
Beats, on the other hand, slots right in to Apple's existing music products lineup in several ways that require we set aside the price tag. To Apple, $3.2 billion is roughly equal to what the company generates in monthly net profit. Thus, it could make sense to pick up a growing, hip company that fills a glaring gap in its product lineup -- and it acts as a massive talent acquisition, something that the company loves.
Apple has reportedly been working on a full-fledged subscription music service for years as an augmentation to its iTunes Music Store, where customers can buy and own individual songs. Last year, Apple introduced iTunes Radio, a free, ad-supported streaming music service similar to Pandora.
However, the popularity and huge growth of Spotify has shown Apple that perhaps the time is right for the company to finally take the plunge into subscription-based music.
Services like Spotify are something that the late Steve Jobs frequently scoffed at in public, arguing that people preferred to own their music. Of course, Jobs was known to talk down product categories just before Apple jumped in with both feet -- like the smartphone and tablet markets.
Beats would give Apple an easy, somewhat established entry into the subscription music market, and the company could even get the product integrated into iOS 8 in time for a launch this fall, though that might be too much to ask. Instead, Apple could rebrand Beats, or just leave it as-is... a preinstalled option on the iPhone and iPad. Regardless, Eddy Cue, Apple's iTunes head and the executive behind the Beats negotiations, according to The New York Times, would have a number of options to fill a hole in the company's offerings.
As an added bonus, Apple would gain a hugely profitable and popular headphone manufacturer, though it would be surprising if Apple kept the brand around -- Beats by Dr. Dre by Apple doesn't quite have the same ring to it that "iPod" does.
But, the real prize would be the music industry expertise. Both Jimmy Iovine, a longtime music industry executive, and Dr Dre., whose real name is Andre Young, are expected to take senior roles at Apple following the acquisition. They could plug in well as part-time advisors to the existing iTunes infrastructure, working on projects like the iTunes Festival, as well as other projects like special events at Apple Retail Stores. Both Young and Iovine could use their existing business relationships to secure deals with record labels, plus bring some level of cachet to the company to help it attract younger customers.
It's unlikely that Apple will make any sudden moves with Beats if and when the deal completes. Instead, it's likely to leave Beats to operate as a wholly owned but separate subsidiary, for the most part, with the notable exception of the Beats Music service, which I expect to see integrated into iOS sooner rather than later.
In an interview with Walt Mossberg at the D: Dive Into Media conference, Beats co-founder Jimmy Iovine said of the Beats Music service, which focuses an incredible amount of energy on curated smart playlists, "if you have to search, we have failed you." That sounds like something straight out of a Steve Jobs keynote and a perfect fit for Apple. "Most technology companies are culturally inept," Iovine said. "I don't care what they do, they're never going to get curation right... we're going to be miles ahead of them."
"We are going to service you in the music space for what we think you need. which is basically 'what song comes next?' No one listens to one song and stops... it's important what song comes next."
If you want to know why Apple might want Beats and Jimmy Iovine, watch this interview:
Music was something close to Steve Jobs' heart and he and Iovine were close friends. Jobs was known to stay at Iovine's house when he visited Los Angeles. Yes, $3.2 billion is a lot of money, but at the end of the day, it's a drop in the bucket to Apple. If Tim Cook believes Beats is a good strategic fit for the company, one that fills a need, and that bringing Dr. Drew, Jimmy Iovine, and the rest of the music experts at Beats to Apple is worth 30 days of profits, he's earned the right to make that decision.
A free trial of the Beats Music service is available from its website.
Reportedly, the deal is very close to completion, and we could see an announcement as soon as this week. What do you think about Apple's potential Beats acquisition? Let us know your thoughts in the discussion thread below.