Apple, the Cupertino-based company, on Wednesday, May 28th, 2014, officially announced its acquisition of Beats Music and Beats Electronics, by agreeing to pay $3 billion for the audio equipment and subscription streaming music service founded by producer Jimmy Iovine and Dr. Dre (Andre Young).
The announcement comes nearly three weeks after deal negotiations were leaked to the media. Despite rumors that Apple was only interested in Beats Music in an effort to boost iTunes numbers, the deal includes both the hardware and the streaming software sectors of lovine and Dre's business.
It's by far the most expensive acquisition in Apple's 38-year history. The high price is the company's willingness to counter the threats that are posed to its iTunes store. The price to acquire the two companies consist of $2.6 billion in cash and $400 million in Apple stock that will vest over time.
"With $1.1 billion in revenue last year, Beats is already making money and will boost Apple's earnings," said Apple CEO Tim Cook in an interview. He said that Beats' music streaming service was the main selling point in the deal.
"We have known these guys forever," said Cook about Iovine and 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."
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.
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 much different from when Apple reshaped the scene with the 2001 debut of the iPod.
"Music is such an important part of all of our lives and holds a special place within our hearts at Apple," said Cook. "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."
Beats co-founders Iovine and Dre will join Apple. Their titles will simply be "Jimmy and Dre," Iovine told The Wall Street Journal. Iovine also said that he'd always known in his 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," lovine said in a statement. "Apple's deep commitment to music fans, artists, songwriters and the music industry is something special."
"Music is such an important part of Apple's DNA and always will be," said Eddie Cue, Apple's SVP of Internet Software and Services. "The addition of Beats will make our music lineup even better, from free streaming with iTunes Radio to a world-class subscription service in Beats, and of course buying music from the iTunes Store as customers have loved to do for years."
Beats was founded in 2008 by Dr. Dre, now a hip-hop producer, and Iovine, a longtime recording industry executive who is currently Chairman of Universal Music Group’s Interscope Geffen A&M Records. The company primarily sells high-end headphones and speakers, as well as audio software and subscriptions to a music-streaming service. Beats that dominates the luxury headphone market has been a big seller in Apple's stores.
Headquartered in Culver City, California, Beats conquered 62 percent of the $1 billion U.S. market for headphones that are priced above $100. Its headphones, which emphasizes bass, also has 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 Cook.
The purchase highlights Cook's biggest strategic move away from how Apple was when it was under Steve Jobs leadership, Jobs who died in October 2011. favored smaller acquisitions and didn't 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 Jobs founded after leaving Apple in the 1980s.
Apple typically makes smaller purchases of startups and companies most people have never heard of. And by acquiring Beats, the company is seeing a considerable change.
Cook said he never considered what Jobs would have thought about the Beats acquisition. Jobs "told me to do what was right," Cook said. "And I am 100 percent 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."
To celebrate the deal, Beats Music updated its iOS app, dropping the cost of an annual subscription to $100 (a $20 discount) and extending the free trial to two weeks. Tim Cook also confirmed that the streaming service will still be available to folks on Android and Windows Phone.
Apple's iTunes and the Competition
Apple's iTunes has transformed the music industry since its release in 2003 by selling singles for 99 cents so fans could make their own digital playlists rather than having to buy compact discs (CDs) that also included lots of songs they didn't want.
In recent years, things have changed. Consumers have been embracing other music options that cater to their individual tastes even more than iTunes ever did.
A host of free and paid streaming music services such as Pandora, Spotify, Rhapsody, Rdio, iHeart Radio, and TuneIn are now threatening iTunes with their ability to match songs with the listeners favorites. At the same time, Apple is also facing competition from other song-downloading services run by Google and Amazon.
The Beats deal also aligns Apple with the push toward higher-quality music. But some analysts question whether Beats will be a good fit after being acquired by Apple, which makes most of its revenue by selling hardware such as iPhones and iPads.
Spotify announced that it was partnering with Sprint and HTC on the HTC One (M8) smartphone, to stream music in a way that restores some of the fidelity lost to digital compression. Pono Music has promised digital files that are CD quality or higher.