Turn the Beat around! Why Apple buying Beats for $3.2 billion makes sense

Beats-By-Dre-Studio-High-Definition-Powered-Isolation-Headphones-LOVE-Steve-Jobs-Apple-Limited-Edition-Black-White

By Dwayne DeFreitas

Yesterday the Financial Times broke news that Apple, Inc, was in talks to acquire Beats Electronics, AKA Beats by Dre (“Beats”), a trendy music brand that’s recently added streaming music software to its high-end listening hardware business. Forbes says that a person close to the matter, Dr. Dre confirmed it this morning.

From a technophile perspective, Beats has never really been that exciting. The over-the-ear headphones that they’re widely known for are not cheap and the reviews say they only excel with certain types of music. As a marketer, however, I find the reach and penetration of Beats pretty fascinating. With their flagship headphones pulling users away from the convenience of earbuds and branding that’s bold and powerful, Beats has managed to revive “Bling” from the 90s rap scene that its namesake (rapper Dr. Dre helped to create) and bring it into the 21st century– leveraging the same tween and teen demographic that used to save their lunch money for fancy sneakers and Guess jeans.

Beats Studio

Beats are trendy and attractive to the same youngsters that fell in love with the iPod a decade ago

As stated earlier, Beats also recently launched a streaming music service called Beats Music. Like Spotify, Rdio and others, Beats lets you find tracks, make playlists and download music to your device for offline use (subway and airplane rides) for about $10.00 per month. So what makes the Beats Music service stand out? As WSJ tech columnist Joanna Stern points out, Beats Music has an innovative way of recommending new music to users. When you have the time check out her video on the subject, it’s pretty fantastic.

What Beats lacks most notably however, is deep integration with the current top social media networks– functionality that’s key to rival services like Spotify and Google Music.

Apple’s music experience was at the core of its early 21st century growth

So what does Apple want with beats for $3.2 billion dollars? The Beats Music streaming service. Music has a long been one of the keys to Apple’s success. Remember that Apple’s domination of mobile space began not in 2007 with the debut of the iPhone, but with the launch of iPod and the iTunes music store that quickly followed – before mobile was “Mobile.” iPod sales, driven on the promise that users could hold 1,000 songs in their pocket, are a huge part of Apple’s history. The iPod, along with the late 90s iMac and iBook helped Apple emerge from the realm of “geeks with expensive computers” to become a trendy, fun, high-end music brand much like Beats has become today.

AAPL stock during iPod launch

The iPod was announced in September 2001 and launched in late October. Shares soared. Apple was in people’s pockets thanks to their music device (courtesy Yahoo Finance)

But while the iPod was popular it was also, compared to rival devices, expensive. What Apple had going for it, however, was the music. With the iTunes software users had an easy way to get their CD collections into their pockets. And once the iTunes Music Store launched in 2003, users engaged in a never-before-available, completely unrivaled music discovery and purchasing experience. With iTunes you could find nearly any song you wanted, in good quality (compared to so many pirated music titles) free from virus or other scary risks. The music moved the iPod and the iPod moved Apple.

AAPL stock during iTunes Store launch

Apple introduced the iTunes Store in Spring of 2003. The ease at which users could download and listen to music sold more iPods. Mobile digital music became the standard (courtesy Yahoo Finance)

In fact, in 2006 a huge draw for the adoption of the iPhone was the idea that your iPod could make phone calls. Now you only needed one device in your pocket. The iPod culture moved the iPhone devices and once again music moved Apple forward. To repeat: music was integral to creating the Apple of today.

That was seven years ago.

In today’s digital music landscape, iTunes is considered something of a dinosaur. Why?

  • The iTunes App: The desktop interface is clunky, and the features of the Music app on the phone are largely tied to purchases.
  • iTunes Ping: Apple tried to add social media integration into the iTunes in fall 2010 via service they called iTunes Ping. It fell flat and Apple shut it down in fall 2012.
  • iTunes Match: A service that allowed users to have access to streaming versions of the music in their iTunes library for $25 launched in late 2011 to mixed reviews.
  • iTunes Radio: The service debuted with iOS 7 in 2013 behaves much like Pandora’s music service. Streaming music with limted control and no playlist functionality. The Pandora functionality’s been around on the iPhone since 2008.

Beats Music may be the solution to Apple’s music problem.

Beats Music offers that missing premium digital music piece that Apple’s iTunes has largely missed out on. Beats’ “Sentence” music discovery system is a uniquely powerful way for users to set up playlists– quickly. Unlike Spotify and Google Music, Beats Music is not heavily focused on social media integration, which means that Apple doesn’t need to venture into that territory until they feel ready.

Beats is also easy to tie directly to Apple’s bottom line.

Unlike so many other billion+ dollar acquisitions in the tech sector in the last 18 months, Beats Music is a service with a revenue model that works. In an age where users are moving to Netflix-like streaming music subscriptions rather than purchasing music outright, Apple can make revenue on both sides of that business. With 24 million users, Spotify is one of the most popular services to compete with Beats Music. The trouble is that as a case study, Spotify has shown that the streaming music model takes a long time to scale and others claim it may never be profitable on its own. Apple’s $150+ billion pile of cash could, along with embedding the software into its device’s default music player, solve that problem.

The fact is that Apple’s never claimed to make huge profits on the iTunes or App stores. But those services drive sales for their hardy, sleek, tested hardware, which is where the vast majority of Apple’s revenue comes from. With the iPhone becoming an ever-larger piece of their revenue pie, integrating a top end service like Beats Music into the upcoming iOS 8 is sure to move more devices, which is what Apple wants.

The Bonus? Beats can also bring back the youngsters. Walk into any AT&T or Verizon store and you’ll see all sorts of new smartphones with the latest bells and whistles available for free. While one can get an iPhone 4S for about $1 today with a new contract, the device debuted in 2011 and the newer Apple phones begin at $100.00. Tween, teen and family budgets drive young users toward free Galaxy S and HTC devices. With Beats Music built into iPhone, young users will be forced to think twice because the full Beats experience would only be available on iPhone.

The bottom line

So why buy Beats for $3.2 billion? Because premium music streaming is a challenge that Apple needs to have solved in a compelling manner if they want to move devices in 2014 and beyond.

Dwayne De Freitas is a marketing and technology expert that regularly co-hosts The Drilldown podcast. You can find him on Twitter @dwayned.

Devindra Hardawar consulted on this article.