POV: Apple Buys Beats

MINDSHARE POINT OF VIEW: Apple has bought music company Beats in a deal rumoured to be worth $3bn. Beats, which was co-founded by rapper and music producer Dr Dre, built its success in the headphones business, where it more or less single-handedly created a new fashion sector that they dominate. More recently they bought music streaming service Mog and re-launched it as Beats Music with a Super Bowl ad starring Ellen DeGeneres.

Since news of the potential acquisition leaked there has been a lot of commentary about why Apple would pay ‘so much’ for a company whose music streaming service is still very small (in terms of users/subscribers). A very simple reason might be that the headphones part of the business was estimated to have 2013 revenues of $1.5bn: compare that to WhatsApp which has revenues in the low millions but was bought for nearly $20bn. Beats is also still growing strongly whilst Apple currently has no obvious new growth boost beyond established existing products. In analyst Ben Thompson’s view: (iPhone sales) will grow by single digits…the iPad has plateaued, the Mac is growing in a shrinking market.

The attention on the current low base of the music streaming service also appears to be slightly short-term in its focus. Whilst Apple has come to dominate the paid download sector, essentially creating a near-monopolistic service with iTunes, 2013 saw the first ever drop in paid for music downloads as listeners move to services like Spotify & Pandora. Whilst Apple has tried to crack this market its iTunes Radio has been far from a smash-hit.

Although Beats may be small at the moment, it’s probably a better product: it is available on Android as well as Apple products (with Android having a much larger market share globally) and also, importantly, is a move towards a trend that many of the large tech companies are adopting, of effectively unbundling their services. Whereas the Web lent itself to large, multifaceted solutions, apps are increasingly focused around single activities – so Facebook now has its main app, Instagram for photos, WhatsApp for messaging, etc…

With Beats Apple also gets access to two high ranking execs, in the shape of Dre and his co-founder and music industry veteran Jimmy Iovine. Iovine famously tried and failed to sell Steve Jobs on the notion of a music subscription service; he obviously had more success with Jobs’ successor Tim Cook. It would make sense to assume that Iovine and Dre will be expected to bring their ability to manufacture and sell cool to Apple, as they work to maintain their place at the pinnacle of tech & culture as Apple looks to differentiate itself even more from the rest of the, increasingly commoditized, tech world. They will be doing this alongside another recent Apple hire, Angela Ahrendts, who Apple took from her previous role as CEO of Burberry, where she re-injected cool into the fading brand, in part by tapping into music and technology.

Although the buy might not be as ‘exciting’ as Facebook purchasing WhatsApp it, like Google’s purchase of smart-thermostat company Nest, arguably makes more sense and gives a more interesting view of where consumers are heading.  It doesn’t have an immediate impact on advertisers as Beats Music doesn’t have an ad-funded free version. If however the streaming service does become more popular it will be yet another avenue advertisers could potentially use to connect with people, similar to Spotify and Pandora but powered by the wider Apple ecosystem.