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Apple Buys Beats For Brand Power

The price of cool comes to $3 billion, as Apple seeks cred with a younger audience.

Apple on Wednesday said it has agreed to buy streaming service Beats Music and Beats Electronics, the affiliated audio equipment maker, for $3 billion.

As part of the deal, the largest to date for Apple, Beats co-founders Jimmy Iovine and Dr. Dre will join Apple, deepening the company's connections to music industry power players.

Tim Cook, Apple’s CEO, said in a statement that Apple is buying the companies "so we can continue to create the most innovative music products and services in the world."

The $3 billion acquisition consists of $2.6 billion for Beats Music and $400 million for Beats Electronics, a breakdown that happens to reflect Apple's proportional interest in streaming and consumer electronics. Selling premium-priced Beats headphones and speakers undoubtedly fits Apple's preference for selling products with high margins, but the deal is largely about streaming and brand power.

[What else is next for Apple? Read Apple Eyes Home Automation.]

Apple senior VP of Internet software and services Eddy Cue in a statement said the addition of Beats will improve the company's music lineup, "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."

But just because customers have been downloading songs from iTunes for years doesn't mean they will continue to do so a decade hence. As streaming music services have become more popular, music downloads have become less so, threatening the relevance of Apple's iTunes music store and Apple's position as a digital goods gatekeeper. Many younger music consumers no longer see the need to download and store songs; they prefer paying a monthly subscription fee for access to a vast library of songs.

Van Baker, research VP at Gartner, said in a phone interview that the Beats Electronics is not the focus of this deal. "There's no reason why Apple couldn't create the equivalent of Beats headphones on its own," he said, attributing a competence to the company not evident in its underwhelming iPod Hi-Fi. "I think this is about the streaming side of things."

Beats Music was built through the acquisition of a streaming service called MOG in 2012, which suggests Beats isn't sought for superior engineering talent. Baker suggests Apple is buying the company because of the power of the Beats brand and because of the audience that Beats has attracted.

"Why not buy Spotify? Apple already has the Spotify audience," said Baker. "They're after a younger, edgier audience. The challenge will be retaining them."

A young music customer, Baker recounted, said this about the deal: "Who wants to buy a set of Beats headphones with an Apple logo on it?"

Apple may well withhold its logo from Beats products for that very reason: Apple, the underdog a decade ago, has become the big dog, as Baker put it. And that's not cool, at least among the young. When kids see Apple products, they see the things their parents use.

In Apple's attempt to reinvigorate its image, there are echoes of Oldmobile's 1988 ad campaign, "This is not your father's Oldsmobile." The slogan wasn't enough to revive Oldsmobile, but Apple's business situation is far sunnier. Maybe cool is just a commodity that can be bought and streamed for a monthly fee.

Baker isn't sure whether the deal will quiet critics who argue Tim Cook's management of Apple has been lackluster. The financial wisdom of the deal will take time to assess. But the deal "establishes that Apple is Tim Cook's company now," Baker said. "Not many people think Steve Jobs would have bought Beats."

IT is turbocharging BYOD, but mobile security practices lag behind the growing risk. Also in the Mobile Security issue of InformationWeek: These seven factors are shaping the future of identity as we transition to a digital world (free registration required).

Thomas Claburn has been writing about business and technology since 1996, for publications such as New Architect, PC Computing, InformationWeek, Salon, Wired, and Ziff Davis Smart Business. Before that, he worked in film and television, having earned a not particularly useful ... View Full Bio

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User Rank: Ninja
5/31/2014 | 6:01:33 PM
Re: Apple Buys Beats - wasteful move
Well, it doesn't hit my pocket directly at least, so in that respect, no I do not care. It does seem like an awful lot of money though, so I'd have to assume that there's more to it than meets the eye.

One thing I thought was interesting, was reading on one of the Mac forums of people who were actually signing up to try Beats now that Apple bought them - whether because they're just devoted Apple fans or because they had been previously unaware of it and Apple's purchase generated attention, i don't know. I wonder if Beats' sub numbers will rise this month?
User Rank: Ninja
5/30/2014 | 4:52:36 PM
Re: Apple Buys Beats - wasteful move
They should have just bought MOG before Beats did and rebranded it "". 

It would have been much cheaper to do so: Beats baid $16 million for MOG. Apple is paying $2.6 billion for what MOG has become since then

Yes, we all agree that 16 million is better than 2.6 billion, but -honestly- do we even care how much Apple paid for Beats?
User Rank: Ninja
5/30/2014 | 7:47:54 AM
Re: Spotify
I doubt that Spotify would be next.  I think the move here was to capture a more urban audience.  The Beats brand seems to reach that market well so that is why Apple went that direction.  As noted by others the difference between what Apple paid for Beats and Beats paid for MOG is a good indicator of what Apple bought.  It wasn't the hardware it was the brand.  I'm sure Apple already has the marketing machine running at full speed and they will do a great job with the branding but I don't see the quality of the product improving through this process.
User Rank: Author
5/29/2014 | 4:35:24 PM
Re: Spotify
Wouldn't that be interesting?! I wonder whether we'll see even more pop stars stick their names on headphones with Apple at the helm of Beats? A year or so ago I read an interesting article -- in Consumer Reports, perhaps? -- on these headsets, the money some stars made off them, and the (inferior) quality vs. other higher ticket sets. It was really fascinating to see how headphones have become the new sunglasses, in terms of slapping on a logo and charging a premium.
Lorna Garey
Lorna Garey,
User Rank: Author
5/29/2014 | 2:53:51 PM
I'd love to know if Apple sniffed around Spotify and was rebuffed before making this deal. I agree with others, it seems like trying to buy coolness to me, which rarely works. But hey, it's not like Apple didn't have the money. Guess we'll see where it goes.
Thomas Claburn
Thomas Claburn,
User Rank: Author
5/29/2014 | 12:40:19 PM
Re: Apple Buys Beats - wasteful move
>They should have just bought MOG before Beats did and rebranded it "". 

It would have been much cheaper to do so: Beats baid $16 million for MOG. Apple is paying $2.6 billion for what MOG has become since then.
IW Pick
User Rank: Ninja
5/29/2014 | 9:58:19 AM
Apple Buys Beats - wasteful move
I see no "cred" in trying to buy "cool". If anything, it sounds desperate, not "cool" at all. It's like paying the high school football star to hang out with you so you can try getting chicks. Besides, Beats headphones and ear buds are not all that great for the money, compared to Sennheiser, AKG, Bose, and even lowly Sony products.

The young audience they are trying to capture with this move is notoriously fickle and whims can turn on a dime.

They should have just bought MOG before Beats did and rebranded it "". MOG was a better experience and more flushed out from the users point of view (being able to find new music you wanted to hear such as new releases, instead of relying on B.S. "currated" playlists). Hopefully Beats will correct those user interface mistakes before Apple takes over and they become entrenched.

User Rank: Apprentice
5/29/2014 | 8:20:29 AM
Re: Beats
You have missed the boat on this one Beats is much more than a headphone/ear bud retailer . If you were to look in the trunk dashboard or door pannels of many new Dodge Chrysler Jeep  vehicles you would notice the Beats logo plastered all over the place not to mention the technology also comes standard in many new lap tops and cell phone.The water at Beats runs deeper than many seem to understand or realize,it's not just about the music and downloads or headphones any more. I for one would like to see a Beats smartphone controlled app for my car that could lock un-lock start and control the HVAC while reminding me where I parked and how much time is left on the parking meter while at the same time sending a play list to my car so when I hit the key I automatically hear that song I just tagged and sent to said car. And just for fun real time tracking so if I loan my car to someone I can see where it is and how fast they are driving. All this and more are already available through several third party retail companies so why not make it part of the total package when designing new cars? I think Apple has positioned themselves for the next level of global domination if they play their cards right ! "Idatalink" should be on the radar for Apple/Beats as the next partership/ acquisition. Does anyone remember a few years ago when Microsoft Ford/Sync Kenwood and ADS,idatalink parent company,teamed up and delivered something people actually wanted and were asking for? Check it out here...
User Rank: Strategist
5/29/2014 | 8:07:55 AM
Re: Beats
The whole deal makesno sense. The Beats headphones, in my opinion, are horrible. Unless you enjoy headache producing bass that overwhelms all other frequencies in the music they are not for listening to anything other than rap or hip hop which, for that kind of money, is a ridiculous investment since those headphones sound like crap unless you are listening to a genre of music that will sooner, rather than later, fade away into obscurity like disco.

Agree also with the price for the streaming service, it isn't like they were nibbling away profoundly at Apple's streaming service. To pay that money to supposedly save I Tunes from becomng irrelevant? Ridiculous. I'm not a big fan of Apple and their mindset but I am now thinking that, like others in the trade have been saying, it looks like they definitely have lost their mojo.
User Rank: Ninja
5/29/2014 | 7:32:42 AM
I had not seen the breakdown of what they paid for each part of Beats and it surprises me that they paid so much for Beats' Music service.  It isn't one of the more popular services so unless they have a huge collection of licensed music that seems like an awfully steep price.  I see the Beats electronics headphones all over the place so I can see the name being marketable but maybe not at a $3 billion price tag.
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