beats

Apple’s apparent purchase of Beats took everyone by surprise. I must confess that my immediate reaction was to be slightly appalled. As someone whose audio tastes run more to B&O and B+W, I’ve always viewed Beats headphones as over-bassed, over-priced fashion items. But then my tastes in music admittedly differ somewhat from those of the typical Beats customer.

Even so, it’s still a little baffling at first glance. Tim Cook himself said a year ago that Apple asks two questions when considering an acquisition:

Would it help us make a great product, and would the culture fit at Apple?

My immediate answer to both would be “no,” so why would Apple spend $3.2B on a headphone manufacturer with a small sideline streaming music service … ? 

Let’s look at what Beats might offer to Apple. It knows how to make headphones with a sound that appeals to those with a taste for bass that causes buildings to vibrate as you walk past. But that’s trivial: if you compare some of Apple’s current bassy iPod EQ profiles to Beats Audio’s profile, there’s not much difference.

Beats has a particular design ethic somewhat different to that of Apple products, designs that could reasonably claim to have become iconic in their own right. But Apple has built its entire brand on stylish, minimalist, under-stated design. It’s hard to see it wanting to shift direction, and Beats has in any case headed some way towards a more conservative, Apple-istic aesthetic in its most recent products.

Beats has a streaming music service. This is potentially more interesting. The market is shifting away from downloads, where iTunes is king, to streaming, where Apple is nowhere. iTunes Radio doesn’t seem to have set the world alight, and my personal view is that radio services are ultimately just a halfway house to on-demand streaming like Spotify, Rdio, Google Play All Access – and Beats Music.

Apple ultimately needs an on-demand music service, but the question I’d have to ask here is: why would it need to buy Beats to create one? Again, Apple almost certainly has all the expertise it needs in-house, and could easily go out and hire some Spotify execs if it needed more.

It’s also not for the subscriber base. Beats Music has only around 200,000 subscribers, which – in Apple terms - is indistinguishable from zero.

head

But Beats does have one thing going for it: an extremely cool image in the youth market. Look around at the headphones being worn on any street, any metro service. Filter out anyone aged 30 or over. Filter out low-end tat. What you are left with is almost exclusively Beats.

In the high-end headphone market as a whole, Beats has 64 percent of it. In the high-end youth headphone market, it’s basically all of it.

Of course, Apple also has a highly cool image across the market, youth included. But the youth market is fickle. What’s in today can be out tomorrow. This year’s ‘must be seen with’ brand can be next year’s embarrassment. No company – not even Apple – can afford to be complacent about its fashionable image.

To appreciate just how much expertise Beats has in appealing to the fashion-conscious youth market, think back to before Beats headphones existed. How many people did you see wearing headphones – rather than earphones – in the street? Vanishingly few. How many of those few were under 30? Almost none.

This was the marketing genius of Beats. It took a product category that was as boring and old-fashioned as could be – headphones were things worn by 50 year old white guys at home to listen to classical music – and turned it into a product that 20 year old rap fans wanted to wear. That’s pretty huge.

iwatch-side-view

There’s another product category out there that currently has much the same old-fashioned image as did headphones. Watches. How many teens wear watches these days? How many 20-somethings?

Today’s smartwatches haven’t done much to change that: mostly they’ve been bought by tech-heads. So when you want to figure out how to make smartwatches popular in the youth market, Beats may have something to bring to the party.

Almost certainly not in terms of the hardware. As I said earlier, I don’t see Apple wanting to incorporate any Beats-style design cues, and the physical design of the iWatch must have been finalised long before this deal was even conceived.

But perhaps in terms of the marketing. Perhaps in terms of what it takes to turn an unexciting product category into a must-have fashion item. Couple together the expertise both companies have in making things cool, and you may just have a winning combination.

Is that marketing expertise worth $3.2B? Maybe, maybe not. But it doesn’t have to be: Beats headphones bring in $1B per year. Keep that business going at that kind of level, and Apple may just have purchased Beats’ youth marketing expertise for free. Looked at in those terms, what initially seemed rather baffling could be viewed as a no-brainer.

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82 Responses to “Opinion: What is Apple’s thinking in spending $3.2B on buying Beats?”

  1. TheMacAdvocate says:

    I wasn’t aware that the deal was confirmed.

    Oh – it’s not.

  2. iJonni says:

    I still think it’s for the steaming music agreements. They would have to be renegotiated after the contract terms are up, but I do believe they are transferable should Beats actually be acquired. iOS 8 w Beats streaming radio. iPhone 6 w Beats audio. Not the logo, just the name. That’s enough to get the Tweens excited.

    • Ben Lovejoy says:

      I just can’t believe Apple couldn’t negotiate equal or better terms directly.

      • Im sure the all the labels see when they talk to apple is $$$$, beats (MOG) probably had the same terms as spotify,rdio and others, but the Labels would want to soak apple. Beats bought MOG streaming service, so im pretty sure the licenses would come over

      • Jimmy Iovine is a senior executive at Vivendi Universal Music Group.
        Beats investor Carlyle Group / Len Blatvatnik recently bought Warner Music Group.
        Vivendi owns about 14% of Beats.

        So, no I don’t think Apple could negotiate anywhere near the same deals… The company he’s buying is owned by some of the same people who own the whole or large portions of the record labels they are negotiating with in the first place. :)

      • Ben Lovejoy says:

        That’s true, but Apple brings a far, far larger subscriber base, so has much greater negotiating clout.

      • They do indeed however now they have the clout AND the people who own some of the music publishing rights as well… so some of the negotiations won’t even be negotiations… Basically instead of negotiating with the music labels directly, they’ll be hiring people on staff who own the rights that the music labels are negotiating on behalf of. Cutting out the middle man.

      • Let me put it this way:
        Music labels own something unique (You can’t replace a song by another)
        Music labels already sign some steam service, which the income increase with listener.
        Apple doesn’t have anything to compete with spottily, and each day they delay, they got fewer potential users. But they got tons of cash.
        If you’re the record label, will you still sign at a lower price?
        (P.S. This is the same reason why Apple haven’t made a TV channel store. )

      • I believe that is exactly the point why Apple is so late to the streaming music market. The labels feel f*cked over by Apple for their iTunes deals a decade ago and are now getting back at Apple with really high demands that Apple isn’t willing to meet. The big labels all backed Spotify as their chosen service, all to be in control of the revenue streams again and as a preemptive strike against Apple, Amazon and everyone that was going to get into their business of marketing music.

        Maybe Apple indeed bought a vast catalogue of streaming rights with Beats through the back door.

    • Other reports this morning are confirming that the streaming agreements *don’t* transfer. Besides, the price is ridiculous for such a small service.

    • Grubers opinion on the conclusion that it´s basically about the streaming agreements:

      Numerous people are wondering if it’s all about streaming rights from the music labels — i.e. rights that Apple couldn’t get on its own (because the music labels have long resented iTunes’s dominance in digital music downloads), so they’re buying a company that negotiated those rights on their own. The problem with this theory is that those licenses (to my understanding) aren’t transferable in the event of an acquisition. Music label executives may be dumb, but they’re not that dumb.

      http://daringfireball.net/linked/2014/05/08/beats

  3. Great view on this topic Ben. I guess we’ll just have to wait and see.

  4. I don’t see how this makes any sense at all, but it’s rare for Apple to make a mistake of this calibre so I’m prepared to believe there might be a reason that we just don’t know about yet.

    It certainly is bizarre though, especially given that “quality” in things like headphones is highly subjective. There are folks with a lot of sound engineering background that will say that “beats are the best” and a similar amount of folks with a similar amount of talent that will say “beats suck.” There is no objective “best” in headphones, nor will there ever be a single headphone that everyone agrees is so.

    • Ben Lovejoy says:

      Indeed, it’s personal taste – and also probably linked to our tastes in music.

    • I don’t think anyone is talking about the talent that will be coming to apple (apple cares alot about talent). MOG was around for a while before Beats bought them out and turned it into their beats streaming service. Some very good talent on that team. Also you have allot of music talent involved with beats. Deal also makes sense because buying any other streaming service would probably cost more, and you get 0 hardware engineers to go with it.

    • jrox16 says:

      Is it possible that Apple simply wants to include Beats headphones in a larger iPhone / iPod package deal targeting music lovers? Could it be as simple as that, so that Apple didn’t have to develop their own? Obviously the people running Apple are not total idiots, all disagreements aside, so they must know what they are doing here.

      • Apple wouldn’t dream of selling anything Beats offers as their own. They would make radical adjustments to make it as best as they possibly could.

  5. Josh Mobley says:

    In much the same way that Pixar brought in brad bird, I think apple did it to save themselves from themselves. Yes, they could have built their own streaming service but they thought music discovery was the answer. No, this purchase is about bringing in a group of people that will fix the music side of their offerings. They could care less about the hardware. This is all about the streaming end of things. Music will be twofold from apple in the near future. Streaming for most on the beats platform and high quality downloads (higher than now) from iTunes. The advantages are obvious.

  6. Chad Gammon says:

    Why does no one seem to get this?? I read article after article of amazement that Apple would buy Beats. If you have followed Apple for the past 10+ years you would know that Apple became a Juggernaut in the music industry and Steve gave the music companies the finger when they wanted to increase prices. Where else were they going to go? So when it comes to Spotify like features the music companies refuse to give Apple those licensing rights because they don’t want to be in the same boat with Apple having all the power.

    Now fast forward, Beats announces a streaming music service, what a week ago? Two things: It takes much longer than a week to secure music licensing. It also take much longer than a week to purchase a company. So one of two things happened. Apple told Beats: “You secure the rights and we will purchase the company”. Or Beats told Apple “Hey we are securing these rights, we know you would like them, how about making an offer?”

    See, this is not that hard guys…

  7. Very insightful analysis, puts it in a different light for me. Well done.

  8. For $400M Apple buys NeXT and Steve Jobs.
    For $3.2B Apple buys Beats and gets a pair of red headphones.

    • jrox16 says:

      Funny isn’t it. Although I’m pretty sure Beats is worth a hell of a lot more than NeXT was at the time of purchase. Realize the purchase of NeXT proved to be the most important buy in Apple’s history, but that’s hindsight. At the time, NeXT was a small company which didn’t make much money if any. They bought the core OS tech and the ability to draw Jobs back. Beats made over a billion dollars in revenue in 2013.

  9. Apple usually buys companies for the IP and the talent, not the products they sell.

  10. too much money, didn’t know where to spend ??? …lol

  11. Ron Farrow says:

    I think this has been in the works for a while. Check out the color choices and names. Look familiar? (space grey) http://www.beatsbydre.com/earphones/urbeats-se/space-gray/900-00213-01.html

  12. I think it’s interesting that you say in this article…

    “The market is shifting away from downloads, where iTunes is king, to streaming, where Apple is nowhere.”

    Let us time travel back to March 11, 2014 when Mr. LoveJoy penned this article on 9to5Mac.

    iTunes Radio beats Spotify to take 3rd place in U.S. music streaming, eyes up #2 spot

    http://9to5mac.com/2014/03/11/itunes-radio-beats-spotify-to-take-3rd-place-in-u-s-music-streaming-eyes-up-2-spot

    Being in 3rd place isn’t too shabby.

    Personally, I don’t think that Apple has a chance at getting more of the streaming radio market share than Pandora because Pandora is on every form factor and platform that exists. iTunes Radio will only ever be available for iOS and iTunes/OS X.

  13. Wuuuut :O I didn’t expect this at all. But it’s great, I love Beats, have my headphones from them and they’re great :P

  14. High end, over-priced electronic devices with a heavy emphasis on aesthetics that extends even to the packaging. Am I talking about Apple or Beats?

  15. hmurchison says:

    It’s amazing that many cannot see the forrest through the trees here. Some things clearly stand out.

    1. Beats headphones are nice but I doubt that that’s the reason for the acquisition. Many writers simply cannot get beyond their jaundiced view of the music efficacy of Beats headphones. So long as they deliver profit it’s a good deal.

    2. Beats Music – This is really what Apple wants. Many writers continue to fixate on Beats Music’s paltry userbase (200k users?) But how big was Siri before Apple acquired them as opposed to now? It doesn’t matter how small something is once Apple gains control their massive distribution network takes over. Thus the smart thing to do is look at what makes Beasts Music standout and that right now is best in class music curation.

    3. Personnel. Apple hasn’t made large acquisitions because often integrating large companies is deleterious to existing company culture. Apple has no desire in delivering Windows or Android software so any acquisitions they make will be divesting these assets. Looking at Beats Music they are a small company without a lot of cruft (unnecessary assets). Integration would be easy. Last and most important is Iovine. If people thought that Google got value in getting Tony Fadell’s services after the Next acquisition then they should be 10x more excited about the potential of Iovine working for Apple. He has considerable more persuasion than Fadell within their respective industry. This is a huge win.

    The 3.2 Billion dollars is nothing to Apple. Apple’s stock in on the rise. They have new product categories coming and acquiring Beats Electronics is what I consider Wall Street friendly.

    • aeronperyton says:

      Thank you for being so perfectly verbose.

      Every time there’s a truthful rumor before the news, fans and pundits are always going “What the hell? I don’t understand” or “This is a terrible idea!”

      Then the actual news breaks, Apple shows off the end result of what caused the original rumors and everyone goes “Oh! Now I get it.” and “So THAT’S why they did that.”
      :)

    • Ben Lovejoy says:

      1 to me works in so far as it makes what look like an expensive deal a cheap one. That’s why I say they are essentially getting the marketing expertise free.

      2 isn’t a fair comparison. With Siri, Apple wanted hugely valuable IP; Beats doesn’t have any.

      3 is where it’s at, I think, mostly on the marketing side and somewhat on the curation side (the latter being easier to buy without the company).

  16. Two other things to consider:

    It could simply be a good investment. It’s privately held, so it’s hard to research, but it Forbes is to be believed, Beats has revenues in the ballpark of $500 million. Assuming they’re not carrying crazy debt, that’s a reasonable purchase price for that kind of revenue stream. I know it is not Apple’s typical way, but they could just keep manufacturing and selling headphones under the separate label.

    Second, they’re keeping the Beat’s brand away from competitors. Companies like HP can gain some instant cache with a Beats’ label. Presumably, that would end.

  17. scanendtile says:

    I suspect that more than the headphone and streaming businesses, Apple have acquired Beats because they have been doing a lot of development in building small low power speaker systems into products ranging from laptops to tablets and phones. Apples in built audio quality has been lacking for a very long time in their products, so I think the headphones business will just carry on and not be rebranded as Apple, but they will begin to incorporate the speaker technology into ipads and iphones etc.

  18. This is interesting: Apples first design leader Robert Brunner (designed the power book) is a Designer @ beats. http://www.fastcodesign.com/3018681/design-50/dynamic-duos-jimmy-iovine-and-robert-brunner-on-beats-and-listening

  19. Why don’t they acquire something better and classier than BOSE, B&O or B+W?
    I mean, These brands produce really classy products, especially BOSE!
    Beats and Apple just don’t match!

  20. airmanchairman says:

    Ben, you answered your own question while asking it, no easy feat that:
    “over-priced fashion items” certainly fits in somewhat to the fruity one’s culture, so there will be some compatibility in that department at least.

    Add Apple’s relentless drive for quality and uniqueness, presentation and vertical integration into their portfolio of offerings (imagine Siri wearing a baseball cap back-asswards) and they could be on to another winner…

    • While some consider Apples products overpriced, what you get for your money is much more then compared to a pair of beats headphones. Nearly any review of their products their sound quality is bellow what you can get cheaper with much better sound.

  21. Streaming service is a big part of this deal: Jimmy Iovine is a senior executive at Vivendi Universal Music Group owns 14% of beats, Beats investor Carlyle Group / Len Blatvatnik

  22. How about Tim Cook is just buying something for buying’s sake? As it is mentioned in the article, it’s all about image. Apple has not had any high profile purchases, perhaps it’s board of directors think dropping 3.2B can increase stock value by 32B.

  23. This deal is not really about the headphones, it’s about the beats by dre streaming service and it’s music rights. Think about it like this, if apple was to go and try to make a deal with these music companies for Apple new streaming service they will charge apple much more money for those rights, but beats has those rights already for much cheaper. So this deal is really genius because apple just went around the music companies and saved a ton of money in the process.

  24. Apple should have bought MOG before Beats did. I tried Beats music, but the MOG experience is much better. MOG is still running, but only for a few more weeks. Shut Beats down and put the Apple logo on MOG!

    • Loved mog, beats is somewhat different but i can still download full 320kbps album with 1 button push., its easy to add albums to your library you just want to stream too (i.e. some new artist you want to try out but not take up space) also their custom (DJ picked) playlists are awesome. you should subscribe to them. Overall i’m getting used to the new interface and really starting to like it.

  25. PMZanetti says:

    “Almost certainly not in terms of the hardware”

    Almost certainly it is. Do they have any patents?

    • Ben Lovejoy says:

      Nothing worth anything, from a brief trawl.

      • PMZanetti says:

        Then its definitely peculiar indeed, unless Apple wants to help them make great headphones that aren’t $400.

        Imagine that…Apple taking on hardware partner to make what they do cheaper.

      • Ben Lovejoy says:

        Beats headphones reportedly cost about $14 to make …

      • 14 beans sounds about right for that level of quality. Seriously, from a true audiophile’s standpoint, those headphones sound like Rocky Balboa punching dead cows in a meat locker. Seriously, the tonal quality and response across the ENTIRE spectrum (not just specific bandwidths) is atrocious. It boggles my mind they’re getting the prices for them that they are!

  26. I would say Apple got a great deal, seeing as how Beats is a product that you can hold, versus Facebook spending about 765 trillion on Instagram and other worthless apps. Now THAT’S a waste of money.

  27. Mike Sabino says:

    Something anecdotal about the Beats brand in relation youth, urban, hip hop and under 30s culture…

    On my Facebook feed, which type of friends (and I have a pretty good variation and spread in the mix) immediately filled my feed about the potential acquisition of Beats by Apple? Was it the ones that can fall under the techy, nerd, gadget sector? Or was it the youth, urban, hip hop and under 30s culture? Or the business minded entrepreneurial and professional type? Or the creatives? or my mom and aunties?

    Far and away it was it the youth, urban, hip hop and under 30s culture types who normally are not the first to post on anything tech gadget or business related). The gadget and nerd type as well as the business types were more in shock. Remember, we aren’t talking about a product or an album being dropped, its an acquisition… yet the kids are up on this.

    The impact of this potential deal is already apparent.

    • PMZanetti says:

      I think Beats made a huge mistake by branding themselves as being “Buy these headphones if you listen to Hip Hop/Rap”

      They have great quality hardware that anyone can use for any high quality music experience. But you won’t see too many of Rock kids buying Beats due to horribly poor branding.

      • Mike Sabino says:

        To an extent I can agree with that. However, these days kids are far more mixed in their listening choices. Also, the Hiphop community spends. Rock for the last few decades has adopted an image and culture that is almost anitspending. I remember back during grunge, consumerism was something to tally against. This was the same, and still is the same with punk. And punk ethos have certainly spread into more general rock and more so in to the indie scene. where most of the prominent bands start out.

        So going after the rock market, which doesn’t spend as much, isn’t a high priority. Go after the portion of the market that spends the most first, then expand out. Just like Apple’s strategy.

    • Ben Lovejoy says:

      Yes, that certainly seems to be what this is about for Apple

  28. Mike Sabino says:

    Bigger than Beats streaming, or Beats headphones is Dre and Iovine.

    Along with the news of Beats, comes the news that Jimmy Iovine may being joining Apple as a consultant or some other capacity or role. (not sure if i saw it posted here or another Apple blog)

    If this is the case, that is HUGE. Apple already has considerable clout whiny the industry, to bring Iovine into the fold would be enormous, and raise their power even higher. Iovine is garners huge respect and pull not just from the business and execute end, but from the creative end of the industry as well. Combine this with Apple’s enormous lead in music purchases, its customer base, how much its customer base spends comparative competition, its ecosystem, and the marketing, online and retail success of Angela Ahrendts. Remember she was part of the team that brought in Jay z and Beyonce in marketing with Apple for Burberry.

    Each one of these people/companies has been about expansion of the high end to the masses, in a new and exciting way.

  29. I think they bought beats for a few reasons. Currently, Apple doesn’t sell traditional style headphones. I think they want someone with that expertise. Apple doesn’t have the experience of bringing something back from the dead – ie Headphones, Watch, etc. Although if we’re going to see a 2014 release this is pretty late in the game. Apple doesn’t have the same deals as Beats does for streaming music. As well if you have an industry insider then they will have a better chance of negotiating better terms in the future with other labels. I think Apple likes the ‘Music sentence’ approach – maybe something they’ll integrate with Siri to make custom playlists. Beats could have individual patents that they weren’t willing to sell/sweetened the deal. I think Apple paid the price they – not for one sole reason, but many. Out of all of the streaming services – I think Apple sees Beats as an underdog that might take over the industry. See: iPod, iPhone and iPad. None of these products were first to market but quickly revolutionized and dominated their fields. I think Beats was going to do that to streaming, and Apple wanted that x factor that is going to make them a success and bringing to iTunes Radio.

  30. Who are apple biggest competitors in high end smartphones? Samsung and HTC. Apple has been taking on Samsung in the Courtroom but how are they going to fight HTC. One of HTC’s biggest features on their flagship HTC One (M7 and M8) has been Boom Sound speakers powered by Beats audio. If Apple owns Beats HTC has to either drop Beats audio from their phone or pay Apple a licensing fee. I may not be right but that’s my theory.

  31. The power of the hip hop culture is just being recognized in public by one of the most powerful technology brands, APPLE. Me being part of the hip hop culture I have watched how we set the president for what’s cool time and time again. I have watched hip hop celebs wear or mention a product and it sell out soon after. This is not new, this is only part of what beats brings to apple who are no slouches at all in the cool, functional, high end department. This is just it being recognized and capitalized on.

    • kobymac says:

      Hip hop culture, or blind sheep culture? I mean, some of the fashion hip hop has introduced is parodied the world over for being ridiculously funny. Cool people dont have celebs telling them what’s cool. Those people are called suckers.

  32. I keep remembering Steve Jobs standing on stage time after time saying “Apple stands at the intersection of TECHNOLOGY and LIBERAL ARTS”. There’s something of that in this deal with Beats.

    Spotify etc. are at the intersection of Technology and _Entertainment_ whereas Beats’ Sentence-based streaming playlist and their curated collections bring in taste and psychology and sociology, not just fashion (though Beats has that base covered too).

  33. How is this so shocking , i think many journos a copying and pasting, Apple sells music, they also happened to have a music player that’s popular and OMG they bought a headphone company, whats so estrange, I can understand if the bought a Shoe company or a restaurant chain.

  34. kobymac says:

    They produce an over priced, underperforming product that people purchase for style over substance. Seems like a perfect fit for apple.

  35. Guy Godin says:

    “headphones were things worn by 50 year old white guys at home to listen to classical music”
    When I see someone wearing headphones in public (beats or not) that’s what goes through my mind. Idk but I think they look silly.

  36. I don’t know all the economics of this, but isn’t Apple the single biggest deliverer of consumer headphones as part of almost every major product in their product line-up?

    Those economies of scale quite surely don’t sum up to $3.2b but they might partly justify the purchase…