Breaking Down the Crazy Apple-Buying-Beats Riff
May 9, 2014 10:54 AM PT
The hottest -- and possibly craziest -- tech rumor of the week is, hands down, that Apple is in negotiations to acquire Beats Electronics for US$3.2 billion.
First reported by Matthew Garrahan and Tim Bradshaw of the Financial Times, the story has been fanned into a raging inferno faster than a wildfire on a hot August day. Unfortunately, the only cited source for the rumor is "people familiar with the deal."
The Basic Beats Deal
On the surface, the deal to acquire Dr. Dre's and Jimmy Iovine's Beats Electronics would give Apple a popular line of cool headphones as well as a nascent streaming music service, Beats Music, which is designed around paying subscribers. Individuals pay $9.99 per month, while a family of five can get it for $14.99 each month.
The premise behind Beats Music is curated playlists created by DJs who live and breathe music. Finding the right stream for each person has been the challenge for years, especially when a single person's own tastes can change not only from day to day but within a day: Who hasn't busted a move to a song in the morning and later that day couldn't skip it fast enough?
Mood music, baby. Contextual. With Beats Music, you craft a sentence to describe your location, how you feel, and whom you're with. For instance, you would build a sentence through preconfigured labels for something like this: I'm ON A BOAT and feel like GOING BACK IN TIME with MY FAMILY to VINTAGE SOUL & FUNK.
Apple doesn't have this.
Apple's iTunes Radio lets you create a basic radio station, which supposedly learns from your preferences, letting you note the kind of song you would like to play more of -- or never play again. Apple's solution is good, but it's not fantastic -- and it sure as heck isn't insanely great.
Still, Beats Music is an app that runs on the iPhone, so Apple already has it anyway -- just no cut of the revenue.
Meanwhile, iTunes downloads fell 2 percent to $3.93 billion, which signals the first annual decline since iTunes launched in 2003. On the other hand, streaming music revenue in the U.S. grew 39 percent, generating $1.4 billion in revenue, to account for 20 percent of the recorded music industry's business, Billboard reported.
If you do the math -- no matter how the notes are shifting -- the music business represents pocket change to Apple, which generated $170 billion in 2013.
Worse, even if Beats is fantastically successful, Apple's customers are still happily using their iPhones. Even if a rival like Google (or the burgeoning Amazon) rushed out to buy Beats and somehow made it exclusive, Beats Music wouldn't be enough to get millions of people to ditch their iPhones.
Desperate to Buy Cool?
Another flavor to this rumor is that Apple suddenly is desperate to buy cool. The problem with this statement is that it goes against the DNA of Apple: Apple doesn't buy cool. Apple buys intellectual property, the people behind innovative little companies. Apple doesn't buy things that it already essentially has.
No matter how uncool Tim Cook might seem to be, he doesn't seem to be the type of stodgy old man who wants to buy someone else's creation to add to the Apple family of products -- especially not to be cool.
It would be such a huge departure -- with little practical monetary upside -- that there would have to be a much better explanation.
Leak or Misinformation?
It's unlikely that the Financial Times reporters simply made this stuff up. They likely had a source -- but was that source tapping into the truth? What if the source was working with faulty -- even planted -- information? What if that source is now fired?
So how could this deal actually make sense?
First, Apple has a tendency to create innovative new ways for hardware and software to work together. If Apple is creating new wearable technology that needs a new hardware specification -- say a new plug for headphones -- getting Beats to build it into its line of popular headphones would be smart.
If Apple had to pony up the cash to retool a manufacturing system to make it happen, that would make sense. Heck, Apple did something similar for its sapphire glass efforts, so why not for popular headphones?
Of course, Apple could simply build special new headphones itself, right? Sure, but why stop there? Consider Apple's new CarPlay initiative. It lets car manufacturers create their own interfaces to Apple's tech. This is a relatively new move, a loosening of typical Apple control. It's not a leap to imagine Apple wooing Beats to incorporate or use some new Apple tech.
Second, what if Beats Music has an important patent, technology, or special transferrable music license? What if Apple's music man Eddy Cue -- who reportedly is in discussions with Beats -- learned this from Iovine?
While possible, all of it seems a bit unlikely, especially the licensing: If the music industry has such a love-hate relationship with Apple, wouldn't it ensure that Apple couldn't simply buy specialized streaming rights from Beats Music?
There's a smarter option that still makes sense: What if Apple wants to manage and sell Beats Music subscriptions itself? Right now, you can order Beats Music through AT&T, and it's available through other U.S. mobile networks and carriers. When Apple saw those deals happening, I'm sure there was a mad scramble in Cupertino. Was Apple supposed to let the cellular service carriers collect the revenue for side-stream products without a fight?
Having significant third-party subscriptions processed through carrier monthly billing processes is a competitive landscape-shifting move that Apple would recognize -- especially if Beats Music should turn out to be utterly fantastic.
Apple has to be fighting to ensure that the carrier-driven subscription model does not become a default model for Beats Music -- or worse yet, for any industry.
On the upside for Beats Music, instead of working with AT&T, what if it could get Apple to manage its subscription service? What if Apple rolled out the service across the world, letting Beats Music do its thing, while Apple just gave Beats Music a huge worldwide channel boost to hundreds of millions of iTunes accounts?
Apple has access to an incredible base of customers who happily buy content through their iTunes accounts -- and through their iPhones. Even if Apple should manage to retain a 30 percent cut of the revenue, there would be no other way Beats Music could rocket out to the world as quickly as it could through Apple.
That's a win-win situation. Worth $3.2 billion? Hard to say, but at least it seems to make sense for both Beats and Apple.