Tech Law


Breaking Down the Crazy Apple-Buying-Beats Riff

The hottest — and possibly craziest — tech rumor of the week is,hands down, that Apple is in negotiations to acquire BeatsElectronics for US$3.2 billion.

First reported byMatthew Garrahan and Tim Bradshaw of the Financial Times, thestory has been fanned into a raging infernofaster than a wildfire on a hot August day. Unfortunately, the onlycited 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 BeatsElectronics would give Apple a popular line of cool headphones aswell as a nascent streaming music service, Beats Music, which is designedaround paying subscribers. Individuals pay $9.99 per month, while afamily of five can get it for $14.99 each month.

The premise behind Beats Music is curated playlists created by DJs wholive and breathe music. Finding the right stream for each person hasbeen the challenge for years, especially when a single person’s owntastes can change not only from day to day but within a day: Whohasn’t busted a move to a song in the morning and later that daycouldn’t skip it fast enough?

Mood music, baby. Contextual. With Beats Music, you craft a sentenceto describe your location, how you feel, and whom you’re with. Forinstance, you would build a sentence through preconfigured labels forsomething like this: I’m ON A BOAT and feel like GOING BACK IN TIMEwith MY FAMILY to VINTAGE SOUL & FUNK.

Apple doesn’t have this.

Apple’s iTunes Radio lets you create a basic radio station, whichsupposedly learns from your preferences, letting you note the kind ofsong you would like to play more of — or never play again. Apple’ssolution is good, but it’s not fantastic — and it sure as heck isn’tinsanely great.

Still, Beats Music is an app that runs on the iPhone, so Apple alreadyhas it anyway — just no cut of the revenue.

Meanwhile, iTunes downloads fell 2 percent to $3.93 billion, whichsignals the first annual decline since iTunes launched in 2003. On theother 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 musicindustry’s business, Billboard reported.

If you do the math — no matter how the notes are shifting — themusic business represents pocket change to Apple, whichgenerated $170 billion in 2013.

Worse, even if Beats is fantastically successful, Apple’s customersare still happily using their iPhones. Even if a rival like Google (orthe burgeoning Amazon) rushed out to buy Beats and somehow made itexclusive, Beats Music wouldn’t be enough to get millions of people to ditchtheir iPhones.

Desperate to Buy Cool?

Another flavor to this rumor is that Apple suddenly is desperate to buycool. The problem with this statement is that it goes against the DNAof Apple: Apple doesn’t buy cool. Apple buys intellectual property,the people behind innovative little companies. Apple doesn’t buythings that it already essentially has.

No matter how uncool Tim Cook might seem to be, he doesn’t seem to be thetype of stodgy old man who wants to buy someone else’s creation to addto 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 thisstuff 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 hardwareand software to work together. If Apple is creating new wearabletechnology that needs a new hardware specification — say a new plugfor headphones — getting Beats to build it into its line ofpopular headphones would be smart.

If Apple had to pony up the cash toretool a manufacturing system to make it happen, that would make sense.Heck, Apple did something similar for its sapphire glass efforts, so whynot for popular headphones?

Of course, Apple could simply build special new headphones itself,right? Sure, but why stop there? Consider Apple’s new CarPlayinitiative. It lets car manufacturers create their own interfacesto Apple’s tech. This is a relatively new move, a loosening of typicalApple control. It’s not a leap to imagine Apple wooing Beats toincorporate or use some new Apple tech.

Second, what if Beats Music has an important patent, technology, orspecial transferrable music license? What if Apple’s music man EddyCue — who reportedly is in discussions with Beats — learned thisfrom Iovine?

While possible, all of it seems a bit unlikely,especially the licensing: If the music industry has such a love-haterelationship with Apple, wouldn’t it ensure that Apple couldn’tsimply buy specialized streaming rights from Beats Music?

There’s a smarter option that still makes sense: What ifApple wants to manage and sell Beats Music subscriptions itself? Rightnow, you can order Beats Music through AT&T, and it’s available throughother 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 cellularservice carriers collect the revenue for side-stream products withouta fight?

Having significant third-party subscriptions processed through carriermonthly billing processes is a competitive landscape-shifting movethat Apple would recognize — especially if Beats Music should turn out to beutterly fantastic.

Apple has to be fighting to ensure that the carrier-drivensubscription 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 getApple to manage its subscription service? What ifApple rolled out the service across the world, letting Beats Music doits thing, while Apple just gave Beats Music a huge worldwide channelboost to hundreds of millions of iTunes accounts?

Apple has access toan incredible base of customers who happily buy content through theiriTunes accounts — and through their iPhones. Even if Apple should manage toretain a 30 percent cut of the revenue, there would be no other way BeatsMusic could rocket out to the world as quickly as it could throughApple.

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.

Chris Maxcer

TechNewsWorld columnist Chris Maxcer has been writing about the tech industry since the birth of the email newsletter, and he still remembers the clacking Mac keyboards from high school -- Apple's seed-planting strategy at work. While he enjoys elegant gear and sublime tech, there's something to be said for turning it all off -- or most of it -- to go outside. To catch him, take a "firstnamelastname" guess at You can also connect with him on Google+.

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