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Apple Agrees to Buy Beats for $3 Billion in Biggest-Ever Deal

Apple offered to replace some older iPhone 5 smartphones with flawed on-off buttons/AFP

Apple Inc. agreed to buy Beats Electronics LLC for $3 billion, its biggest-ever acquisition, nabbing a popular line of headphones and a nascent subscription music-streaming service as the iPhone maker seeks to rev up growth.

Beats founders Dr. Dre and music-industry executive Jimmy Iovine will join Apple, the companies said in a statement yesterday. The purchase price is $2.6 billion, with $400 million more that will vest over time. The acquisition is projected to close in the quarter that ends in September.

The deal signifies that Apple Chief Executive Officer Tim Cook is willing to use the company’s $150.6 billion in cash more aggressively, a departure from predecessor Steve Jobs’s playbook of acquiring smaller companies to bring in technology and talent. As sales of digital music downloads fall, buying Beats gives Apple a foothold in Internet-based streaming, where Google Inc.’s YouTube, Spotify Ltd. and Pandora Media Inc. dominate.

“Music is such an important part of all of our lives and holds a special place within our hearts at Apple,” Cook said in the statement. “That’s why we have kept investing in music and are bringing together these extraordinary teams so we can continue to create the most innovative music products and services in the world.”

Sales Cooling

The deal indicates how the CEO, who is facing pressure to jump-start Apple’s revenue amid cooling iPhone and iPad sales, is shifting tack to acquire growth. Even as Google and Facebook Inc. have spent billions on acquisitions, Apple previously avoided tie-ups of this size. Its biggest past purchase was the $400 million deal for NeXT in 1997, which brought Jobs back to Apple.

Maynard Um, an analyst at Wells Fargo Securities LLC, wrote in a note yesterday that Apple should focus its deals on more growth-oriented businesses.

“While we believe Apple should get some benefit of the doubt because of its historical success, a music-related acquisition still seems, to us, more defensive,” wrote Um. “Given the changing landscape and our view that Apple will have to eventually evolve its business model, we believe Apple should be acquiring more offensive assets to better position itself.”

The deal had been anticipated, after news of Apple’s talks with Beats emerged earlier this month. Apple made the official announcement yesterday a few hours before its head of iTunes, Eddy Cue, and Iovine were scheduled to speak at a technology conference. Cue will oversee the Beats Music team for Apple, while marketing chief Phil Schiller will run the Beats headphones group.

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Apple also will hold its annual developer conference next week in San Francisco, where it will unveil software updates.

Beats Music

A central part of the deal’s allure is the Beats Music service. While the purchase uses just a fraction of the cash and investments on Apple’s balance sheet, it shows that the Cupertino, California-based company is serious about introducing its own music-subscription service. Jobs had long resisted such a move, insisting that people don’t want to rent their music.

Apple took a step in that direction last year, introducing iTunes Radio, an advertising-supported music-streaming service that competes with Pandora.

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