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

May 29, 2014
American Rapper, Dr. Dre/AFP
American Rapper, Dr. Dre/AFP

, While Apple’s iTunes remains the world’s largest seller of music, it only offers downloads of single tracks and albums. Music-streaming services, where a customer pays for access to the songs instead of owning them in a digital library, have gained in popularity, especially among younger listeners, said Mike McGuire, an analyst at Gartner Inc. Yet the services aren’t lucrative and present business challenges, even for Apple, he said.

“They haven’t moved to a subscription model, and there are a lot of good reasons they didn’t,” McGuire said. “The big one is there isn’t a lot of money to be made.”

Subscription Service

Apple plans to keep Beats as a stand-alone music application that will run on devices based on Google’s Android software and Microsoft Corp.’s Windows operating system, as well as those made by Apple.

Not everyone is a fan of music-streaming services. Musical acts including Radiohead have criticized subscription services because they don’t compensate artists as well as the pay-per- track model. For instance, the latest album from the band The Black Keys is available on iTunes, though not Spotify.

Satisfying Service

Beats introduced its music-subscription service earlier this year. Like Spotify and other rivals, the company offers unlimited access to millions of songs in exchange for a monthly fee. Beats hired music critics, radio DJs and record-label veterans to create playlists and other curation tools to help customers navigate the overwhelming amount of music available — a component Iovine said was missing from the experience.

“It needs feel. It needs culture,” Iovine said in an interview with Bloomberg Businessweek in 2012. “What Apple has in the downloading world is very, very good. But subscription has an enormous hole in it, and it’s not satisfying right now.”

In buying Santa Monica, California-based Beats, Apple also would get the company’s colorful, high-end headphones. Iovine and Dr. Dre, whose given name is Andre Young, started Beats in 2006 amid rising use of iPods and smartphones to listen to music on the go.

The pair quickly proved their marketing acumen. The headphones, priced at about $170 to $450, gained popularity as stylish accessories for the general public and not just audiophiles, fueled by partnerships with musicians, fashion designers and athletes like San Francisco 49ers quarterback Colin Kaepernick and NBA All-Star Lebron James, who helped pitch the products to a younger audience.

“They have done a hell of a job in branding,” McGuire said.

Fashion Finds

With Iovine and Dr. Dre, Cook continues to bring in people with fashion experience. Former Burberry Group Plc CEO Angela Ahrendts now runs the company’s retail operation, and former Yves Saint Laurent CEO Paul Deneve is working on “special projects” for Cook.

Apple and Beats have deep ties. Iovine, who is stepping down as an executive at Universal Music Group as part of the deal, was a friend of Jobs and an early music-industry advocate for Apple’s efforts with the iPod and iTunes.

“I’ve always known in my heart that Beats belonged with Apple,” Iovine said in the statement.

The acquisition is a boon for Iovine, who has worked on projects as varied as Bruce Springsteen’s “Born to Run” and the movie “8 Mile,” and Dr. Dre, whose seminal rap album “The Chronic” helped make rap music popular with suburban teenagers in the 1990s.

Universal Music was an investor in Beats, along with private equity firm Carlyle Group LP.

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