After nearly three weeks of rumors, drunken video and reduced valuations, Apple officially announces that it will acquire Beats Electronics and hire founders Jimmy Iovine and Dr. Dre.
In a statement released Wednesday, Apple confirmed rumors that began circulating earlier this month that it will purchase Beats' headphones business and four-month-old Beats Music streaming service for $2.6 billion in cash and $400 million equity, which amounts to the $3 billion price tag reported Tuesday by the New York Post.
The deal will allow Apple and Beats to create breakthrough music products "you haven't thought of yet," although executives of neither company declined to elaborate what they are planning to work on. What we do know, however, is that Beats will retain its own brand, a rare move for Apple which has usually shut down its acquisitions to absorb the talent into the core Apple team. The Beats acquisition itself is an unusual step for the world's richest technology company, which has often focused on smaller startup acquisitions than on blockbuster deals. The last time Apple took a huge chunk out of its money chest was when it bought NeXT Computer to bring Steve Jobs back into the near-bankrupt company.
In an interview with Re/code, Apple chief executive Tim Cook hailed the latest two additions to the Apple team, saying Beats Music, which banks on human curation to bring listeners the right playlists depending on their context, is "the first subscription service to get it right." He also said Beats' headphones, which are loved and loathed at the same time, comprises a "fast-growing," "reasonable-sized" business.
"This is all about music, and we've always viewed that music was key to society and culture. Music's always been at the heart of Apple. It's deep in our DNA," Cook tells Re/code. "What Beats brings to Apple are guys with rare skills. People like this aren't born every day. They're very rare. They really get music deeply."
A few analysts, however, are puzzled. If Apple's reason for buying Beats was for the music, why won't Apple create its own music streaming service? With 800 million iTunes users and 40 million free listeners on iTunes Radio, Apple is in a position to compete with the likes of Spotify and Pandora. It's a "no-brainer," says Cook, who notes that Apple has bought 27 other companies between now and fiscal year 2013.
"We could build just about anything that you could dream of," he says. "But that's not the question. The thing that Beats provides us is a head start. They provide us with incredible people, that don't grow on trees. (...) The point is that Jimmy and Dre have built something phenomenal. And they have phenomenal skills. And we can begin, the instant that this deal is approved, working on the future together."
So why pay $3 billion for a company that made $1.02 billion in revenue and $40 million of profits? Nobody can tell for sure, but some analysts believe Apple has to pay top-dollar for Beats the same way people pay top-dollar for premium-priced Beats headphones. At the same time, the sudden popularity spike of streaming music as opposed to the flattening sales of digital downloads, a market Apple currently dominates, might have contributed to the hefty price tag.
Still, with Beats' human-curated streaming music under the Apple helm, iTunes Radio isn't going away anytime soon. Neither is iTunes, which is still the world's biggest seller of single-song and a la carte music downloads. When Apple founder Steve Jobs opened iTunes in 2003, his friend Iovine approached him with a proposal to offer subscription services. Jobs declined, believing that people wanted to own their music. He was right, at least, at that time. Last year, however, listener preference shifted to streaming services as more people preferred to listen on the go, not just when they're in front of their computers. The NPD Group says 52% of smartphone owners in the U.S. have at least one music streaming app on their phones.
Competitors also praised the acquisition, believing it will benefit the entire streaming business and music industry as a whole.
"It's a watershed moment that will grow the entire segment by introducing more people to the joy of hearing anything you want, anytime and anywhere," says Paul Springer, senior vice president for the Americas of Rhapsody International.
Apple says Iovine and Dr. Dre will work under Eddy Cue, Apple's chief of Internet services.
The iPhone maker expects the deal to be complete by the end of this year.
