Apple and its $3 billion earphones ready to beat up on Spotify

Profile picture for user slauchlan By Stuart Lauchlan May 28, 2014
Summary:
It’s the largest acquisition in Apple's history. It’s the biggest strategic decision made by CEO Tim Cook. But why is Apple splashing out $3 billion for some over-priced headphones?

It is one to be filed under worst kept secret of the month, but Apple finally confirmed its takeover of buying Beats Electronics and the Beats Music streaming service for a cool $3 billion.

When this was first rumoured a few weeks ago, I must admit my favorite reaction to the news came in the form of this acid-tongued tweet from James Governor at Redmonk:

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He has a point. Apple-junkie that I am, I loathe their earphones. It totally baffles me that a company so celebrated for its design has singularly failed to tackle the ear pod issue.

But is there more to it than that? For $3 billion, you’d certainly hope so, even if we do live in a world where Google will pay $3.2 billion for a smoke alarm with ideas above its station.

It’s the largest acquisition in Apple's history.  It’s also the biggest strategic decision made by Tim Cook since he stepped into Steve Jobs CEO shoes.

So what will Apple get for its money, assuming the deal goes through?

Apple's Got Talent

Notably, the deal brings some top-line talent under the Apple roof in the form of Beats co-founders Jimmy Iovine and Dr. Dre, who will report to iTunes boss Eddy Cue.

It also beefs up Apple as a contender in the streaming music business, a sector that Jobs once dismissed with a comment about customers “not being interested” in subscription music models.

But that was back in 2007. Flash forward to 2014 when Spotify is boasting 10 million subscription customers and it’s a very different world.

As Cook explained at the CODE conference in California yesterday:

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. We’ve sold Macs to musicians since the beginning of Macs. And we accelerated the music industry with the digital music revolution with the iPod and the iTunes music store.

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Beats Music only launched in January and has around 250,000 active users, so it’s not exactly a Spotify-killer - at least not on its own and not just yet - but Cook argued that what Beats Music offers is quality, not quantity:

What Beats brings to Apple are guys with very rare skills. People like this aren’t born every day. They’re very rare. They really get music deeply. So we get an infusion in Apple of some great talent.

We get a subscription music service that we believe is the first subscription service that really got it right. They had the insight early on to know how important human curation is. That technology by itself wasn’t enough, that it was the marriage of the two that would really be great and produce a feeling in people that we want to produce.

They’ve also built an incredible premium headphone business that’s been tuned by experts and critical ears. We’re fans of that. It’s a reasonable-size business that’s fast-growing.

But mostly, it’s because we always are future-focused. So it’s not what Apple and Beats are doing today. It’s what we believe pairing the two together can produce for the future.

Buy not build?

All that apart, the decision to buy rather than build has raised eyebrows, with the likes of James McQuivey at Forrester Research alluding to a downbeat interpretation of the Beats move:

Choosing to buy Beats purely for its existing businesses and revenues would represent Apple significantly lowering its sights, aiming to graduate right from innovative leader of life-changing technology to kinda-cool company that makes stuff teenagers like. Not that selling to teenagers isn't a good thing, it can certainly bring in money, but it doesn't typically generate long-lasting brand relationships.

To be clear, if Apple is buying Beats purely for its headphones or music subscription business, then Apple is making a mistake.

For his part, Cook counters that Apple has a track record of acquisitions that no-one pays much attention to and counters:

We could build just about anything that you could dream of. 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. They’re creative souls, kindred spirits.

And by the way, we do acquire companies. I know we don’t talk about them, but we’ve acquired 27 companies between fiscal year 2013 and this year so far. So we’ve never been of the mindset that we shouldn’t acquire things.

That’s not likely to convince TechMarketView’s Richard Holway - an Apple enthusiast in the main - who argues:

I couldn’t exactly see why Apple couldn’t have produced its own premium headphones – maybe a lot better than the Beats version. Same goes with the streaming service.

None of this, in my view, fits the great new product genre that we Apple followers have waited so long for. Nothing really new from Apple since the iPad launched over 4 years ago on 3rd Apr 2010.

We are promised such wondrous new product lines (iWatch, iTV, iConnectedHome?) this year. We’ve waited too long.

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Unbuttoned shirts

He adds mischievously that if Apple is in pursuit of Urban Cool, then there’s a problem:

The photos of the key players in all the press show a bunch of balding middle-aged men trying to look cool by leaving their shirts untucked. I found that rather sad!

Ouch! Rather less cuttingly, Forrester’s McQuivey is still a believer:

There are those of us who still believe that Apple hasn't thrown in the towel. And why would it? There are still many consumer markets to dominate - entire markets like wearables and home automation tech and even in-car experiences, all of which are in their infancy - and Apple still has the smarts, the brand, and certainly the money to make a run for any of those things if not all of them. So why would Apple instead sign up to become a holding company for fashionable but not life-changing brands?

McQuivey predicts Apple will tie Beats into a wearables strategy for what he calls:

body-based product innovation. As if Apple came to the wearables market, took one look at Google Glass and said, "We can do better than that."

But he concludes:

If…none of this materializes and Beats just ends up being a nice accessories business for Apple, well, then we will have to finally accept that a phenomenon like Apple can't last forever.

My take

Steve Jobs insisted that we all wanted to own our own music and just looking at the download stats for iTunes, he was clearly right as he obviously so often was.

But he wasn’t right all the time. Remember his opposition to the iPad Mini which now looks like such an obvious development.

The reality today is that people are prepared to sign up for monthly subscriptions to listen to as much music as they want from services such as Spotify and that’s a potential threat to the iTunes download model.

According to the Neilsen and Billboard 2013 US Music Report, streaming services revenues were up 32% year on year while digital download sales declined 6%. The direction of travel is clear.

Against that backdrop, it makes sense when Cook states:

“The instant that this deal is approved, we can begin working on the future together. And I believe that that future is better than anything either company could build on its own.”

We shall see - and hear.