Apple’s $3bn purchase of Beats was finally confirmed on Wednesday after weeks of speculation.
After a formal statement from Apple, chief executive Tim Cook, its head of internet services Eddy Cue and co-founder of Beats Jimmy Iovine were interviewed on stage at the Code conference in California about the acquisition.
Here’s what we learned:
‘This is all about music’
“This is all about music, and we’ve always viewed that music was key to society and culture,” said Cook “Music’s always been at the heart of Apple. It’s deep in our DNA.“
Apple bought the whole of Beats, which includes Beats Electronics – the headphone and speaker brand – but also Beats Music, the relatively new streaming music service set up by the dynamic duo of rapper Dr Dre and Iovine.
Beats Music claims to have has 250,000 paying subscribers, although a leaked royalty report suggests the true number is actually 111,000 paying accounts, including many subscribers signed up for family accounts that support for up five users.
The Beats Music service will be kept as a standalone offering – with its existing Android and Windows Phone apps surviving – and not rolled directly into the iTunes music offering. It will be headed by Cue, with Iovine and Dre reporting to him for music purposes.
Cue described Beats Music as “the first music subscription service done right”, specifically talking about its mix of professional curation and playlists.
Cook agreed: “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.”
Why music streaming?
Apple has steadfastly refused to enter the subscription music service arena in the past because Steve Jobs thought no one wanted to rent music tracks – they wanted to own them.
But the digital music landscape has changed in recent years. Digital growth in music sales has levelled off, and while Apple’s iTunes music store is still dominant, the growth is now in subscription services.
Apple launched its radio-style music streaming service iTunes Radio in June 2013 in the US, available via iPhone, iPad or Mac computer for free. But until now it hasn’t dipped its toe into the music subscription business.
Buying Beats Music instantly propels Apple into that space, and with deals already struck with music labels and a service that is already up and running in the US, even if it is relatively small fry compared to the 40-million-user-strong Spotify, which has over 10 million paying subscribers across 56 countries.
But why not just build one itself?
If music subscription is the next frontier for digital music, and Apple already has the expertise in-house, why did it not just build one itself?
“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,” explained Cook. “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.”
Apple gives Beats Music the resources and audience to accelerate its grow its subscriber number and expand to countries beyond the US. Each one of Apple's install base of around 800 million iTunes users has a credit card on file - and could be a potential Beats Music subscriber.
And the headphones?
Apple has produced both headphones and speakers in the past, but has never found great success beyond the basic set bundled with every iPhone. Iovine didn't spare Apple any blushes by describing those as only good enough "to see if the sound works".
Iovine said that "our dream is that everyone in the world who buys a phone" will also upgrade their headphones. Apple sold over 500m iPhones; even if only 10% of those buy into a Beats product, that's huge growth for Beats.
Beats Electronics, which makes and sells headphones and speakers, will be overseen by Phil Schiller, Apple’s head of worldwide marketing. Dre and Iovine will report to Schiller for all things headphones.
Apple will take over design duties for new Beats headphones, while the rest of the Beats Electronics team will be absorbed into Apple. Beats Electronics will then be able to leverage Apple’s extensive distribution network and will continue to be sold in Apple stores.
‘Jimmy’s on the cutting edge’
A key part of Beats draw for Apple has been acqu-hiring Iovine. A powerhouse in the music industry, Iovine has been working with Apple on-and-off for the last 10 years. He was instrumental in the deals that forged the first iTunes music store, and had been talking to Apple about Beats since its inception.
“Jimmy has been on the cutting edge of innovation in the music industry for decades, including as a key partner for Apple in the launch of the iTunes Music Store more than ten years ago,” said Cook.
Iovine will become a full time employee at Apple, but will not be based out of Apple’s head quarters in Cupertino. Instead he will remain in Los Angeles, attempting to bridge the gap between Silicon Valley technology and the entertainment industry.
“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,” explained Cook.
For Apple, Iovine brings influence in the music industry, the same influence that got Beats Music up and running. For Iovine, Apple is apparently a kindred spirit.
"These guys get it," Iovine said. "They respect what we do. They respect copyright. They respect the entire food chain.”
“I’ve always known in my heart that Beats belonged with Apple,” continued Iovine, saying that the creation of Beats was inspired by “Apple’s unmatched ability to marry culture and technology".
During the love-in, Iovine attacked rival music service Spotify saying it would “cave” after its venture capital funding had been exhausted. But he did also rubbish Apple’s own headphones saying they sounded “like a mosquito” - and forcing Apple’s Cue to defend them live on stage.
"We make the best headphones that come in the box,” said Cue, noting that "when you want to make incredible sound, it costs more money."
Have you forgot about Dre?
Little has been spoken about Dre. He will become a full time employee, just like Iovine, and will apparently still work on Beats products. Most of the discussion has been around the Beats team, which Dre is a part of, but his public outbursts caught on camera will undoubtedly have ruffled some feathers.
For now, he is the self-proclaimed “first billionaire in hip-hop” even if that might be a slight exaggeration.
Beat’s second mobile phone company in three years
Apple is not the first technology company to attempt to bring Beats into its fold. Apple rival HTC originally bought a 50.1% controlling stake in Beats for $300m in August 2011. The two companies later split in August 2013.
According to Iovine, it wasn’t a good fit, and the two company cultures clashed badly: HTC’s strap line had been “quietly brilliant” for years, which clashed with the big, brash image of Beats.
Before the HTC deal, Iovine revealed that he had tried to partner with Apple several times over the last decade, saying "Apple makes deals the way they make products" while making a slow turning motion with his fingers.
How much is the deal worth in the end?
Reports before the announcement yesterday put Apple’s acquisition of Beats at $3.2bn. The reality is the slightly smaller sum of $3bn made up of $2.6bn and $400m in stock over the next years. While this is the biggest deal in Apple’s history – the company usually prefers smaller, lower profile company acquisitions – Apple is sitting on a cash reserve of $150bn, which means there is plenty more capital where that came from.
The acquisition is still subject to regulatory approval, but Apple expects it to complete by the end of September this year.
What’s next for Apple and Beats?
Apple’s Cue said that the company’s 2014 line up is "the best product pipeline that I've seen in my 25 years at Apple.” Cook didn’t give much away, other than saying that Iovine, Beats and Apple would be working on projects for products and services that no one had thought about yet.
Apple’s World Wide Developer Conference (WWDC) kicks off next week in California. Traditionally Apple releases a sneak peek into its new software for both its Mac computers and its iPhone and iPad at WWDC each year.
It is possible we will also see some new products, although Beats are unlikely to feature in Apple’s events until the acquisition has completed.
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