5 things to know about Apple's duet with Beats
CUPERTINO, Calif. (AP) — Apple CEO Tim Cook looked like he wanted to dance Wednesday as he discussed his company's $3 billion acquisition of Beats Electronics. The deal, by far the most expensive in Apple's 38-year history, will give the iPhone and iPod maker a line of trendy headphones known for their hip appearance and thumping bass sound.
But Cook seems most excited about the potential of Beat's still nascent music-streaming service, which currently has more than 250,000 subscribers. That's paltry compared to the more than 10 million people subscribing to Spotify's rival streaming service, Cook is confident that will change once Beats has access to the data that Apple Inc. has accumulated while selling more than 35 billion songs to more than 800 million iTunes accounts during the past 13 years.
COMBINING MATH WITH EMOTION
Apple is intrigued with Beats Music's approach to compiling playlists to suit the individual tastes of each subscriber. Rather than just grouping songs by genre or relying on toneless algorithms that analyze past listening habits, Beats also draws upon the knowledge and ears of tastemakers such as Beats' co-founders — rap music pioneer Dr. Dre and longtime recording industry executive Jimmy Iovine, who has been an engineer or producer on seminal albums made by Bruce Springsteen, Tom Petty and Dire Straits.
"We are getting the first music subscription service that got it right, that believes in human curation," Cook said during a Wednesday interview at Apple's Cupertino, California headquarters. "We think this is killer. The feeling that you get from listening to this service is so different than anything else."
FILLING A VOID
Apple is the top seller of songs downloaded over the Internet and has attracted 40 million listeners to its free iTunes Radio service since its launch eight months ago. But neither of those resonates with music lovers like a classic album or a playlist tailored for a person's mood at a particular time, according to Eddy Cue, the head of iTunes.
"With Beats, you can create a playlist that truly moves you," Cue said Wednesday. "It gives you emotions, it gives you meanings, it tells about culture. Those are things you can't get from a single song and we love that."
MONEY MAKER
Cook says Beats is already profitable, six years after Iovine, 61, and Dre, 49, started the company, which is now based in Culver City, California. Dre originally wanted to design flashy sneakers, according to Sony Music CEO Doug Morris, who considers Iovine to be his best friend. Iovine thought making a stylish line of headphones would be more lucrative. The company launched its music streaming service earlier this year.
After generating $1.1 billion in revenue last year, Beats' sales increased by 30 percent during the first three months this year, Cook said. He expects Beat to boost Apple's earnings beginning in October. Apple earned $37 billion on revenue of $171 billion in its last fiscal year, so Beats' initial contribution won't be that significant financially.
A DECADE-LONG COURTSHIP
Iovine has disparaged the technology industry as "culturally inept," but he says he has always thought of Apple differently since he first met the company's late co-founder, Steve Jobs, to discuss the state of digital music in 2003.
"I came back to my team and said, 'These guys get our industry and they get culture,'" Iovine said Wednesday. "This is a company that was founded by a person who respects music."
Cook, who worked closely with Jobs before succeeding him as CEO in 2011, says the admiration was mutual.
Jobs "knew Jimmy very well and he loved Jimmy very much," Cook said.
THINKING DIFFERENTLY
Many Apple watchers are convinced that Jobs would have never have bought Beats, no matter how fond he might have been of Iovine.
Jobs, who died in October 2011, was famous for hoarding cash and when he spent money, he preferred investing it in research that would enable Apple to innovate on own. Until Wednesday, Apple's biggest previous purchase had been its $400 million acquisition of NeXt Computer, a company that Jobs started after he was ousted from Apple in the 1980s.
Jobs also had denigrated music subscription services, such as the one that Beats is trying to build.
Cook says he tries not to ever consider what Jobs might have done if he were still alive, but he insists that his predecessor wasn't as resistant to acquisition as most people think.
"We have never been anti-acquisition," Cook said. "We have looked at some very, very large companies and we decided not to buy them. But we didn't decide not to do them out of religious reasons. There was no rule, 'Thou Shalt Not Acquire.' There was no rule that everything had to be built organically."
Apple has now bought 27 companies since September 2012. Most of them have been small deals that haven't required Apple to disclose the price.
CUPERTINO, Calif. (AP) — Apple is buying more flair, swagger and song-picking savvy with its $3 billion acquisition of Beats Electronics, a headphone and music streaming specialist founded by rapper Dr. Dre and Jimmy Iovine, one of the first recording executives to roll with the hip-hop culture.
Wednesday's announcement came nearly three weeks after deal negotiations were leaked to the media. It's by far the most expensive acquisition in Apple's 38-year history, a price that the company is paying to counter a threat posed to its iTunes store.
The price consists of $2.6 billion in cash and $400 million in Apple stock that will vest over an unspecified time period. The deal is expected to close before October.
With $1.1 billion in revenue last year, Beats is already making money and will boost Apple's earnings once the new fiscal year begins in October, Apple CEO Tim Cook said in an interview.
Iovine, 61, and Dre, 49, were the keys to the deal. They began working with Apple in the early days of its iTunes store and now will become key in Apple's music divisions, though Cook said their roles haven't been determined yet
"We have known these guys forever," Cook said of Iovine and Dre. "We've dated, we've gone steady and now we are getting married. This relationship started a decade ago, so we know there is an incredible cultural fit. These two guys have a very rare set of skills. It's like finding a particular grain of sand on the beach. It's that rare."
Cook indicated Beats' music streaming service was the main selling point in the deal, though the headphone line also is expected to continue growing, too.
Although he regards most technology companies as "culturally inept," Iovine believes Apple will empower Beats to realize its goals of improving the sound of digital music and creating playlists tailored for each subscriber.
"To complete our dream, we needed a company like (Apple)," Iovine said in an interview. "We couldn't finish this on our own."
The growing popularity of music streaming services such as Pandora and Spotify has been reducing sales of songs and albums, a business that iTunes has dominated for the past decade. U.S. sales of downloaded songs slipped 1 percent last year to $2.8 billion while streaming music revenue surged 39 percent to $1.4 billion, according to the Recording Industry Association of America.
Although Apple broke into streaming with the launch of iTunes Radio last September, the service has not been as popular or as lucrative as the company expected, according to two people familiar with the matter. The people were not authorized to speak publicly about the matter and spoke on condition of anonymity.
ITunes Radio has 40 million listeners and will continue as a free service with ads while Beats Music will try to tap into the more than 800 million iTunes accounts to sell more subscriptions to its customized service. Beats Music currently has more than 250,000 subscribers, Cook said. That's well below the more than 10 million paying customers that Spotify's streaming service boasts.
Apple is counting on the Beats acquisition to boost its cachet with teenagers and younger adults as it tries to remain a leader in digital music — an industry that looks much different than when Apple reshaped the scene with the 2001 debut of the iPod.
"Apple suddenly has regained its cool," said Sony Music CEO Doug Morris, who was one of the first recording executives to embrace iTunes at Iovine's urging more than a decade ago.
Beats was founded in 2008 by Dr. Dre, whose real name is Andre Young, and Iovine, a longtime recording industry executive who is stepping down as chairman of Universal Music Group's Interscope Geffen A&M Records to join Apple. It now dominates the luxury headphone market. Its equipment is also a big seller in Apple's stores.
Operating from its Culver City, California, headquarters, Beats commands 62 percent of the $1 billion U.S. market for headphones priced above $100, according to NPD Group.
The purchase marks Apple CEO Tim Cook's biggest strategic break from the way the Cupertino, California, company was led under co-founder Steve Jobs, who died in October 2011. Jobs favored smaller acquisitions and didn't believe subscription music plans would be popular. Before Beats, Apple's biggest acquisition had been its $400 million purchase of NeXt Computer, a company that Jobs founded after being ousted from Apple in the 1980s.
Cook said he never considered what Jobs would have thought about the Beats' acquisition during the negotiations. Jobs "told me to do what was right," Cook said. "And I am 100 percent certain this is what is right. This is one of those things that we will look back upon and say it was meant to be."
Morris, who considers Iovine to be his best friend, believes Cook is making a smart move that will give Apple even more credibility in the music industry.
"It's a game changer because Jimmy is that kind of guy who can change a game," Morris said. "I am not saying he is Steve Jobs, but he is a guy with new ideas and he really knows how to build the bridge between music and technology."
But some analysts question whether Beats will be a good fit for Apple, which makes most of its money selling hardware such as iPhones and iPads.
Forrester Research analyst Frank Gillett says Apple would have been better off developing its own headphones in-house and expanding into music subscriptions through iTunes.
"It's hard to understand why Apple would have to spend $3 billion on a nascent streaming service and a line of bass-heavy headphones," Gillett says.
Yukari Iwatani Kane, the author of "Haunted Empire," an inside look at Apple since co-founder Jobs' death, also sees a disconnect.
"Culturally, Beats is the complete opposite of Apple," Kane says. "It's known for being loud and bold and in your face. It doesn't fit with Apple's understated, discerning brand."
Having visited Apple on a regular basis since he first met Jobs more than a decade ago, Iovine said he has no qualms about joining Apple.
"This is not a big company to us," Iovine said. "We can roller skate in the halls here. Dre and I have been working together for 22 years. We are not about to go somewhere where we are going to fall."
Dre was more sedate Wednesday than he was in a celebratory video posted online declaring him as hip-hop's first billionaire after news of the Apple talks leaked earlier this month. "To be able to do something that could potentially change the world, I'm thrilled."