Apple agreed to buy Beats Electronics for US$3 billion, its biggest-ever acquisition, nabbing a popular line of headphones and a nascent subscription music-streaming service as the iPhone maker seeks to rev up growth.
Beats founders Dr. Dre and music-industry executive Jimmy Iovine will join Apple, the companies said in a statement. The purchase price is $2.6bn, with $400 million more that will vest over time. The acquisition is projected to close in the quarter that ends in September.
The deal signifies that Apple chief executive Tim Cook is willing to use the company's $150.6bn in cash more aggressively, a departure from predecessor Steve Jobs's playbook of acquiring smaller companies to bring in technology and talent. As sales of digital music downloads fall, buying Beats gives Apple a foothold in Internet-based streaming, where Google's YouTube, Spotify and Pandora Media dominate.
“Music is such an important part of all of our lives and holds a special place within our hearts at Apple,” Mr Cook said in the statement. “That’s why we have kept investing in music and are bringing together these extraordinary teams so we can continue to create the most innovative music products and services in the world.”
The deal indicates how the chief executive, who is facing pressure to jump-start Apple’s revenue amid cooling iPhone and iPad sales, is shifting tack to acquire some growth. Even as Google and Facebook have spent billions on purchases, Apple previously avoided tie-ups of this size. Its biggest past deal was $400m for NeXT in 1997, which brought Mr Jobs back to Apple.
Maynard Um, an analyst at Wells Fargo Securities, wrote in a note yesterday that Apple should focus its deals on new types of businesses.
“While we believe Apple should get some benefit of the doubt because of its historical success, a music-related acquisition still seems, to us, more defensive,” wrote Mr Um. “Given the changing landscape and our view that Apple will have to eventually evolve its business model, we believe Apple should be acquiring more offensive assets to better position itself.”
The deal had been anticipated, after news of Apple’s talks with Beats emerged earlier this month. Apple made the official announcement yesterday a few hours before its head of iTunes, Eddy Cue, and Iovine were scheduled to speak together at a technology conference. Mr Cue will oversee the Beats Music team for Apple, while marketing chief Phil Schiller will run the Beats headphones group.
Iovine said yesterday at the Code conference in Rancho Palos Verdes, California, that he was the one who initially approached Apple about a deal with Beats, with Mr Cook and Mr Cue involved in negotiations to complete the agreement. Mr Cue added that he had wanted to work with Iovine for a long time.
“At the end of the day, it’s not about what Apple’s doing today or what Beats is doing today – it’s about the things that we’re going to do together and those things are going to be much greater than anything we could do on our own,” Mr Cue said.
A central part of the deal’s allure is the Beats Music service, which highlights how serious the Cupertino, California-based company is about its own music-subscription service. Mr Jobs had long resisted such a move, insisting that people don’t want to rent their music.
Apple took a step in that direction last year, introducing iTunes Radio, an advertising-supported music-streaming service that competes with Pandora.
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, said Mike McGuire, an analyst at Gartner. 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,” Mr McGuire said. “The big one is there isn’t a lot of money to be made.”
Apple plans to keep Beats as a stand-alone brand and the 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 criticised 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.
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,” Mr 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.”
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