Apple is reported to be buying Dr Dre’s headphone brand Beats for $3.2bn, in a deal that would be the Cupertino-based company’s largest acquisition to date. But what does Beats offer Apple that the iPhone manufacturer can’t do itself?
Beats is one of the most high-profile brands in headphones. The designs are big, flashy and bold; an excellent example of brand and style over substance, as Beats headphones demand a large premium for middle-of-the-road sound quality. Their sound generally does not match competing products from Bose, Sennheiser or a plethora of smaller manufacturers.
Two music powerhouses
Launched by the rapper Dre and and music producer Jimmy Iovine in 2008, the Beats brand headphones were first manufactured by Monster, then a boutique audio and cable manufacturer. The success of Beats can be put down to Dre and Iovine’s ability to market the brand.
The duo used their high profile among hip-hop artists to ensure that Beats headphones appeared in every influential music video possible – which quickly launched them into the consciousness of the rap and hip-hop buying public.
The genius behind Beats was to make wearing big, bulky and showy headphones cool again. Lots of manufacturers had “cans” – over-the-ear models – but until Beats came along and showed celebrities wearing them, they weren’t a fashion accessory in quite the same way that they are today.
Beats shed Monster as a manufacturing partner at the end of 2012, building the headphones itself. Mobile phone manufacturer HTC paid $309m for a 50.1% controlling stake of Beats in 2011. The acquisition gave the Taiwanese firm exclusive rights to make smartphones with Beats branded audio systems, which included the company’s 2013 HTC One flagship smartphone which shipped with Beats audio – the DSPs (digital signal processors, which turn digital data into music) and audio amplifiers – inside.
HTC then sold back half of its stake in Beats to the company for $150m in 2012, with Beats buying out the final 25.1% HTC stake in September 2013. In that time Beats launched a new range of headphones and portable speakers, designed and manufactured in house, and then in January 2014 the company launched Beats Music – a music streaming subscription service built upon the company’s acquisition of a similar service called MOG in 2012.
So what is Apple actually buying?
In acquiring Beats, a deal that is currently still speculation –although boasts by Dre of being the “first billionaire rapper” seem to suggest the Financial Times’ report is accurate – what Apple is buying, first and foremost, is a brand.
This would mark the first time that Apple has bought a large brand that many consumers have heard of. Historically, Apple has bought much smaller, innovative companies for technology, products and talent, but they’re in no way part of the mainstream public consciousness. Apple’s previous biggest known acquisition was Anobit, an Israeli company with expertise in solid-state chips, for $390m in December 2011. Its best-known was Siri – the “digital voice assistant” – though that was in 2010, well before the Siri name was publicly familiar.
It will have also bought a marketing powerhouse. The double team of Iovine and Dre have significant sway in the music industry, and together have proved they have the ability to create a brand from nothing and bring it to the mass market in developed nations like the UK and US in the space of six years.
Beats also has a history of clever, if somewhat unorthodox marketing strategies. Its beginning, with product placement in music videos was key, but a standout was the (alleged) circumvention of 2012 London Olympics sponsorship agreements that barred brands from being advertised during the Olympics that were not official Olympic sponsors.
It’s said Beats got around the ban by giving specially decorated headphones to key athletes, who duly wore their brand new headphones walking out to events. At one point almost every swimmer in certain finals came walking out to compete wearing large Beats cans, presumably replacing whichever headphones they would have normally worn as part of their isolation and warm up strategies.
Beyond the brand, Beats also poses a range of headphones and speakers, many of which are already sold in Apple stores.
Apple sells two models of its own headphones: the EarPods, which ship in the box with the iPhone, and the Apple In-Ear Headphones, which are more traditional in-ear “canalphones” costing £65.
In purchasing Beats, Apple would then own seven lines of headphones, three lines of earphones and four lines of speakers.
Apple, like all other smartphone manufacturers, is staring down the barrel of smartphone saturation in developed markets like the UK and US. At that point gaining new customers is difficult, and growing sales becomes difficult unless Apple can woo customers away from other mobile manufacturers.
In some markets such as Japan, where 97% of mobile subscribers have smartphones, saturation has led to price wars, fluctuating sales and fierce competition – which Apple is unlikely to want to face without a backup.
Apple may see Beats as a way to expand its mobile device ecosystem beyond computing products like the iPhone, iPad and Mac computer line. Beats sits in an tangential market to smartphones. They are inherently linked because the smartphone powers most of what is listened to on the companies headphones, but they are an accessory or an addition to the smartphone and therefore something Apple can sell to people who already own a smartphone.
Beats Music: the missing link?
In addition to the brand and hardware Beats produces, there is also the Beats Music service.
Apple has the incredibly successful iTunes store, but its model is one where consumers buy music, rather than renting it under a subscription model.
Downloads are slowing, while streaming services such as Spotify have shown that paying a monthly subscription for music and streaming it from a large library is a viable alternative. It is certainly eating into the bottom end of the music retail market.
Apple launched its own iTunes Radio music streaming service in the US in 2013 – a free ad-supported service available to all iTunes users. iTunes Radio allows users to listen to pre-defined “stations” or to generate a playlist based on a single artist with songs by them, plus others. So far though it’s only available in the US and Australia.
Beats Music (also available only in the US and Australia) is a direct competitor to Spotify, offering both on-demand music streaming and a radio-like service, which combines algorithm and human curation to generate playlists based on artists or moods and events.
The service has 20m songs available in its library, and also has the backing of both high-profile and independent artists, with Trent Reznor of Nine Inch Nails acting as Beats Music chief creative officer.
Beats Music also acquired Topspin Media, a company dedicated to a direct-to-fan model that gave music artists a direct relationship with fans circumventing recording labels. Beats Music is perceived as friendly to music artists in a way that other music services are not, especially Apple’s iTunes, which some of the music industry blames for the decline of revenues.
With Beats Music, Apple would get another line into the music industry that made the original iPod and iTunes into a market leader. It also gives Apple access to both curation and music artist talent like Reznor and Beats Music’s Julie Pilat, who leads the music curation team, having previously been a broadcast radio music director.
Fits like a brick
To say that it is unclear quite how Beats and Apple would fit is be an understatement. The news that the two were in acquisition talks has prompted head-scratching around the world. On the face of it, they’re not a good business fit: iTunes Radio directly competes with Beats Music, the Beats brand status as expensive but average-sounding headphones does not match up with Apple’s premium-quality experience, and Apple’s brand in music and mobile technology far exceeds that of Beats.
If confirmed, Beats would be the largest acquisition Apple has made to date, and while it will have certainly bought itself a powerful brand, it is difficult to see what justifies the large $3.2bn sum.
Perhaps Apple has just bought another company with revenues in excess of $1bn and intends to leave it operating as a separate entity. But if so, that would be the first time it has done that, and is certainly uncharacteristic.