15 ms·

Apple Confirms Its $3 Billion Deal for Beats Electronics

339 points by bedhead 12y ago

nostromo 12y ago
Is music even still important to Apple? The iPod is in a longterm decline. Low margin music streaming has replaced purchased mp3s. I think music has changed from the main event in the Apple ecosystem to a minor attraction. It seems like Apple is looking backwards and defensively, not forward and offensively on this one.
- zavi 12y ago
  More streaming vs purchasing mp3s doesn't mean people will be using headphones less.
- sscalia 12y ago
  It might be hard for someone with an autism-spectrum order to understand, but normals really love music. It's part of being a human being. So yes, Music is extremely important. For anyone.
  - pauletienney 12y ago
    please ...
- k-mcgrady 12y ago
  Music is probably one of the top 3 things people do on their Apple devices so it's important for Apple to control that experience in some way. If people are leaving behind purchasing in favour of streaming they have to download an app on their new iOS device before they can listen to music. Apple would rather the music experience be built-in.
jaxytee 12y ago
Depending on the details of the deal, this may make Dr Dre hip hop's first billionaire.
- UnethicalHacks 12y ago
  he owns something like 22% of the company. I read somewhere that this will bring him to approx $800m.
  - newaccountfool 12y ago
    So it will become rather easy for him to become a billionaire if he invests it correctly. Pretty good for a guy from the streets of Compton.
    - Bootvis 12y ago
      If he didn't spend too much he should be a billionaire right now, see [1]. Money quote: "Forbes estimated his net worth at US$270 million in 2012." [1]: http://en.wikipedia.org/wiki/Dr._Dre#Income http://en.wikipedia.org/wiki/Dr._Dre#Income
- joeblau 12y ago
  It will make him close, but not there. I'm sure Diddy is no motivated to start some tech startup idea.
  - jaxytee 12y ago
    Curtis "50cent" Jackson seems to have followed in Dre's footsteps and now has his own headphone line http://smsby50.com/ http://smsby50.com/ . Wouldn't it be interesting if they were acquire by a Google/Microsoft/Amazon?
    - joeblau 12y ago
      That would be funny, but I think that makes less sense than Apples move. I've heard a lot of speculation, but nobody really knows what Apple's plans are.
- k-mcgrady 12y ago
  When the rumour was $3.2bn he wasn't going to become a billionaire despite his video stating his was - so now the price has dropped he certainly isn't one. Also - what does Beats have to do with his career in hip hop? Hip hop didn't make him almost $1bn, an electronics company he co-founded did. It just irks me every time I see 'hip hops first billionaire'. It has absolutely nothing to do with hip hop.
smackfu 12y ago
Interesting that they closed the deal and announced it before the WWDC Keynote on Monday.
- k-mcgrady 12y ago
  It's not really an announcement for a developer conference. Plus aren't these things typically announced after the markets close (which wouldn't be possible at WWDC)?
  - smackfu 12y ago
    Eh, Apple is Apple. They announced iTunes Radio at WWDC 2013, and that doesn't have an API or anything for developers. And I'm not sure about announcing acquisitions outside of market hours. Apple does plenty of acquisitions that they never announce. Beats would probably need to announce being acquired if they were a public company, but they aren't.
- yaur 12y ago
  Someone posted a video of Dre drunk at a party confirming the deal. I'm guessing Apple is in damage control mode at this point and would have liked to announced it later.
k-mcgrady 12y ago
An important quote from the article: >> “Could Eddy’s team have built a subscription service? Of course,” he said. “We could’ve built those 27 other things ourselves, too. You don’t build everything yourself. It’s not one thing that excites us here. It’s the people. It’s the service.” From my usage of the Beats streaming service it stands head and shoulders above everyone else because of the people it has creating playlists. They are really fantastic especially when compared with Spotify. Apple could build a streaming music service but they need the right people to build a good one.
- gareim 12y ago
  Even though Cook said it's not about building it, "it's the people. It's the service", is $3 billion worth what is essentially an acquihire? EDIT: Right, it's still a profitable business regardless and I should have touched on that. But I don't want to see big tech companies acquire just for profit. They become behemoths that die slow deaths. I want to see Apple continue to reinvent based on their vision. I don't want them buying safe businesses. It's the reality of the world, I guess. I just firmly believe that Apple could have created their own spin on this market for less than $3 billion and beat out Beats.
  - IBM 12y ago
    Yes because it's a profitable business and will be accretive right away. The financials provide a baseline for why this deal is good, Iovine/Dre and Beats Music is just a free call option.
  - k-mcgrady 12y ago
    True but if they're the best people that might be the only way to get them. The company makes a lot of money so you have to take that into account - it's going to continue make a lot of money under Apple. I think enough that they could make that $3bn back in 5 years on headphone sales alone even if the streaming service didn't work out. Edit: >> "Right, it's still a profitable business regardless and I should have touched on that. But I don't want to see big tech companies acquire just for profit." I agree. I don't think Apple was buying for profit. But when you're valuing a company the fact they are really profitable has to factor into the price. I read they made almost $1bn last year selling headphones so $3bn isn't a crazy valuation.
danhak 12y ago
So, Apple acquires music streaming service lala.com in late 2009 for $80 million and shuts it down unceremoniously. Less than 5 years later pays $3 billion for Beats electronics, largely for their music streaming service.
- k-mcgrady 12y ago
  Lala became iTunes Radio AFAIK.
  - mattkopecki 12y ago
    Actually, FWIW I think lala's technology (matching songs based on the audio waveform instead of the file's metadata) was used to underpin iTunes Match. It is the component where you match your local library to Apple's library in the cloud, and then only upload anything that Apple doesn't already have.
  - eghri 12y ago
    Lala was way more than iTunes radio. It had low priced cloud music purchases (e.g. $0.29 a song), unlimited cloud streaming for MP3's you already owned, free album listens for 1-2 plays, an integrated streaming player for third party sites, and more. It was way ahead of its time and competitors, but it was killed by Apple and used for almost nothing.
    - thisisdave 12y ago
      Several of those features sound a lot like iTunes Match.
- deleted 12y ago
  [deleted]
izzydata 12y ago
"Apple, the company that turned digital music into a mainstream phenomenon" Is this guy serious?
- JTon 12y ago
  Is that not what Apple did with the iPod and iTunes? I don't see a problem with that statement
- Osmium 12y ago
  What's uncontroversial about that? The iTunes Store did make (legal) digital music mainstream. That's not to say it was the first store of its kind, but it was certainly the first to have widespread success.
  - izzydata 12y ago
    CDs are digital music, everyone was listening to digital music before apple did anything. People were using walkmans long before the iPod. The point is trying to credit apple for "digital" music as opposed to "analog" music. That is just absurd. Credit them from making a business out of selling digital music, but not for making digital music popular.
    - Osmium 12y ago
      Completely fair point – I was reading "digital" in this context as something ephemeral, like a computer file (mp3s etc.), rather than a physical object such as CD, even though as you say CDs are digital too.
    - jmelloy 12y ago
      I don't think anybody realistically considers a CD "digital".
      - __david__ 12y ago
        Of course they do, in general—there's nothing analog about CDs. But in this context it clearly meant "digital downloads".
JumpCrisscross 12y ago
The meat of this deal isn't likely the streaming service. Beats Music had only 111,000 subscribers as of March [1]. Compare that to Spotify's 10 million paying subscribers, 30 million non-paying users, and $4 billion valuation. The deal's financial logic is driven by Beats's $1.3 billion business (in 2013) of selling high-priced headphones. Given Apple's P/E ratio of 14.9x earnings [2], the acquisition would make sense so long as Beats were running at least a 15% profit margin on those headphones. That's a surer basis for a $3 billion bet than a nascent streaming service. [1] http://nypost.com/2014/05/27/apple-cuts-purchase-price-of-beats/ http://nypost.com/2014/05/27/apple-cuts-purchase-price-of-be... [2] https://www.google.com/finance?q=aapl&ei=_0qGU5C_BabzsgeenYHACQ https://www.google.com/finance?q=aapl&ei=_0qGU5C_BabzsgeenYH...
- gareim 12y ago
  Except the majority of Beats headphones sold are much less than $450. Looking around, most of the catalog is $250 or less. Even the article says "up to $450".
  - newaccountfool 12y ago
    The replica makers, I wonder what their profit margin would be on a pair of $450 headphones.
- danudey 12y ago
  Your argument makes sense, but it kind of falls apart when you consider that Beats aren't actually good headphones, to the point where The Wirecutter actually did an article[1] where they listed all the various Beats products and then provided examples of better deals (some of them with significantly better quality at half the price). I don't understand why Apple would buy a headphone company that makes pretty but lousy products whose price is only justified by the brand name; Apple gets that unjustified criticism already, they hardly need to reinforce it by acquiring a brand to which it actually applies. [1] http://thewirecutter.com/reviews/faq-what-are-some-alternatives-to-beats/ http://thewirecutter.com/reviews/faq-what-are-some-alternati...
gareim 12y ago
Apple redefined the mp3 player market, the ultraportable laptop market, the smartphone market, the tablet market, and now they're buying a company that reinvented the higher-end headphone market. Is it smart of a brand that has traditionally created their own iconic images to buy another cultural icon for $3 billion? I don't think so. Maybe this gets used a lot, but would Steve Jobs have done this? Or would he have created his own headphones and music streaming service? I'm willing to bet anything this is going to be seen as where Apple's golden age began to wane. EDIT: I said "higher-end" because it's perceived to be, even though audiophiles would never agree. The consumer market believes that Beats and Bose are king though. That's another reason that I'm against this purchase; Apple isn't even buying anything technically higher end (Sennheiser, Beyerdynamic, HiFiMan, what have you).
- sz4kerto 12y ago
  > reinvented the higher-end headphone marke There's zero high-endness about Beats headphones. They're all right (at least if they were priced around 30% of their current price), but really, they don't sound particularly good.
  - baddox 12y ago
    That doesn't mean they're not part of the higher-end headphone market.
    - sz4kerto 12y ago
      High-end is a sonic category, not a price category. There are extremely expensive audio systems that are targeted towards concerts, etc..
      - baddox 12y ago
        That's an interesting definition. I think of it as a synonym of "upscale," which refers explicitly to high price but does generally have a connotation of high quality as well.
deleted 12y ago
[deleted]
6thSigma 12y ago
I would have never guessed that Apple's largest acquisition ever would be Beats.
- higherpurpose 12y ago
  Me neither. They could be doing so much smarter acquisition for that money, or much less, such as buying Imagination, and creating their own fully integrated SoCs, with both CPU and GPU.
  - sanxiyn 12y ago
    They probably are working on their own GPU anyway. They don't need Imagination for that. http://appleinsider.com/articles/13/05/31/apples-graphics-chip-development-center-in-orlando-houses-former-amd-intrinsity-engineers http://appleinsider.com/articles/13/05/31/apples-graphics-ch...
- goatforce5 12y ago
  Their largest acquisition so far. (Was Apple's purchase of NeXT bigger than this deal relative to their value at the time?)
  - aaronbrethorst 12y ago
    AAPL had a market cap of about $20bn on December 20, 1996 when they acquired NeXT for $429mm + 1.5mm shares of AAPL (the share price on 12/20/96 was $23.50). So the deal had a total value of $464.25mm, or about 2.5% of AAPL's market cap. $3bn out of $537bn is a couple orders of magnitude smaller. sources: http://en.wikipedia.org/wiki/NeXT#1996:_After_NeXT http://en.wikipedia.org/wiki/NeXT#1996:_After_NeXT, https://www.google.com/finance?q=AAPL https://www.google.com/finance?q=AAPL and some arithmetic.
jotm 12y ago
Two companies that succeeded at selling overpriced, under-featured hardware to consumers mostly based on the brand name? A match made in heaven. :-)
abalone 12y ago
The most interesting reveal from Tim Cook's quote is that he only mentions the music service and the talent, not the headphones. That's super interesting. It basically means Apple looked at this like a typical Apple aquihire / component technology purchase (of the service), that just happened to have a multi-billion dollar profitable accessories business attached to it. That makes it a very unique kind of deal.
- chadgeidel 12y ago
  I agree. I think the music industry connections are probably more important than the headphones themselves. It's the brand and the associated people.
- austenallred 12y ago
  It seems a bit absurd to pay $3 Billion for an acquihire/component deal, but Apple has $145 Billion in the bank and just bought the most popular non-Apple name in music.
  - abalone 12y ago
    It's not that absurd when you factor in the profitability of the headphones business. It's interesting, not because Apple would overpay for what they wanted (they didn't), but because they looked past the most obvious aspect of Beats from a market valuation perspective to the relatively more startup-y aspects of it.
    - gtirloni 12y ago
      Isn't this SV bias? Beats is startup-y? With 300 employees and $1.5bn revenue? Beats drives a successful marketing business (much like RedBull). I think Apple is buying that. Apple doesn't need to acquire expertise on how to build and sell luxury items.
      - jader201 12y ago
        Yet they need expertise in marketing?
programminggeek 12y ago
Why didn't Apple just buy MOG when it was a separate thing? Or, why not just buy rdio now? This is more than an acquihire or however you want to spin it. I'm sure right now Beats headphones are printing money and the people at beats are good at marketing youth culture. Apple needs the ability to sell expensive tech to teens to be cool. Beats manages to sell overpriced headphones to teenagers all the time in huge numbers, even if it doesn't make financial sense. It's like designer jeans or Oakley sunglasses or... the iPod.
sayemm 12y ago
"Still, I stay close to the heat And even when I was close to defeat, I rose to my feet My life's like a soundtrack I wrote to the beat" - Dr. Dre, http://rapgenius.com/412394 http://rapgenius.com/412394
- deleted 12y ago
  [deleted]
wnevets 12y ago
this the beginning of the end.
evo_9 12y ago
I think the 3B would have been put to better use by buying HBO.
- isamuel 12y ago
  What in the world makes you think Time Warner would sell HBO to Apple?
- skinnymuch 12y ago
  I don't see why Time Warner would want to sell its cash cow. Especially for that price.
  - ConnorBoyd 12y ago
    So they buy Time Warner and still have $120B left over
lstroud 12y ago
Will Beats be a wholly owned subsidiary or integrated into Apple? I would imagine corporate structure will provide the answers on why Apple made this decision.
- Alphasite_ 12y ago
  The only subsidiary Apple has is Filemaker, and its very very hands off, so I imagine they're going to strip off anything of value and dump the rest.
ladzoppelin 12y ago
This is smart and as a non-apple user it could suck if Apple starts blocking cross-platform compatibility. Beats is actually MOG which is an amazing services that specialized in streaming 320's mp3's. It sounded amazing and I think it currently sounds better than Spotify at high quality. What sucks is what do people do if they currently have a beats sub but really don't have anything to do with Apple.
justinlink 12y ago
This could have a mobile angle too. The HTC One was branded with Beats speakers and headphones. Maybe they'll do an iphone with "Beats Audio" rather than wait for another Android phone to have partnered with Beats.
- salgernon 12y ago
  Ugh. This sounds too much like "Intel Inside" - although to be fair, the 20th Anniversary Macintosh (late 1990s) featured a sound system by Bose.
johnohara 12y ago
The question is not "why is Apple buying?" The question is why is Geffen/Interscope/A&M selling?
- return0 12y ago
  $3 fuckin billion. Eventhough everyone here goes through their post-hoc rationalization by claiming that "beats is a great company", it's way way overpriced here.
joshferg 12y ago
Wonder if Dre will join Apple's Board
jsz0 12y ago
I think the key to this deal was the Beats brand. Apple was facing a very difficult task in trying to modernize/redefine the iTunes Store. They attempted to bolt on various new things like Ping, iTunes Match, iTunes Radio, etc but it ended up being a convoluted mess. Too much legacy baggage there. I suspect Apple will preserve the Beats brand and use it as the launching pad for all their next-generation media services/products. iTunes Store will continue on as the place you go to buy things while Beats will clearly be the place you go to stream things.
onedev 12y ago
The amount of people in this thread who are unable to understand the brilliance of this deal is astounding. What they bought is not one thing, but all the components that came together in the right way, at the right time. * Beats Music, a music service that is truly different from the others and is in my opinion better in many ways. * Legendary founder of Interscope records Jimmy Iovine (who then ran it for 25 years) as part of Apple management. * Dr. Dre, enough said. * The amazing people behind the curation of the playlists on Beats Music. * A powerful brand, though this part is still a grey area for me. It remains to be seen how they handle the brand. * A strong command of the market. In 2012, NPD Group reported that Beats had a market share of 64% in the U.S for headphones priced higher than $100. It's likely even higher now. * Hardware that's flying off the shelves as noted above. They have the opportunity to improve the engineering of this hardware to make a truly great product while retaining the amazing branding. All of those things came together into one place in one deal. It's incredibly smart.
- samstave 12y ago
  Apple made 170 Billion dollars last year. They are insane not to try to spend chump change on the music industry. The own the delivery of sound from that industry INTO a vast % of the consumers of it. Apple is going to own the entire experience of media consumption for some % of their customer base. They will be the label, the distribution, the hardware and the content. A 100% apple audio feed, all wrapped up in a tight little box tied directly to your bank account. Every click costs you something.
  - onedev 12y ago
    Exactly. You're absolutely right. They will try to control the flow right from the time artists make the sounds to the time the audio hits the listener's ear. Just as they control an app from the time it's written to the time the user uses the app on their phone (while taking a nice 30% cut of proceeds).
- sleepyhead 12y ago
  I haven't tried Beats Music (I am in Cambodia at the moment so no soup for me), but why is it better than Rdio and Spotify?
asimpletune 12y ago
I just want to go on record with an entirely different idea as to why Apple is buying beats. They're going to make a label. Why Apple doesn't do streaming: Apple hates committing to something unless it's absolutely perfect. There are numerous examples, but NFC technology is a good one that comes to mind. Granted, they've made mistakes, like Mobile Me, but that was due to poor implementation, rather than immature technology and infrastructure. A similar problem has been in their way as far music streaming goes. The obstacle in their path to connecting consumers to content are labels (the same applies to cable companies and iTV, but that's a different story). Labels are greedy, difficult to deal with, and a general nuisance who provide little or no value. Meanwhile, the actual content providers, i.e. songwriters and performers, view labels as a necessary evil, but no one believes for a second that needing them is ideal. The vision: The idea is that Apple is looking to buy Beats to start their own label so they can cut out the label, who is an unnecessary middleman. My reasoning behind this is that Beats is a very strong brand, mainly because it's been run by two very savvy music industry veterans who know how to "produce", in every sense of the word. They're more of a household name than any other headphone maker can claim. If any company had the power, skill, and recognition to pull off disrupting the record industry, it would be beats. The only problem is they don't have enough money, do you know who does? Boom. It's as simple as that. Just take a look at this http://cdn.macrumors.com/article-new/2014/05/beats-royalty-s.. http://cdn.macrumors.com/article-new/2014/05/beats-royalty-s.... and tell me, from Apple's perspective, what the problem is with a music streaming service? The labels get all the money and the artists get none. All Beats has to do is say, "Boom, we're starting a label and we own the streaming service, so you can have a 30% cut per play and we'll keep 70%". If you were an artist and you could literally improve your earnings by 10x wouldn't you? $248K vs $22K is criminal. Just imagine, from Apple's perspective, what this would open up? Essentially, it's total vertical integration, a pipe from artist to audience, unadulterated by stupid bullshit. For example they could have complete coordination of everything from the original recording quality of an album to specialized super high end digital to analog converters in the hardware - from lossless media formats that were recorded especially for that format to headphones that are tuned to provide optimal performance. This is a complete bargain and no ones talking about it. It will serve as a prototype for what Apple would love to do to the television industry (think Apple acquires HBO, a win win for both), and they're doing right under everyone's noses because no one can think big enough. Apple would never, in a million years, purchase a company like that for so much money if they didn't have a very good idea of how it would pay off 10x. And remember, this is the same company that seriously considered becoming a carrier, in order to launch the iPhone.
zacinbusiness 12y ago
The headphones are crap, way too much bass and the build quality is pretty bad even for low-end headphone. But they have fooled people into thinking they are a premium product, somehow. Is that why Apple bought them? I hope we don't start getting "iPad with Beats audio" gimmicks.
malchow 12y ago
Apple paid ~10% of its $35b 2013 free cash flow* for Beats, a company with a software-side growth story and actual positive free cash flow of its own driving investment in the software piece. Apple: spinning off cash, buying companies that themselves spin off cash. A delight to see P. Oppenheimer's conservative approach thriving. Financially, Apple is a thrilling company to watch. * N.B. That's actual GAAP free cash flow. It is pure cream. What better than to accrete to FCF while acquiring, as noted by @onedev, some terrific assets, personnel, and goodwill. This is a smart and cheap move.
nikunjk 12y ago
"It’s going to be accretive in fiscal year 2015" Damn, http://recode.net/2014/05/28/tim-cook-explains-why-apple-is-buying-beats-qa/ http://recode.net/2014/05/28/tim-cook-explains-why-apple-is-...
melvinmt 12y ago
My 3 billion dollar theory is that they want to shut it down to make room for their own high-end headphones.
- pauletienney 12y ago
  Mighty Apple erases market with cash. lol
return0 12y ago
An interesting thing about the deal is that people are coming up with positive stories and opinions about Beats just to justify the price, believing that Apple can't ever be wrong. We 'll see about that ...
eip 12y ago
Marketing geniuses that sell mediocre hardware for premium prices. Sounds like a good fit.
- pauletienney 12y ago
  Actually, hardware is just a part of Apple craft
  - eip 12y ago
    Probably a very small part considering that Foxconn actually builds most Apple hardware. Apple mostly a marketing company.
callmeed 12y ago
Honest question: is there a statute of limitations on what the tech world will tolerate with regards to misogynistic behavior (or bad behavior in general)? Or do people just pick and choose what they want to fight? I ask because everyone rallied behind RadiumOne's CEO being canned after he beat up his girlfriend [0]. Similar with the Mozilla CEO (granted, the offense was different ... but it's interesting to point out that his transgression happened 6 years ago). But now Dr Dre is about to become an executive at the largest tech company in the world and people seem to be lauding the move despite the fact of (A) misogyny in his lyrics since his NWA days and [1] (B) him beating the crap out of a female reporter, doing probation and settling a civil suit out of court [2]. Am I comparing apples and oranges here? (pun intended!) [0] http://techcrunch.com/2014/04/27/ceo-gurbaksh-chahal-fired-from-radiumone/ http://techcrunch.com/2014/04/27/ceo-gurbaksh-chahal-fired-f... EDIT: spellling [1] http://rapgenius.com/Dr-dre-bitches-aint-shit-lyrics http://rapgenius.com/Dr-dre-bitches-aint-shit-lyrics [2] http://en.wikipedia.org/wiki/Dee_Barnes#Dr._Dre_incident http://en.wikipedia.org/wiki/Dee_Barnes#Dr._Dre_incident
- grimtrigger 12y ago
  Side point: beating up a female reporter doesn't make you a mysogynist (it makes you an asshole). Wasn't sure what you meant because of your wording. Our tolerance for entertainers seems to be much higher than for executives. And I doubt many in the tech world think of Dre as a "real" executive. He's there for marketing reasons, but doesn't have much oversight of the day-to-day and the damage he can do is limited. This perception might be wrong.
  - callmeed 12y ago
    > beating up a female reporter doesn't make you a mysogynist I guess I used that phrase because that's how everyone framed the Gurbaksh Chahal incident. At least in my Twitter feed.
    - pooper 12y ago
      I assume he'd be mysogynist if him beating the reporter was related to the reporter's gender. In any case, the ex-CEO didn't serve time so I'd say he got off pretty easily.
bedhead 12y ago
Poor Logitech, a company I've always had a soft spot for. They used to be the king of the peripherals and even bought Ultimate Ears for $34 million back in 2008. Their audio business is probably their lowest margin segment and now Beats gets acquired for almost double Logitech's enterprise value. The power of brands...
- hiharryhere 12y ago
  Logitech never did themselves any favours. I lost my soft spot for them when they bought Slim Devices and then quickly ruined the Squeezebox with bloat and feature creep. The original Squeezebox was elegant and had so much potential.
andy_ppp 12y ago
Check out my beats phone yo... Apps, iOS and a different demographic of people to sell cheaper iOS devices to. Watch the iPhone 5c quietly disappear from ever being an Apple product, it's not one.
- adamio 12y ago
  What demographic is this? Beats headphones are not inexpensive
  - andy_ppp 12y ago
    Cheaply made beats phone will happen and it'll sell more units than you can imagine. It'll have to be cheaper than the iPhone, not by much. I didn't say beats headphones were cheap now did I? Keep up.
    - adamio 12y ago
      How can beats sell a phone cheaper than its headphones?
jackgavigan 12y ago
Dammit! https://news.ycombinator.com/item?id=7736038 https://news.ycombinator.com/item?id=7736038
pauletienney 12y ago
Beats = a bit of cool, a bit of cash, a bit of hardware, a bit of music streaming, a bit of new, a bit of music = good target for Apple.
kerbs 12y ago
Can somebody humor me that there is a non-zero chance he will be the WWDC Bash performer?
saaaaaam 12y ago
I don't know the etiquette of posting here, but I just wrote quite a long response to a comment by JumpCrisscross who says that the meat of the deal is the headphones business rather than the streaming business. I don't know if that comment best lost in a tree of other comments, so I thought I'd repost it here. But I disagree absolutely with that point of view. The meat of this deal is absolutely the streaming service. Apple NEEDS streaming. I buy an iPhone: I pay $100 to have ALL THE MUSIC ALL THE TIME with that phone, for the lifetime of the device. Awesome! It's like Amazon Prime but better. And Apple NEEDS that; for them to negotiate their own streaming service with the majors + merlin it would have cost them dear - probably some sort of huge advance or equity stake (because that is the basis that streaming deals are done on these day). Apple is too rich to do that, so it's probably cheaper for them to spend $3bn on a pre pack streaming service than it is to negotiate their own deals. They are sitting on $170bn in cash. The majors don't budge on streaming - they want big fat advances, and they want equity. There is NO WAY that Apple can pay a percentage advance that will satisfy the majors ("we can't do this for 0.1% of your cash on hand, because that means that next time someone comes to us, they will want the same terms but they will only have $100m on hand") and they can't give them equity - because they value their equity too highly. It's no surprise that this deal is 90% cash and 10% stock, or thereabouts. The Spotify/Echonest deal was absolutely the reverse - 90% stock, 10% cash, because the value to Spotify of that defensive acquisition was worth way more to the Echonest investors in an upside dictated on a future Spotify IPO. $90m of Spotify stock today turns into a whole lot more in a year when they float. Oops. Anyway. For the headphones, Beats did $1.5bn in revenue last year. Let's assume that the average revenue per unit is somewhere in the mid to late hundreds - $150 - $180 per unit. At $150 - $180 per unit that means they sold somewhere around 8,500,000 pairs of headphones. Gosh. Check my maths there, because I thought it was insane too. In 2010 Billboard reckoned the global headphones market was worth about $670m on 70.8m units sold - so that's about $9.50 per unit. Beats have massively outperformed this expectation. And thhis means Beats owns 10% of the headphones market, give or take. There have been various tears-down/BOM costings of Beats which have brought them in at about $20 - $30 per pair - or less. A huge part of the cost of Beats is in the marketing - the endorsements, the adverts (hello, Super Bowl spot at a supposed $8m) the billboard campaigns, the product placements. None of this comes cheap. So let's assume that of their 8,500,000 pairs of headphones they spent maybe $200m - $225m or thereabouts to actually buy the pieces, and manufacture the cans. Let's also assume that - yes - they made 15% margin. On revenue of $1.5bn that means they are making $225m profit. So the manufacturing costs and the profit are about the same - which is fair enough; a 100% markup is pretty decent. But that means that a HUGE element of the value of Beats (and a huge element of that $225m profit on $1.5bn sales) is created in the aspirational value created through marketing - and the marketing costs LOTS money. Remove that marketing spend, and you have a business that doesn't look so shiny. If 90% of the value of the headphones is created by the marketing, then suddenly headphones that can retail at $180 or so per unit, on a per unit cost of $25 need to drop down and retail at $40 or so - which, coincidentally, is about the price point for SkullCandy and other fashion/aspirational headphone brands. So I think the headphones business is worth about 10% - 15% of what Apple is paying in that $3bn transaction. At most. Let's call it $450m, to be generous. So yeah. I really don't think the headphones business is a thing. I imagine for a while they may either incorporate Beats into a "premium" Apple headphones range - or they will drop the Beats brand almost entirely and sell the consumer headphones business off to someone else. Whatever happens, I'd doubt Apple will be using "Beats by Dre" as a brand. It'll be entirely integrated into the Apple brand - "iTunes On Demand" or something else. Whatever they bought, it was not the headphones business. It probably wasn't the streaming business either - if we assume that maybe the Beats Super Bowl commercial netted them some more subscribers for the Beats streaming service and we call it a very generous 200k subscribers, that means that Apple has paid (once we deduct the $450m for the headphones business) something like $12750 per streaming user. Spotify is worth something like $4.5bn at the moment (or, at least, it was until tonight, before Apple potentially decimated that market) and they have 10m paying subscribers. So that's a cost per user of $450 to buy that business. Spotify pays out 70% of every dollar of revenue to rights holders, giving them 30% of their revenue to cover their costs and make a profit. They say that they will pay out $1bn to rights holders this year. Which means that they are expecting to bring in about $1.4bn in revenue. So they have $400 to run their business and make a profit - only, of course, they don't make a profit. So the 10m subscribers + ad-supported users bring them $1.4bn. If you want to buy Spotify today, it's going to cost you $450 per subscribing user. Let's assume that there comes a point that Spotify has maybe 40m subscribers and they bring in $5bn in revenue a year. That gives them $1.5bn to run their business, and maybe at that point they turn a profit. If they return 15% also, then they're making $225m a year profit. That's $5.63 profit per subscriber per year. It's going to take a long time to make back the $450 you spent per user. The value to the Spotify in buying the Echonest was that nobody else could have it. The value to Beats in being bought by Apple is that nobody else wanted it. The value to Spotify in all of this is that it makes it a three (or maybe four) horse race: them, Apple and whichever of the remaining players Amazon buys and bundles into Amazon Prime Instant Music. And then we'll see what Google does with YouTube Streaming. For everyone else, it's a race to the bottom: so long as Apple can offer "iTunes On Demand" for a dollar less than anyone else, they win: they have a one click route to market, and they have a product that becomes more appealing to more people by the addition of a streaming service. Basically, as far as streaming music goes, we're all fucked. Here are some links to vaguely back up some of what I've said above. It's late, though, and I can't reference everything. You can pretty much Google it all though. http://www.billboard.com/articles/news/950594/beats-by-dre-the-secrets-behind-a-headphone-empire?page=0%2C1 http://www.billboard.com/articles/news/950594/beats-by-dre-t... http://teksocial.com/socialblog/2012/5/13/exploiting-the-consumers-and-unscrupulous-profiting-an-inves.html http://teksocial.com/socialblog/2012/5/13/exploiting-the-con... http://9to5mac.com/2014/05/13/beats-music-had-only-111k-subscribers-in-march-claims-music-blog/ http://9to5mac.com/2014/05/13/beats-music-had-only-111k-subs... http://www.completemusicupdate.com/article/spotify-tops-ten-million-paying-users/ http://www.completemusicupdate.com/article/spotify-tops-ten-...
sciguy77 12y ago
I have to say my Beats completely suck. I've had to get them replaced twice and I still get these annoying buzzing sounds. Forum-reading has led me to believe that this is a really common problem. I'm disappointed that Apple would buy such a crappy product, and pay so much for it.
KVFinn 12y ago
There's a lot of comments in here about the business case. Beats is undeniably moving a lot of product. Speaking purely for my personal feelings though this purchase makes me value Apple less. While people say Apple is merely overpriced hardware bought because marketing makes it cool, I think this is wrong, it's also really good hardware. But Beats is that criticism of Apple come true -- overpriced crap made popular with marketing. Ironically I don't even mind the sound profile of Beats -- high fidelity cans are too flat for me personally. But even for someone like me I can get that same sonic effect for a fraction of the price with other brands.
balbaugh 12y ago
I don't understand why everyone has focused so much on the beats headphones side of the acquisition instead of the fact the this is a way for apple to get into the streaming market without having to negotiate from the get go with labels who have been weary of them gaining even more control in the music market. When they negotiated the deals for iTunes they were not even a blip on the radar in the eyes of record labels. Sure, the headphones are the immediate value with the price margin, etc. But, in the end, I see the biggest benefit being gained from an apple backed streaming service. REMEMBER, Apple didn't create iTunes, they bought it.
nashequilibrium 12y ago
Bottom Line, if this was beats by Jack Dorsey, everyone would be jumping up and down but its a black rapper and everyone is confused. The first thing everyone said was a difference in culture. My experience at a fortune 50 marketing firms let's me know right away that this is a premium brand across the globe. Their headphones are priced at such a high premium and their brand recognition as cool and worn by celebrities and top sports stars, across sporting lines from european soccer to swimmers coming out at the olympics. Lets cut the bullshit, we all know why everyone is scratching their heads, because this is not a 22yr old hoodie wearing white hacker. Close your eyes and picture "Beats by Jack Dorsey" and u will know what i am talking about. Some fool will post how this is not true, downvote the post et cetera, but it is what it is!
insky 12y ago
Are the headphones any good? Stylistically, they look like something that you'd pick up from Poundland (UK), for a pound.
Smulv 12y ago
It's well established that Apple is one of the pioneers in the digital distribution of music; however, iTunes hasn't been keeping pace. The portion of Apple's online services revenue from iTunes has been steadily declining since Q1 of 2011 [1]. The Beats' headphones product is definitely profitable and responsible for a big chunk of that $3 billion valuation; however, I doubt that was Apple's main motivator. It seems as if Apple is doing this to both acquire the talent involved as well as the Beats' streaming service. As mentioned in the article Apple usually prefers the smaller segmented purchases, so I'm guessing Beats approached negotiations with an all-in-one mindset. As to the why Beats instead of another streaming service, it has to be some combination of the talent being just that good or the Beats' streaming service has something that distinguishes itself from others. What that is I don't know. I've heard about their mood based playlist feature and find that pretty interesting. I would like to see what happens when the physiological effects of certain music genres are researched, and then applied to develop this mood playlist concept even further. Thoughts? [1] http://www.macrumors.com/2014/05/28/beats-key-declining-itunes-momentum/ http://www.macrumors.com/2014/05/28/beats-key-declining-itun...

339 points by bedhead 12y ago

Is music even still important to Apple? The iPod is in a longterm decline. Low margin music streaming has replaced purchased mp3s. I think music has changed from the main event in the Apple ecosystem to a minor attraction. It seems like Apple is looking backwards and defensively, not forward and offensively on this one.

zavi 12y ago
More streaming vs purchasing mp3s doesn't mean people will be using headphones less.
sscalia 12y ago
It might be hard for someone with an autism-spectrum order to understand, but normals really love music. It's part of being a human being. So yes, Music is extremely important. For anyone.
- pauletienney 12y ago
  please ...
k-mcgrady 12y ago
Music is probably one of the top 3 things people do on their Apple devices so it's important for Apple to control that experience in some way. If people are leaving behind purchasing in favour of streaming they have to download an app on their new iOS device before they can listen to music. Apple would rather the music experience be built-in.

jaxytee 12y ago

Depending on the details of the deal, this may make Dr Dre hip hop's first billionaire.

UnethicalHacks 12y ago
he owns something like 22% of the company. I read somewhere that this will bring him to approx $800m.
- newaccountfool 12y ago
  So it will become rather easy for him to become a billionaire if he invests it correctly. Pretty good for a guy from the streets of Compton.
  - Bootvis 12y ago
    If he didn't spend too much he should be a billionaire right now, see [1]. Money quote: "Forbes estimated his net worth at US$270 million in 2012." [1]: http://en.wikipedia.org/wiki/Dr._Dre#Income http://en.wikipedia.org/wiki/Dr._Dre#Income
joeblau 12y ago
It will make him close, but not there. I'm sure Diddy is no motivated to start some tech startup idea.
- jaxytee 12y ago
  Curtis "50cent" Jackson seems to have followed in Dre's footsteps and now has his own headphone line http://smsby50.com/ http://smsby50.com/ . Wouldn't it be interesting if they were acquire by a Google/Microsoft/Amazon?
  - joeblau 12y ago
    That would be funny, but I think that makes less sense than Apples move. I've heard a lot of speculation, but nobody really knows what Apple's plans are.
k-mcgrady 12y ago
When the rumour was $3.2bn he wasn't going to become a billionaire despite his video stating his was - so now the price has dropped he certainly isn't one. Also - what does Beats have to do with his career in hip hop? Hip hop didn't make him almost $1bn, an electronics company he co-founded did. It just irks me every time I see 'hip hops first billionaire'. It has absolutely nothing to do with hip hop.

smackfu 12y ago

Interesting that they closed the deal and announced it before the WWDC Keynote on Monday.

k-mcgrady 12y ago
It's not really an announcement for a developer conference. Plus aren't these things typically announced after the markets close (which wouldn't be possible at WWDC)?
- smackfu 12y ago
  Eh, Apple is Apple. They announced iTunes Radio at WWDC 2013, and that doesn't have an API or anything for developers. And I'm not sure about announcing acquisitions outside of market hours. Apple does plenty of acquisitions that they never announce. Beats would probably need to announce being acquired if they were a public company, but they aren't.
yaur 12y ago
Someone posted a video of Dre drunk at a party confirming the deal. I'm guessing Apple is in damage control mode at this point and would have liked to announced it later.

k-mcgrady 12y ago

An important quote from the article: >> “Could Eddy’s team have built a subscription service? Of course,” he said. “We could’ve built those 27 other things ourselves, too. You don’t build everything yourself. It’s not one thing that excites us here. It’s the people. It’s the service.” From my usage of the Beats streaming service it stands head and shoulders above everyone else because of the people it has creating playlists. They are really fantastic especially when compared with Spotify. Apple could build a streaming music service but they need the right people to build a good one.

gareim 12y ago
Even though Cook said it's not about building it, "it's the people. It's the service", is $3 billion worth what is essentially an acquihire? EDIT: Right, it's still a profitable business regardless and I should have touched on that. But I don't want to see big tech companies acquire just for profit. They become behemoths that die slow deaths. I want to see Apple continue to reinvent based on their vision. I don't want them buying safe businesses. It's the reality of the world, I guess. I just firmly believe that Apple could have created their own spin on this market for less than $3 billion and beat out Beats.
- IBM 12y ago
  Yes because it's a profitable business and will be accretive right away. The financials provide a baseline for why this deal is good, Iovine/Dre and Beats Music is just a free call option.
- k-mcgrady 12y ago
  True but if they're the best people that might be the only way to get them. The company makes a lot of money so you have to take that into account - it's going to continue make a lot of money under Apple. I think enough that they could make that $3bn back in 5 years on headphone sales alone even if the streaming service didn't work out. Edit: >> "Right, it's still a profitable business regardless and I should have touched on that. But I don't want to see big tech companies acquire just for profit." I agree. I don't think Apple was buying for profit. But when you're valuing a company the fact they are really profitable has to factor into the price. I read they made almost $1bn last year selling headphones so $3bn isn't a crazy valuation.

danhak 12y ago

So, Apple acquires music streaming service lala.com in late 2009 for $80 million and shuts it down unceremoniously. Less than 5 years later pays $3 billion for Beats electronics, largely for their music streaming service.

k-mcgrady 12y ago
Lala became iTunes Radio AFAIK.
- mattkopecki 12y ago
  Actually, FWIW I think lala's technology (matching songs based on the audio waveform instead of the file's metadata) was used to underpin iTunes Match. It is the component where you match your local library to Apple's library in the cloud, and then only upload anything that Apple doesn't already have.
- eghri 12y ago
  Lala was way more than iTunes radio. It had low priced cloud music purchases (e.g. $0.29 a song), unlimited cloud streaming for MP3's you already owned, free album listens for 1-2 plays, an integrated streaming player for third party sites, and more. It was way ahead of its time and competitors, but it was killed by Apple and used for almost nothing.
  - thisisdave 12y ago
    Several of those features sound a lot like iTunes Match.
deleted 12y ago
[deleted]

izzydata 12y ago

"Apple, the company that turned digital music into a mainstream phenomenon" Is this guy serious?

JTon 12y ago
Is that not what Apple did with the iPod and iTunes? I don't see a problem with that statement
Osmium 12y ago
What's uncontroversial about that? The iTunes Store did make (legal) digital music mainstream. That's not to say it was the first store of its kind, but it was certainly the first to have widespread success.
- izzydata 12y ago
  CDs are digital music, everyone was listening to digital music before apple did anything. People were using walkmans long before the iPod. The point is trying to credit apple for "digital" music as opposed to "analog" music. That is just absurd. Credit them from making a business out of selling digital music, but not for making digital music popular.
  - Osmium 12y ago
    Completely fair point – I was reading "digital" in this context as something ephemeral, like a computer file (mp3s etc.), rather than a physical object such as CD, even though as you say CDs are digital too.
  - jmelloy 12y ago
    I don't think anybody realistically considers a CD "digital".
    - __david__ 12y ago
      Of course they do, in general—there's nothing analog about CDs. But in this context it clearly meant "digital downloads".

JumpCrisscross 12y ago

The meat of this deal isn't likely the streaming service. Beats Music had only 111,000 subscribers as of March [1]. Compare that to Spotify's 10 million paying subscribers, 30 million non-paying users, and $4 billion valuation. The deal's financial logic is driven by Beats's $1.3 billion business (in 2013) of selling high-priced headphones. Given Apple's P/E ratio of 14.9x earnings [2], the acquisition would make sense so long as Beats were running at least a 15% profit margin on those headphones. That's a surer basis for a $3 billion bet than a nascent streaming service. [1] http://nypost.com/2014/05/27/apple-cuts-purchase-price-of-beats/ http://nypost.com/2014/05/27/apple-cuts-purchase-price-of-be... [2] https://www.google.com/finance?q=aapl&ei=_0qGU5C_BabzsgeenYHACQ https://www.google.com/finance?q=aapl&ei=_0qGU5C_BabzsgeenYH...

gareim 12y ago
Except the majority of Beats headphones sold are much less than $450. Looking around, most of the catalog is $250 or less. Even the article says "up to $450".
- newaccountfool 12y ago
  The replica makers, I wonder what their profit margin would be on a pair of $450 headphones.
danudey 12y ago
Your argument makes sense, but it kind of falls apart when you consider that Beats aren't actually good headphones, to the point where The Wirecutter actually did an article[1] where they listed all the various Beats products and then provided examples of better deals (some of them with significantly better quality at half the price). I don't understand why Apple would buy a headphone company that makes pretty but lousy products whose price is only justified by the brand name; Apple gets that unjustified criticism already, they hardly need to reinforce it by acquiring a brand to which it actually applies. [1] http://thewirecutter.com/reviews/faq-what-are-some-alternatives-to-beats/ http://thewirecutter.com/reviews/faq-what-are-some-alternati...

gareim 12y ago

Apple redefined the mp3 player market, the ultraportable laptop market, the smartphone market, the tablet market, and now they're buying a company that reinvented the higher-end headphone market. Is it smart of a brand that has traditionally created their own iconic images to buy another cultural icon for $3 billion? I don't think so. Maybe this gets used a lot, but would Steve Jobs have done this? Or would he have created his own headphones and music streaming service? I'm willing to bet anything this is going to be seen as where Apple's golden age began to wane. EDIT: I said "higher-end" because it's perceived to be, even though audiophiles would never agree. The consumer market believes that Beats and Bose are king though. That's another reason that I'm against this purchase; Apple isn't even buying anything technically higher end (Sennheiser, Beyerdynamic, HiFiMan, what have you).

sz4kerto 12y ago
> reinvented the higher-end headphone marke There's zero high-endness about Beats headphones. They're all right (at least if they were priced around 30% of their current price), but really, they don't sound particularly good.
- baddox 12y ago
  That doesn't mean they're not part of the higher-end headphone market.
  - sz4kerto 12y ago
    High-end is a sonic category, not a price category. There are extremely expensive audio systems that are targeted towards concerts, etc..
    - baddox 12y ago
      That's an interesting definition. I think of it as a synonym of "upscale," which refers explicitly to high price but does generally have a connotation of high quality as well.

deleted 12y ago

[deleted]

6thSigma 12y ago

I would have never guessed that Apple's largest acquisition ever would be Beats.

higherpurpose 12y ago
Me neither. They could be doing so much smarter acquisition for that money, or much less, such as buying Imagination, and creating their own fully integrated SoCs, with both CPU and GPU.
- sanxiyn 12y ago
  They probably are working on their own GPU anyway. They don't need Imagination for that. http://appleinsider.com/articles/13/05/31/apples-graphics-chip-development-center-in-orlando-houses-former-amd-intrinsity-engineers http://appleinsider.com/articles/13/05/31/apples-graphics-ch...
goatforce5 12y ago
Their largest acquisition so far. (Was Apple's purchase of NeXT bigger than this deal relative to their value at the time?)
- aaronbrethorst 12y ago
  AAPL had a market cap of about $20bn on December 20, 1996 when they acquired NeXT for $429mm + 1.5mm shares of AAPL (the share price on 12/20/96 was $23.50). So the deal had a total value of $464.25mm, or about 2.5% of AAPL's market cap. $3bn out of $537bn is a couple orders of magnitude smaller. sources: http://en.wikipedia.org/wiki/NeXT#1996:_After_NeXT http://en.wikipedia.org/wiki/NeXT#1996:_After_NeXT, https://www.google.com/finance?q=AAPL https://www.google.com/finance?q=AAPL and some arithmetic.

jotm 12y ago

Two companies that succeeded at selling overpriced, under-featured hardware to consumers mostly based on the brand name? A match made in heaven. :-)

abalone 12y ago

The most interesting reveal from Tim Cook's quote is that he only mentions the music service and the talent, not the headphones. That's super interesting. It basically means Apple looked at this like a typical Apple aquihire / component technology purchase (of the service), that just happened to have a multi-billion dollar profitable accessories business attached to it. That makes it a very unique kind of deal.

chadgeidel 12y ago
I agree. I think the music industry connections are probably more important than the headphones themselves. It's the brand and the associated people.
austenallred 12y ago
It seems a bit absurd to pay $3 Billion for an acquihire/component deal, but Apple has $145 Billion in the bank and just bought the most popular non-Apple name in music.
- abalone 12y ago
  It's not that absurd when you factor in the profitability of the headphones business. It's interesting, not because Apple would overpay for what they wanted (they didn't), but because they looked past the most obvious aspect of Beats from a market valuation perspective to the relatively more startup-y aspects of it.
  - gtirloni 12y ago
    Isn't this SV bias? Beats is startup-y? With 300 employees and $1.5bn revenue? Beats drives a successful marketing business (much like RedBull). I think Apple is buying that. Apple doesn't need to acquire expertise on how to build and sell luxury items.
    - jader201 12y ago
      Yet they need expertise in marketing?

programminggeek 12y ago

Why didn't Apple just buy MOG when it was a separate thing? Or, why not just buy rdio now? This is more than an acquihire or however you want to spin it. I'm sure right now Beats headphones are printing money and the people at beats are good at marketing youth culture. Apple needs the ability to sell expensive tech to teens to be cool. Beats manages to sell overpriced headphones to teenagers all the time in huge numbers, even if it doesn't make financial sense. It's like designer jeans or Oakley sunglasses or... the iPod.

sayemm 12y ago

"Still, I stay close to the heat And even when I was close to defeat, I rose to my feet My life's like a soundtrack I wrote to the beat" - Dr. Dre, http://rapgenius.com/412394 http://rapgenius.com/412394

deleted 12y ago
[deleted]

wnevets 12y ago

this the beginning of the end.

evo_9 12y ago

I think the 3B would have been put to better use by buying HBO.

isamuel 12y ago
What in the world makes you think Time Warner would sell HBO to Apple?
skinnymuch 12y ago
I don't see why Time Warner would want to sell its cash cow. Especially for that price.
- ConnorBoyd 12y ago
  So they buy Time Warner and still have $120B left over

lstroud 12y ago

Will Beats be a wholly owned subsidiary or integrated into Apple? I would imagine corporate structure will provide the answers on why Apple made this decision.

Alphasite_ 12y ago
The only subsidiary Apple has is Filemaker, and its very very hands off, so I imagine they're going to strip off anything of value and dump the rest.

ladzoppelin 12y ago

This is smart and as a non-apple user it could suck if Apple starts blocking cross-platform compatibility. Beats is actually MOG which is an amazing services that specialized in streaming 320's mp3's. It sounded amazing and I think it currently sounds better than Spotify at high quality. What sucks is what do people do if they currently have a beats sub but really don't have anything to do with Apple.

justinlink 12y ago

This could have a mobile angle too. The HTC One was branded with Beats speakers and headphones. Maybe they'll do an iphone with "Beats Audio" rather than wait for another Android phone to have partnered with Beats.

salgernon 12y ago
Ugh. This sounds too much like "Intel Inside" - although to be fair, the 20th Anniversary Macintosh (late 1990s) featured a sound system by Bose.

johnohara 12y ago

The question is not "why is Apple buying?" The question is why is Geffen/Interscope/A&M selling?

return0 12y ago
$3 fuckin billion. Eventhough everyone here goes through their post-hoc rationalization by claiming that "beats is a great company", it's way way overpriced here.

joshferg 12y ago

Wonder if Dre will join Apple's Board

jsz0 12y ago

I think the key to this deal was the Beats brand. Apple was facing a very difficult task in trying to modernize/redefine the iTunes Store. They attempted to bolt on various new things like Ping, iTunes Match, iTunes Radio, etc but it ended up being a convoluted mess. Too much legacy baggage there. I suspect Apple will preserve the Beats brand and use it as the launching pad for all their next-generation media services/products. iTunes Store will continue on as the place you go to buy things while Beats will clearly be the place you go to stream things.

onedev 12y ago

The amount of people in this thread who are unable to understand the brilliance of this deal is astounding. What they bought is not one thing, but all the components that came together in the right way, at the right time. * Beats Music, a music service that is truly different from the others and is in my opinion better in many ways. * Legendary founder of Interscope records Jimmy Iovine (who then ran it for 25 years) as part of Apple management. * Dr. Dre, enough said. * The amazing people behind the curation of the playlists on Beats Music. * A powerful brand, though this part is still a grey area for me. It remains to be seen how they handle the brand. * A strong command of the market. In 2012, NPD Group reported that Beats had a market share of 64% in the U.S for headphones priced higher than $100. It's likely even higher now. * Hardware that's flying off the shelves as noted above. They have the opportunity to improve the engineering of this hardware to make a truly great product while retaining the amazing branding. All of those things came together into one place in one deal. It's incredibly smart.

samstave 12y ago
Apple made 170 Billion dollars last year. They are insane not to try to spend chump change on the music industry. The own the delivery of sound from that industry INTO a vast % of the consumers of it. Apple is going to own the entire experience of media consumption for some % of their customer base. They will be the label, the distribution, the hardware and the content. A 100% apple audio feed, all wrapped up in a tight little box tied directly to your bank account. Every click costs you something.
- onedev 12y ago
  Exactly. You're absolutely right. They will try to control the flow right from the time artists make the sounds to the time the audio hits the listener's ear. Just as they control an app from the time it's written to the time the user uses the app on their phone (while taking a nice 30% cut of proceeds).
sleepyhead 12y ago
I haven't tried Beats Music (I am in Cambodia at the moment so no soup for me), but why is it better than Rdio and Spotify?

asimpletune 12y ago

I just want to go on record with an entirely different idea as to why Apple is buying beats. They're going to make a label. Why Apple doesn't do streaming: Apple hates committing to something unless it's absolutely perfect. There are numerous examples, but NFC technology is a good one that comes to mind. Granted, they've made mistakes, like Mobile Me, but that was due to poor implementation, rather than immature technology and infrastructure. A similar problem has been in their way as far music streaming goes. The obstacle in their path to connecting consumers to content are labels (the same applies to cable companies and iTV, but that's a different story). Labels are greedy, difficult to deal with, and a general nuisance who provide little or no value. Meanwhile, the actual content providers, i.e. songwriters and performers, view labels as a necessary evil, but no one believes for a second that needing them is ideal. The vision: The idea is that Apple is looking to buy Beats to start their own label so they can cut out the label, who is an unnecessary middleman. My reasoning behind this is that Beats is a very strong brand, mainly because it's been run by two very savvy music industry veterans who know how to "produce", in every sense of the word. They're more of a household name than any other headphone maker can claim. If any company had the power, skill, and recognition to pull off disrupting the record industry, it would be beats. The only problem is they don't have enough money, do you know who does? Boom. It's as simple as that. Just take a look at this http://cdn.macrumors.com/article-new/2014/05/beats-royalty-s.. http://cdn.macrumors.com/article-new/2014/05/beats-royalty-s.... and tell me, from Apple's perspective, what the problem is with a music streaming service? The labels get all the money and the artists get none. All Beats has to do is say, "Boom, we're starting a label and we own the streaming service, so you can have a 30% cut per play and we'll keep 70%". If you were an artist and you could literally improve your earnings by 10x wouldn't you? $248K vs $22K is criminal. Just imagine, from Apple's perspective, what this would open up? Essentially, it's total vertical integration, a pipe from artist to audience, unadulterated by stupid bullshit. For example they could have complete coordination of everything from the original recording quality of an album to specialized super high end digital to analog converters in the hardware - from lossless media formats that were recorded especially for that format to headphones that are tuned to provide optimal performance. This is a complete bargain and no ones talking about it. It will serve as a prototype for what Apple would love to do to the television industry (think Apple acquires HBO, a win win for both), and they're doing right under everyone's noses because no one can think big enough. Apple would never, in a million years, purchase a company like that for so much money if they didn't have a very good idea of how it would pay off 10x. And remember, this is the same company that seriously considered becoming a carrier, in order to launch the iPhone.

zacinbusiness 12y ago

The headphones are crap, way too much bass and the build quality is pretty bad even for low-end headphone. But they have fooled people into thinking they are a premium product, somehow. Is that why Apple bought them? I hope we don't start getting "iPad with Beats audio" gimmicks.

malchow 12y ago

Apple paid ~10% of its $35b 2013 free cash flow* for Beats, a company with a software-side growth story and actual positive free cash flow of its own driving investment in the software piece. Apple: spinning off cash, buying companies that themselves spin off cash. A delight to see P. Oppenheimer's conservative approach thriving. Financially, Apple is a thrilling company to watch. * N.B. That's actual GAAP free cash flow. It is pure cream. What better than to accrete to FCF while acquiring, as noted by @onedev, some terrific assets, personnel, and goodwill. This is a smart and cheap move.

nikunjk 12y ago

"It’s going to be accretive in fiscal year 2015" Damn, http://recode.net/2014/05/28/tim-cook-explains-why-apple-is-buying-beats-qa/ http://recode.net/2014/05/28/tim-cook-explains-why-apple-is-...

melvinmt 12y ago

My 3 billion dollar theory is that they want to shut it down to make room for their own high-end headphones.

pauletienney 12y ago
Mighty Apple erases market with cash. lol

return0 12y ago

An interesting thing about the deal is that people are coming up with positive stories and opinions about Beats just to justify the price, believing that Apple can't ever be wrong. We 'll see about that ...

eip 12y ago

Marketing geniuses that sell mediocre hardware for premium prices. Sounds like a good fit.

pauletienney 12y ago
Actually, hardware is just a part of Apple craft
- eip 12y ago
  Probably a very small part considering that Foxconn actually builds most Apple hardware. Apple mostly a marketing company.

callmeed 12y ago

Honest question: is there a statute of limitations on what the tech world will tolerate with regards to misogynistic behavior (or bad behavior in general)? Or do people just pick and choose what they want to fight? I ask because everyone rallied behind RadiumOne's CEO being canned after he beat up his girlfriend [0]. Similar with the Mozilla CEO (granted, the offense was different ... but it's interesting to point out that his transgression happened 6 years ago). But now Dr Dre is about to become an executive at the largest tech company in the world and people seem to be lauding the move despite the fact of (A) misogyny in his lyrics since his NWA days and [1] (B) him beating the crap out of a female reporter, doing probation and settling a civil suit out of court [2]. Am I comparing apples and oranges here? (pun intended!) [0] http://techcrunch.com/2014/04/27/ceo-gurbaksh-chahal-fired-from-radiumone/ http://techcrunch.com/2014/04/27/ceo-gurbaksh-chahal-fired-f... EDIT: spellling [1] http://rapgenius.com/Dr-dre-bitches-aint-shit-lyrics http://rapgenius.com/Dr-dre-bitches-aint-shit-lyrics [2] http://en.wikipedia.org/wiki/Dee_Barnes#Dr._Dre_incident http://en.wikipedia.org/wiki/Dee_Barnes#Dr._Dre_incident

grimtrigger 12y ago
Side point: beating up a female reporter doesn't make you a mysogynist (it makes you an asshole). Wasn't sure what you meant because of your wording. Our tolerance for entertainers seems to be much higher than for executives. And I doubt many in the tech world think of Dre as a "real" executive. He's there for marketing reasons, but doesn't have much oversight of the day-to-day and the damage he can do is limited. This perception might be wrong.
- callmeed 12y ago
  > beating up a female reporter doesn't make you a mysogynist I guess I used that phrase because that's how everyone framed the Gurbaksh Chahal incident. At least in my Twitter feed.
  - pooper 12y ago
    I assume he'd be mysogynist if him beating the reporter was related to the reporter's gender. In any case, the ex-CEO didn't serve time so I'd say he got off pretty easily.

bedhead 12y ago

Poor Logitech, a company I've always had a soft spot for. They used to be the king of the peripherals and even bought Ultimate Ears for $34 million back in 2008. Their audio business is probably their lowest margin segment and now Beats gets acquired for almost double Logitech's enterprise value. The power of brands...

hiharryhere 12y ago
Logitech never did themselves any favours. I lost my soft spot for them when they bought Slim Devices and then quickly ruined the Squeezebox with bloat and feature creep. The original Squeezebox was elegant and had so much potential.

andy_ppp 12y ago

Check out my beats phone yo... Apps, iOS and a different demographic of people to sell cheaper iOS devices to. Watch the iPhone 5c quietly disappear from ever being an Apple product, it's not one.

adamio 12y ago
What demographic is this? Beats headphones are not inexpensive
- andy_ppp 12y ago
  Cheaply made beats phone will happen and it'll sell more units than you can imagine. It'll have to be cheaper than the iPhone, not by much. I didn't say beats headphones were cheap now did I? Keep up.
  - adamio 12y ago
    How can beats sell a phone cheaper than its headphones?

jackgavigan 12y ago

Dammit! https://news.ycombinator.com/item?id=7736038 https://news.ycombinator.com/item?id=7736038

pauletienney 12y ago

Beats = a bit of cool, a bit of cash, a bit of hardware, a bit of music streaming, a bit of new, a bit of music = good target for Apple.

kerbs 12y ago

Can somebody humor me that there is a non-zero chance he will be the WWDC Bash performer?

saaaaaam 12y ago

I don't know the etiquette of posting here, but I just wrote quite a long response to a comment by JumpCrisscross who says that the meat of the deal is the headphones business rather than the streaming business. I don't know if that comment best lost in a tree of other comments, so I thought I'd repost it here. But I disagree absolutely with that point of view. The meat of this deal is absolutely the streaming service. Apple NEEDS streaming. I buy an iPhone: I pay $100 to have ALL THE MUSIC ALL THE TIME with that phone, for the lifetime of the device. Awesome! It's like Amazon Prime but better. And Apple NEEDS that; for them to negotiate their own streaming service with the majors + merlin it would have cost them dear - probably some sort of huge advance or equity stake (because that is the basis that streaming deals are done on these day). Apple is too rich to do that, so it's probably cheaper for them to spend $3bn on a pre pack streaming service than it is to negotiate their own deals. They are sitting on $170bn in cash. The majors don't budge on streaming - they want big fat advances, and they want equity. There is NO WAY that Apple can pay a percentage advance that will satisfy the majors ("we can't do this for 0.1% of your cash on hand, because that means that next time someone comes to us, they will want the same terms but they will only have $100m on hand") and they can't give them equity - because they value their equity too highly. It's no surprise that this deal is 90% cash and 10% stock, or thereabouts. The Spotify/Echonest deal was absolutely the reverse - 90% stock, 10% cash, because the value to Spotify of that defensive acquisition was worth way more to the Echonest investors in an upside dictated on a future Spotify IPO. $90m of Spotify stock today turns into a whole lot more in a year when they float. Oops. Anyway. For the headphones, Beats did $1.5bn in revenue last year. Let's assume that the average revenue per unit is somewhere in the mid to late hundreds - $150 - $180 per unit. At $150 - $180 per unit that means they sold somewhere around 8,500,000 pairs of headphones. Gosh. Check my maths there, because I thought it was insane too. In 2010 Billboard reckoned the global headphones market was worth about $670m on 70.8m units sold - so that's about $9.50 per unit. Beats have massively outperformed this expectation. And thhis means Beats owns 10% of the headphones market, give or take. There have been various tears-down/BOM costings of Beats which have brought them in at about $20 - $30 per pair - or less. A huge part of the cost of Beats is in the marketing - the endorsements, the adverts (hello, Super Bowl spot at a supposed $8m) the billboard campaigns, the product placements. None of this comes cheap. So let's assume that of their 8,500,000 pairs of headphones they spent maybe $200m - $225m or thereabouts to actually buy the pieces, and manufacture the cans. Let's also assume that - yes - they made 15% margin. On revenue of $1.5bn that means they are making $225m profit. So the manufacturing costs and the profit are about the same - which is fair enough; a 100% markup is pretty decent. But that means that a HUGE element of the value of Beats (and a huge element of that $225m profit on $1.5bn sales) is created in the aspirational value created through marketing - and the marketing costs LOTS money. Remove that marketing spend, and you have a business that doesn't look so shiny. If 90% of the value of the headphones is created by the marketing, then suddenly headphones that can retail at $180 or so per unit, on a per unit cost of $25 need to drop down and retail at $40 or so - which, coincidentally, is about the price point for SkullCandy and other fashion/aspirational headphone brands. So I think the headphones business is worth about 10% - 15% of what Apple is paying in that $3bn transaction. At most. Let's call it $450m, to be generous. So yeah. I really don't think the headphones business is a thing. I imagine for a while they may either incorporate Beats into a "premium" Apple headphones range - or they will drop the Beats brand almost entirely and sell the consumer headphones business off to someone else. Whatever happens, I'd doubt Apple will be using "Beats by Dre" as a brand. It'll be entirely integrated into the Apple brand - "iTunes On Demand" or something else. Whatever they bought, it was not the headphones business. It probably wasn't the streaming business either - if we assume that maybe the Beats Super Bowl commercial netted them some more subscribers for the Beats streaming service and we call it a very generous 200k subscribers, that means that Apple has paid (once we deduct the $450m for the headphones business) something like $12750 per streaming user. Spotify is worth something like $4.5bn at the moment (or, at least, it was until tonight, before Apple potentially decimated that market) and they have 10m paying subscribers. So that's a cost per user of $450 to buy that business. Spotify pays out 70% of every dollar of revenue to rights holders, giving them 30% of their revenue to cover their costs and make a profit. They say that they will pay out $1bn to rights holders this year. Which means that they are expecting to bring in about $1.4bn in revenue. So they have $400 to run their business and make a profit - only, of course, they don't make a profit. So the 10m subscribers + ad-supported users bring them $1.4bn. If you want to buy Spotify today, it's going to cost you $450 per subscribing user. Let's assume that there comes a point that Spotify has maybe 40m subscribers and they bring in $5bn in revenue a year. That gives them $1.5bn to run their business, and maybe at that point they turn a profit. If they return 15% also, then they're making $225m a year profit. That's $5.63 profit per subscriber per year. It's going to take a long time to make back the $450 you spent per user. The value to the Spotify in buying the Echonest was that nobody else could have it. The value to Beats in being bought by Apple is that nobody else wanted it. The value to Spotify in all of this is that it makes it a three (or maybe four) horse race: them, Apple and whichever of the remaining players Amazon buys and bundles into Amazon Prime Instant Music. And then we'll see what Google does with YouTube Streaming. For everyone else, it's a race to the bottom: so long as Apple can offer "iTunes On Demand" for a dollar less than anyone else, they win: they have a one click route to market, and they have a product that becomes more appealing to more people by the addition of a streaming service. Basically, as far as streaming music goes, we're all fucked. Here are some links to vaguely back up some of what I've said above. It's late, though, and I can't reference everything. You can pretty much Google it all though. http://www.billboard.com/articles/news/950594/beats-by-dre-the-secrets-behind-a-headphone-empire?page=0%2C1 http://www.billboard.com/articles/news/950594/beats-by-dre-t... http://teksocial.com/socialblog/2012/5/13/exploiting-the-consumers-and-unscrupulous-profiting-an-inves.html http://teksocial.com/socialblog/2012/5/13/exploiting-the-con... http://9to5mac.com/2014/05/13/beats-music-had-only-111k-subscribers-in-march-claims-music-blog/ http://9to5mac.com/2014/05/13/beats-music-had-only-111k-subs... http://www.completemusicupdate.com/article/spotify-tops-ten-million-paying-users/ http://www.completemusicupdate.com/article/spotify-tops-ten-...

sciguy77 12y ago

I have to say my Beats completely suck. I've had to get them replaced twice and I still get these annoying buzzing sounds. Forum-reading has led me to believe that this is a really common problem. I'm disappointed that Apple would buy such a crappy product, and pay so much for it.

KVFinn 12y ago

There's a lot of comments in here about the business case. Beats is undeniably moving a lot of product. Speaking purely for my personal feelings though this purchase makes me value Apple less. While people say Apple is merely overpriced hardware bought because marketing makes it cool, I think this is wrong, it's also really good hardware. But Beats is that criticism of Apple come true -- overpriced crap made popular with marketing. Ironically I don't even mind the sound profile of Beats -- high fidelity cans are too flat for me personally. But even for someone like me I can get that same sonic effect for a fraction of the price with other brands.

balbaugh 12y ago

I don't understand why everyone has focused so much on the beats headphones side of the acquisition instead of the fact the this is a way for apple to get into the streaming market without having to negotiate from the get go with labels who have been weary of them gaining even more control in the music market. When they negotiated the deals for iTunes they were not even a blip on the radar in the eyes of record labels. Sure, the headphones are the immediate value with the price margin, etc. But, in the end, I see the biggest benefit being gained from an apple backed streaming service. REMEMBER, Apple didn't create iTunes, they bought it.

nashequilibrium 12y ago

Bottom Line, if this was beats by Jack Dorsey, everyone would be jumping up and down but its a black rapper and everyone is confused. The first thing everyone said was a difference in culture. My experience at a fortune 50 marketing firms let's me know right away that this is a premium brand across the globe. Their headphones are priced at such a high premium and their brand recognition as cool and worn by celebrities and top sports stars, across sporting lines from european soccer to swimmers coming out at the olympics. Lets cut the bullshit, we all know why everyone is scratching their heads, because this is not a 22yr old hoodie wearing white hacker. Close your eyes and picture "Beats by Jack Dorsey" and u will know what i am talking about. Some fool will post how this is not true, downvote the post et cetera, but it is what it is!

insky 12y ago

Are the headphones any good? Stylistically, they look like something that you'd pick up from Poundland (UK), for a pound.

Smulv 12y ago

It's well established that Apple is one of the pioneers in the digital distribution of music; however, iTunes hasn't been keeping pace. The portion of Apple's online services revenue from iTunes has been steadily declining since Q1 of 2011 [1]. The Beats' headphones product is definitely profitable and responsible for a big chunk of that $3 billion valuation; however, I doubt that was Apple's main motivator. It seems as if Apple is doing this to both acquire the talent involved as well as the Beats' streaming service. As mentioned in the article Apple usually prefers the smaller segmented purchases, so I'm guessing Beats approached negotiations with an all-in-one mindset. As to the why Beats instead of another streaming service, it has to be some combination of the talent being just that good or the Beats' streaming service has something that distinguishes itself from others. What that is I don't know. I've heard about their mood based playlist feature and find that pretty interesting. I would like to see what happens when the physiological effects of certain music genres are researched, and then applied to develop this mood playlist concept even further. Thoughts? [1] http://www.macrumors.com/2014/05/28/beats-key-declining-itunes-momentum/ http://www.macrumors.com/2014/05/28/beats-key-declining-itun...