Apple Fills the Music Streaming Gap

Apple’s latest three billion-dollar Beats purchase leaves many wondering what’s the strategy behind the play. Apple will be buying the whole of Beats, which includes Beats Electronics (headphone and speakers) and Beats Music, the relatively new streaming music service set up by Dr. Dre and Iovine, which is estimated to have between 120,000 and 250,000 paying subscribers. Their acquisition of Beats creates a solid synergy among aesthetic, design, and technology between the two brands, not to mention the high profit margins (a $200 pair of Beats Headphones cost $18 to manufacture) and the opportunity to dominate the highly competitive headphones market.

However, could it could also be an attempt to cover up Apple’s weakness and lack of foresight in the music streaming market? Looking at Spotify and Pandora with combined dominant market share, Apple’s decision makers may have missed the bandwagon by prioritizing outright purchases of songs over streaming. While the iTunes store still manages to hold a significant dominance in the music industry, Apple might find be feeling the rug slipping from underneath them when it comes to streaming, which is picking up traction. Since iTunes Radio hasn’t had as much time to refine their platform as much as Spotify and Pandora, they cannot compare with the refined music streamers. Their acquisition of Beats lets them access Beats Music streaming platform, which they plan to run in parallel with their iTunes Radio service.

Apple has never practiced classic acquisition like Microsoft and Google, who are quick to snatch up new emerging technologies. This could be a sign of Tim Cook’s new direction with Apple. Is he going to continue the acquisition trend and compete with Microsoft and Google, by haggling and negotiating prices for startups and new technologies? Or conversely, is this going to be a one-to-few time occurrence to pick up the slack in lagging departments?

The actual price tag could be smaller than the $3.2bn reported with 80% in cash and the rest in stock. (This is small change for Apple, who sits on a cash reserve of $150 billion.) While this is the biggest deal in Apple’s history — the company usually prefers smaller, lower profile company acquisitions — it’s probably not the last one of its kind.

Strategically speaking, it’s worth noting that this is the first time Apple has acquired a brand worth keeping. Apple needs to deal with managing the brand relationship between itself and Beats, and perhaps start thinking about a brand architecture that might involves future acquisitions. Beats products have reinvented headsets, embodying geeky in-the-know and luxury in one product. If one thing’s for sure, you won’t be seeing Apple’s famed logo replacing Beats’ ‘b’ anytime soon.

the author

Jaraad Mootee

Jaraad is a technology analyst at Idea Couture.