Why Apple bought Beats for US$ 3 billion

• 29 May 2014
• by: Bruno Bandeira
• in: apple
• Tags: Apple, beats
• note: no comments

It's official: Apple paid US$ 3 billion to buy Beats, a headphone empire combined with a promising music streaming service. But that's not all: Apple will take two of the smartest minds in music and entertainment – Dr. Dre and Jimmy Iovine.

Tim Cook, Apple's CEO, and Eddy Cue, vice president of services, explained at Code Conference the reasons for buying Beats. Cook details why he made the biggest acquisition in Apple's history:

– talent: “Beats brings to Apple people with very rare skills. People like that aren't born every day. They are very rare. They really understand music deeply. So we got an infusion of incredible talent at Apple,” says Cook.

– music streaming service: Beats Music launched in the US in January with over 20 million songs in the catalog. What makes it different is that music recommendations aren't just guided by an algorithm: there are also real people helping with it. Cook says this is "the first subscription service that really got this right," and that using Apple's global presence, it could expand to more countries.

Beats Music is available for iOS, Android, Windows Phone and the web. Eddy Cue says he will keep the app on competing platforms, rather than removing them as usual. Why? THErecode speculates that removing Beats Music from Android and Windows Phone could be a problem for regulators to approve the massive acquisition.

- headphones: “They've also created an amazing business of premium headphones tuned by experts and critical ears. We are fans of it. It's a reasonably sized business that's growing fast,” says Cook. He also suggests that Beats headphones will now be able to be sold in more countries.

It's interesting the order that Apple's CEO listed the reasons: talent first, then the new music streaming, and only then the headphones. Many say that Apple wanted, above all, to buy the Beats brand and the hype around it, but Eddy Cue counters: “I don't think you can buy hype… let's make great products together”.

Cook also remembers that the acquisition is not just about what Beats does today: “it's what we believe that combining the two can produce in the future”, he says.

This also says a lot about Apple today: Steve Jobs would never have bought Beats, because he was focused on smaller acquisitions that could be incorporated into the company – Beats, however, will remain independent. But, as Matt Yglesias points out, Cook knows he needs to gather more talent to guide Apple into the future; alone, he could not. He's not Steve Jobs, and he's acting accordingly.

Jimmy and Dre

Beats by Dre was founded in 2008, and in that time it has grown into a business that generated over US$ 1 billion in sales last year alone. But that's just the latest success in two careers with decades of creative and financial triumphs.

Dr. Dre is among the most important and successful hip hop artists in history, not to mention his skills as a producer, record label owner and talent scout. He didn't do it just once – it was four or five times.

First, it was as a member of the NWA; later as a solo artist who helped launch Snoop Dogg's career; then, as the person who kick-started Eminem's career; to later release 2001, his best album. And last year, Dre executive produced Kendrick Lamar's most successful album.

Jimmy Iovine neither is anyone. He began his career as a sound engineer for a variety of celebrities, from Bruce Springsteen to John Lennon, and rose through the ranks to become a top producer. He then founded Interscope Records, one of the last major labels to emerge before digital music dismantled the traditional business model.

In the early 2000s, when most executives in the music industry pretended that digital piracy would go away if they filed too many lawsuits, Iovine was trying to find ways to make money online. He's always been a little ahead of the curve, and as Tim Cook notes, Iovine was one of the first to support iTunes. (Oh, and he was friends with Steve Jobs.)

Beats is a successful business, but it's just a small example of what Dre and Iovine are capable of creating. It's not a traditional music business; he uses an artist's prestige to sell other products. In a world where album sales are increasingly difficult, it's a smart business strategy. Online content, and above all music, needs innovation. How many successful music companies have sprung up in the last decade, and how many of them could be worth a $$ 3 billion acquisition?

Jimmy and Dre – that's their official job title, just their names – could help Apple evolve and develop its music business. Apple has had a lot of success with iTunes, but after ten years, the signs increasingly suggest that the store won't be enough. Beats has proven that there is a lot of money to be made in other areas of music. Apple has always hired people who can see the future, and there are no two oracles of music more creative than Dr. Dre and Jimmy Iovine.