Apple wants to buy Beats mainly to bring CEO Jimmy Iovine and hip-hop legend Dr. Dre on board, according to twin reports from TechCrunch. Apple is also cognizant of its role pumping money into the music industry through the iTunes Store, and plans to operate Beats Music as a standalone service-on-the-side in order to provide a smooth transition from music downloads to music streaming.
Apple funneled roughly US$1 billion to record labels and their artists in 2013, a figure representing 63 percent of industry revenues from the direct sale of songs and albums to consumers. According to unnamed sources cited by Josh Constine, Apple is worried that if it launched a dedicated iTunes streaming service, those revenues would crater, striking a mortal blow to that industry.
According to this source, the nature of Apple's worries are not its own revenues from music—which are barely a line item on its balance sheet—but rather the disruption it would cause to the labels and their artists.
Accordingly, Apple has instead chosen to buy Beats, and with it Beats Music, so that it can operate a streaming service outside of iTunes and its 800 million account holders. Apple will then be able to grow that service while iTunes Store download numbers decrease, preserving something close to an equilibrium for the record industry.
The end goal is to launch an iTunes-branded streaming service with a $5 per month price tag, half that of industry leader Spotify, but only when Apple can do so without cratering the very industry that provides most of that music.
A Brief Aside
I mention that last bit because independently-produced and released music is an ever-growing part of the music business. Declining label revenues has resulted in fewer artists being signed, while decreasing costs and the ever-increasing abilities available in desktop music production have made it both necessary and possible for bands to record and release themselves.
A third factor for independent musicians is the Internet, which has made it possible for scattered fans around the world to find and support a wider and more diverse number of bands.
The flip side to all this indy stuff is that almost all of these bands have day jobs. Only a very few rock/rap/pop/country stars get to be "rich" these days.
Next: Acquihiring Jimmy Iovine and Dr. Dre In Context with Other Apple Hires
Acquihiring Jimmy Iovine and Dr. Dre In Context with Other Apple Hires
One of those rich music stars is Dr. Dre, cofounder of Beats. John Biggs's sources said that Apple is ponying up to bring both him and his CEO partner, Jimmy Iovine, on board. Apple apparently wants them for their grasp of youth culture and talent in making deals happen in the music industry.
"They want Jimmy and they want Dre," the source told TechCrunch. "He's got fashion and culture completely locked up."
This isn't the only report that has pinned this acquisition on getting the two executives, and in my opinion, those stories have reached a level that gives them a tremendous level of credibility.
John Bigg's source also said that getting Messrs. Iovine and Dre on board is merely another step in a series of hires Apple CEO Tim Cook has already engaged in, namely: Angela Ahrendts of Burberry, Leica engineer Ari Partinen, Nike’s Ben Shaffer, and former CEO of Yves St. Laurent, Paul Deneve.
All of these people are known for their cultural and management expertise, not their technology acumen. Mr. Cook's goal, therefore, is to make Apple into a more culturally aware company in order to stay ahead of trends.
I was one of the reactionary many who poo-pooed the first rumor from The Financial Times about the Beats buy. I went so far as to say that I hoped it wasn't true because I couldn't see the value of the company to Apple. Beats headphones are subpar, Beats Music is an also-ran in the streaming market (with admittedly good technology behind the service), and surely Jimmy Iovine and Dr. Dre aren't worth $3.2 billion.
That negativity quickly transformed into the awareness that just because I didn't understand the value of the company to Apple didn't necessarily mean the value wasn't there. Every other acquisition overseen by Tim Cook has appeared solid, if not brilliant, with hindsight, and until proven otherwise, there was no reason to think this one will be different.
But the longer we've gone into this rumor cycle and the more reports from unnamed-sources-in-the-know that I've read, the more my skepticism has retreated. Thursday's reports from TechCrunch have put me over the top.
Apple's concern about not cratering the recording industry, a plan to develop Beats Music on the side, and seeing the acquihiring of Jimmy Iovine and Dr. Dre in line with the other hires mentioned above all make sense.
Doubters and those devoid of critical thinking skills continue to underestimate Tim Cook and Apple as a whole, but that doesn't seem to be stopping either entity from reinventing itself in front of our very eyes.