As I'm sure you know, the last few days at the Apple rumor-mill have been quite industrious. Lots of milling work to be done, I suppose. What I'm talking about of course is the Beats acquisition by Apple. At the time of this writing, the purchase wasn't confirmed, but according to sources "in the know", the deal will happen, which is why I feel some sense of comfort writing about it before it's official.
The Beats acquisition for $3.2 billion is a helluva huge deal - the largest in the history of Apple, which is why it's particularly interesting to pundits and analysts alike. It's worth pointing out that Apple, classically, makes smaller acquisitions, mostly because Apple has a very unique culture that large, established companies cannot easily synergize with. Now, I don't know the Beats corporate culture, organizational structure, or any of the touchy-feely environment details, which is why I will steer clear of the subject. What I do know, however, is that Apple decided that either the culture is similar to its own, similar enough not to matter, or maybe even, it's different enough to be a sub-brand. Realistically though, even Apple doesn't know the answer to that yet, and only time will tell.
So what exactly are 3.2 Instagram's getting for Apple?
A Hardware Business
Beats by Dre are crappy headphones, and I'm being polite here, since any audiophile will use much more indecorous language to describe them. But that doesn't matter, because they sell millions of units, much like NYC hotdogs: the terrible quality is overpowered, somehow, by a customer desire for some tubed meat. Unlike NYC hotdogs, Beats headphones actually look really good, especially when you compare them to other prosumer headphones from Sennheiser, Bose, and Sony models. Most people don't need pristine audio quality. Rather, they just care what sounds good. And by all accounts, Beats headphones sound good. They look great too. They sell millions of units. They command a coolness factor. They made two earmuffs on your head sexy to wear in public. On the business side, the Beats hardware business is very profitable, since they use cheap materials that are converted into high consumer prices. The supply chain (getting them to stores around the world) is probably the hardest problem for the business, and we know Apple under Tim Cook excels at that. In terms of Return on Investment, the Beats hardware business pays for itself many times over.
Consumers love Beats. They don't love the iPod (anymore). They never loved iTunes. When most people hear iTunes, they associate it with syncing your music through a USB cord. Is that really the brand Apple wishes to cultivate for the future? It isn't. Beats is the new iTunes. I fully expect within 1 - 2 years for iTunes to go the way of the dodo, to be replaced entirely by Beats. Beats is the new music service by Apple. I suspect they will kill off the bloated confusion that goes by the name of iTunes, and release a simpler, music focused Beats app for Mac OS X, iOS, Windows, and eventually Android. It will be focused on streaming, but of course purchasing music will stay around for those who want it.
Apple had a few options here. One, they could have created internally a brand new music brand, which is always a risky, especially with intangible services that succeed based on the consumer reaction to it. R&D would take money and time (money isn't a problem, time is), heavy advertising would cost a good chunk, and success is not guaranteed.
Option two. Purchase a music streaming service. The most logical option would be Spotify, since they are the number one service in the business. But that wasn't an option at all. Spotify would probably cost too much (and wouldn't sell), has over a thousand employees, and is headquartered in Stockholm, Sweden. The last point is likely the largest deterrent. Apple would not purchase a company with thousands of employees that isn't based in the United States, unless it's for manufacturing reasons.
Rdio was another possibility, but that would be purely for their streaming service since it isn't a brand. Most people have never heard of Rdio. Apple could have picked it up for cheap too, since the company has been losing subscribers for the last year and is in questionable condition. At first I thought this would be a better purchase than Beats, since the Rdio design aesthetic was so similar to iOS 7 before iOS 7 was released. But after further thought it would be a pointless acquisition that Apple actually could develop internally rather quickly.
In fact, Beats was the only brand that had everything Apple didn't. It came with a cool hardware business. It came with a streaming service. And finally, it came with connections. Jimmy Iovine is a brand on his own, as is Sir Mister Dr. Dre. If anybody can sell cool, it's these two. They can guarantee all the licensing arrangements Apple could have wished for, which was always a pain point for iTunes. Beats is what we call trifecta.
Success Isn't Guaranteed
But it's sure as hell likely. Beats is already a well known and liked brand. The main thing for Apple now is to not diminish it. Let it thrive as its own thing. Beats is the reinvention of iTunes, and the hardware business is just added profits. Music industry connections have also been acquired, so all legal rights should be easier to negotiate. There's only one thing left, that is - Apple has to make the deal official.