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Apple is orchestrating a $3.2-billion acquisition of Beats Electronics, the headphone maker and music streaming distributor founded by hip-hop star Dr. Dre and record producer Jimmy Iovine, according to a Financial Times report published late Thursday, May 8, 2014. (Michael Dwyer/AP)
Apple is orchestrating a $3.2-billion acquisition of Beats Electronics, the headphone maker and music streaming distributor founded by hip-hop star Dr. Dre and record producer Jimmy Iovine, according to a Financial Times report published late Thursday, May 8, 2014. (Michael Dwyer/AP)

Apple’s acquisition of Beats more about music than headphones Add to ...

In what would be the biggest acquisition in its long and storied history, Apple is poised to buy a headphone-maker – but not for the headphones.

Apple is in talks to acquire Beats Electronics, the maker of the iconic Beats headphones, according to multiple reports. At a proposed price tag of $3.2-billion (U.S.), the deal would be the largest ever undertaken by Apple.

Since its founding in 2008, Beats has become a cultural phenomenon. The company’s flagship “Beats By Dre” headphones, endorsed by Beats co-founder and hip-hop mogul Dr. Dre, climbed to prominence on the back of myriad celebrity endorsements, mostly by pop stars and professional athletes. Today, the bass-heavy headphones compete with the likes of Bose and Sennheiser in the premium headphone market. According to research group NPD, Beats now controls more than half of that market.

Apple’s apparent willingness to spend $3.2-billion on Beats left some industry observers baffled. The headphone-maker’s best-known asset is its brand – signified by its lower-case-B logo. However Apple normally acquires companies for their technology or talent, rarely for their branding.

But there is one business where Beats has a head start on its suitor – streaming music.

In iTunes, Apple owns what is likely the biggest and most profitable record store on Earth. However the company has relatively little presence in the growing market of streaming music and music subscription services. In that arena, a host of startups such as Spotify and Pandora have built a loyal fan base, as many of the tech industry’s biggest companies struggle to build their own streaming services.

Using Beats Music as a launching pad for its own streaming service would allow Apple to round out its music offerings and open up one or more new revenue models. For example, Apple may give users an ad-supported free music streaming service, similar to Pandora in the U.S., or offer a pay-per-month subscription service that opens up access to a vast music library – the latter option potentially giving Apple a means of turning its consumers from one-time music buyers to recurring monthly customers.

“While the price tag would clearly be a shocker … we think given the large cash position coupled with the reality that [Apple] needs to build a more robust ‘recurring’ revenue stream there may be more logic to the deal than meets the eye,” said RBC Capital Markets analyst Amit Daryanani.

Many streaming music services have yet to turn a profit, but are nonetheless experiencing rapid user growth. Mr. Daryanani pointed to a report from the International Federation of the Phonographic Industry, a music industry group, that estimated streaming music industry revenue jumped 50 per cent last year, while the music downloads offered through services such as iTunes dropped 2 per cent – the first decline in the industry’s history.

Apple’s purchase – should it come to fruition – is not without risk. In 2011, phone-maker HTC Corp. paid $300-million for a 50.1-per cent stake in Beats. However the partnership did little to boost HTC’s fortunes or increase the popularity of its smartphones. By the end of 2013, the company had sold its entire stake in Beats.

But given Apple’s massive store of free cash, the acquisition may have little downside. As Canaccord Genuity analyst T. Michael Walkley noted this week, sales of Apple’s iPhone 5 were weaker in April than the month before, but the company is likely to have a breakout second half of 2014, as it is widely expected to launch a new line of larger smartphones. With Beats Electronics under its corporate umbrella, Apple may be able to supplement those devices with new and improved headphones and expanded music offerings – further inducing its customers to buy all their digital entertainment hardware and software from the same place.

An Apple spokeswoman declined to comment for this story. Dr. Dre himself appeared to confirm the Apple acquisition in a shaky home video posted online and then quickly taken down this week. In the video, the rapper bragged about becoming the hip-hop industry’s first billionaire – he is estimated to hold a 15-per-cent stake in Beats Electronics.

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