Jakarta Globe – Bloomberg, May 29, 2014
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Sales of Apple’s iPhones contonue to be strong, but the iPad’s growth has slowed. (AFP Photo/John Moore) |
San
Francisco. Apple agreed to buy Beats Electronics for $3 billion, its
biggest-ever acquisition, nabbing a popular line of headphones and a nascent
subscription music-streaming service as the iPhone maker seeks to rev up
growth.
Beats
founders Dr. Dre and music-industry executive Jimmy Iovine will join Apple, the
companies said in a statement yesterday.
The
purchase price is $2.6 billion, with $400 million more that will vest over
time.
The
acquisition is projected to close in the quarter that ends in September. The
deal signifies that Apple Chief Executive Officer Tim Cook is willing to use
the company’s $150.6 billion in cash more aggressively, a departure from
predecessor Steve Jobs’s playbook of acquiring smaller companies to bring in
technology and talent.
As sales of
digital music downloads fall, buying Beats gives Apple a foothold in
Internet-based streaming, where Google YouTube, Spotify and Pandora Media
dominate.
“Music is
such an important part of all of our lives and holds a special place within our
hearts at Apple,” Cook said in the statement. “That’s why we have kept
investing in music and are bringing together these extraordinary teams so we
can continue to create the most innovative music products and services in the
world.”
Sales
cooling
The deal
indicates how the CEO, who is facing pressure to jump-start Apple’s revenue
amid cooling iPhone and iPad sales, is shifting tack to acquire growth.
Even as
Google and Facebook have spent billions on acquisitions, Apple previously
avoided tie-ups of this size.
Its biggest
past purchase was the $400 million deal for NeXT in 1997, which brought Jobs
back to Apple.
Maynard Um,
an analyst at Wells Fargo Securities LLC, wrote in a note yesterday that Apple
should focus its deals on more growth-oriented businesses.
“While we
believe Apple should get some benefit of the doubt because of its historical
success, a music-related acquisition still seems, to us, more defensive,” wrote
Um. “Given the changing landscape and our view that Apple will have to
eventually evolve its business model, we believe Apple should be acquiring more
offensive assets to better position itself.”
The deal
had been anticipated, after news of Apple’s talks with Beats emerged earlier
this month.
Apple made
the official announcement yesterday a few hours before its head of iTunes, Eddy
Cue, and Iovine were scheduled to speak at a technology conference.
Cue will
oversee the Beats Music team for Apple, while marketing chief Phil Schiller
will run the Beats headphones group.
Apple also
will hold its annual developer conference next week in San Francisco, where it
will unveil software updates. Beats Music A central part of the deal’s allure
is the Beats Music service.
While the
purchase uses just a fraction of the cash and investments on Apple’s balance
sheet, it shows that the Cupertino, California-based company is serious about
introducing its own music-subscription service.
Jobs had
long resisted such a move, insisting that people don’t want to rent their
music.
Apple took
a step in that direction last year, introducing iTunes Radio, an
advertising-supported music-streaming service that competes with Pandora.
While
Apple’s iTunes remains the world’s largest seller of music, it only offers
downloads of single tracks and albums. Music-streaming services, where a
customer pays for access to the songs instead of owning them in a digital
library, have gained in popularity, especially among younger listeners, said
Mike McGuire, an analyst at Gartner.
Yet the
services aren’t lucrative and present business challenges, even for Apple, he
said.
“They
haven’t moved to a subscription model, and there are a lot of good reasons they
didn’t,” McGuire said. “The big one is there isn’t a lot of money to be made.”
Subscription
service
Apple plans
to keep Beats as a stand-alone music application that will run on devices based
on Google’s Android software and Microsoft Windows operating system, as well as
those made by Apple.
Not everyone
is a fan of music-streaming services.
Musical
acts including Radiohead have criticized subscription services because they
don’t compensate artists as well as the pay-per- track model. For instance, the
latest album from the band The Black Keys is available on iTunes, though not
Spotify.
Satisfying
service
Beats
introduced its music-subscription service earlier this year.
Like
Spotify and other rivals, the company offers unlimited access to millions of
songs in exchange for a monthly fee. Beats hired music critics, radio DJs and
record-label veterans to create playlists and other curation tools to help
customers navigate the overwhelming amount of music available — a component
Iovine said was missing from the experience.
“It needs
feel. It needs culture,” Iovine said in an interview with Bloomberg
Businessweek in 2012. “What Apple has in the downloading world is very, very
good. But subscription has an enormous hole in it, and it’s not satisfying
right now.”
In buying
Santa Monica, California-based Beats, Apple also would get the company’s
colorful, high-end headphones.
Iovine and
Dr. Dre, whose given name is Andre Young, started Beats in 2006 amid rising use
of iPods and smartphones to listen to music on the go.
The pair
quickly proved their marketing acumen. The headphones, priced at about $170 to
$450, gained popularity as stylish accessories for the general public and not
just audiophiles, fueled by partnerships with musicians, fashion designers and
athletes like San Francisco 49ers quarterback Colin Kaepernick and NBA All-Star
Lebron James, who helped pitch the products to a younger audience.
“They have
done a hell of a job in branding,” McGuire said. Fashion Finds With Iovine and
Dr. Dre, Cook continues to bring in people with fashion experience.
Former
Burberry Group CEO Angela Ahrendts now runs the company’s retail operation, and
former Yves Saint Laurent CEO Paul Deneve is working on “special projects” for
Cook.
Apple and
Beats have deep ties. Iovine, who is stepping down as an executive at Universal
Music Group as part of the deal, was a friend of Jobs and an early
music-industry advocate for Apple’s efforts with the iPod and iTunes.
“I’ve
always known in my heart that Beats belonged with Apple,” Iovine said in the
statement.
The
acquisition is a boon for Iovine, who has worked on projects as varied as Bruce
Springsteen’s “Born to Run” and the movie “8 Mile,” and Dr. Dre, whose seminal
rap album “The Chronic” helped make rap music popular with suburban teenagers
in the 1990s.
Universal
Music was an investor in Beats, along with private equity firm Carlyle Group.