Apple Was Right to Buy Beats

A few weeks ago, Apple announced their intent to purchase Beats, a company founded by two powerful men in the music industry.  Apple Inc, the company founded by Steve Jobs and Steve Wozniak is without either of its founders today at the helm for the first time since Steve Jobs returned to the company after Apple purchased Job’s company NeXT.  Wozniak or “Woz” as some call him left full-time employment at Apple in 1987, but is still considered an employee while Steve Jobs passed away in 2011 while on leave from Apple with pancreatic cancer.

Tim Cook was pushed into the lime-light following Job’s death.  Tim Cook, who became CEO when Jobs stepped down  earlier in the year, had previous served as the companies COO.  In his new role he was was expected to be not only Chief Executive Officer, but also Chief Showman like his predecessor.  Jobs had led the company through a massive resurgence following some difficult years.  He’d repositioned the company from mostly selling to computers, to one that also excelled with selling portable devices.

“An iPod, a phone, and an Internet communicator. An iPod, a phone…are you getting it? These are not three separate devices, this is one device, and we are calling it iPhone. Today, Apple is going to reinvent the phone, and here it is. ” -Steve Jobs at the MacWorld Conference in 2007 introducing the first iPhone.

Steve Jobs introducing the first iPhone in 2007

Fast-forward to today and we’ve had seven different generations of iPhones hit the market, the successful launch of the iPad, the iPad Air, as well as changes to the desktop PC, notebook computer, iPods, and AppleTV lines.  These lines are relatively mature with various adjustments as new technology becomes available. Can’t miss features like Siri, a fingerprint scanner, and a completely re-tooled mobile OS with the upgrade to iOS7 have left shareholders and the public wondering where the innovation is for this tech giant.  Have they lost it without their fearless leader?

Enter Beats, the company founded by Dr. Dre, a rapper and music producer and Jimmy Iovine, the former recorder producer and founder and CEO of Interscope Geffen A&M record label.  Both come with a great deal of credibility in their backgrounds.

Iovine in the studio with John Lennon in 1974 (credit NY Times Bob Gruen)

As detailed in a Newsweek profile of Iovine, the son of a longshoreman started out in the record industry as a janitor.  Before long, he was working as a recording engineer up to where he is now.  The profile goes on to describe his vision for success.  Iovine recognized that rap could be commercially successful before other labels had.  And it isn’t just this, Iovine is relentless in his pursuit.  Not only that, but he’s been a partner with Apple since the beginning of iTunes according to an article in the New York Times about the acquisition.

“Jimmy was one of the first people we showed iTunes to,” said Eddy Cue, Apple’s content chief.

The Wall Street Journal revealed the Dr. Dre played a similarly powerful role at Beats as Mr. Iovine.  Dre’s obsession with making sure their signature product, Beats by Dre have the best sound possible was only one part of his role at the company.  The man whose real name is Andre Young served as a sort of eye for the company on culture despite being forty-nine years old.

According to his biography in Rolling Stone, Dre grew up in South Central Los Angeles.  He was one of the pioneers of gangster rap, working with Iovine and groups including NWA.  Dre later moved into producing music and partnered with Iovine to start Beats.

As part of the deal, Iovine leaves his long time position at Interscope, but takes on a Senior role at Apple along with Dr. Dre.  So what does Apple get beyond the talent of these two music industry titans?  This will be the first time in its history that Apple has purchased another brand not to just swallow it up.  There is a great deal of equity in the Beats brand.

In terms of hardware, it comes with the signatures headphone line, Beats by Dre.  Apple has stuck to ear-buds since it launched its first iPods in 2001.  While they are sleek and small, their are serious limitations based on their size for us in new apps.  Having an existing popular headphone brand to build off of for application for apps is a game changer, especially with recently announced changes include in iOS8 like the Health app.

The brand also comes with a subscription music service.  The popularity of the music service Pandora led Apple to launch iTunes Radio.  Unfortunately, there has been virtually no talk about Apple’s service while Spotify has gobbled up market share.  Consumers have begun to care less about actually owning music and more about having access to it (something I’d like to explore further down the road).  Recognizing changing consumer taste for the current standing music ownership model, Apple knew it had to jump in head-first to compete with Spotify, but didn’t want to re-invent the wheel.  This purchase positions them well in music business while not abandoning the current successes of iTunes.

At $3 billion, it seems that Apple bought more than tangible assets.  Apple will almost certainly have to recognize goodwill on their books for this purchase, but in return will quiet down investors after years of hoarding cash and breathe new life into the company.   Human capitol and product additions from this acquisition make me confident in Apple’s future.

 

 

3 Comments

  1. Unfortunately, Beats is considered a joke within the tech community. At one point, Apple catered to the hardcore techy, but their unwillingness to update the Mac Pro regularly (the recent update is a start) and their “lowest-common-denominator” marketing alienates a large portion of that customer base.

    Beats headphones aren’t even price competitive with the infamously overpriced Bose brand. Popular tech bloggers and reviewers, such as MKBHD, consistently chastise Beats and advocate the purchase of other brands, like Sennheiser and Audio Technica. And Spotify has a pretty solid grip on the streaming music industry. I’m curious to see if the acquisition bears fruit.

    • My current headphones are actually an entry level set of Sennheiser ones that are over the head. I think the one thing about Beats is they aren’t marketed towards audiophiles. I haven’t heard generally positive things about their sound quality, but I think that if anyone can make a change in quality for them, it is going to be Apple. Tim Cook is a process/operations guy, not an idea guy. The people they are bringing in are more idea people. My big worry for the company is whether Jony Ive and Jimmy Iovine will be able to play nice together.

  2. You struck a nerve – again I believe the acquisition was more about Intellectual Property (the Brand), human talent acquisition, and relationship acquisition than it was about ongoing business.

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