Financial Times reported last week that Apple is closing in on a $3.2 billion acquisition of Beats by Dre. Though Apple can afford the high price tag, this deal comes as a shock following years of much simpler acquisition deals. Prior to this, the company had been focused internally, fighting competition, initiating new development and improving old products.
With the price and the lack of a clear relationship between the two companies, there has been a lot of speculation regarding the intentions of the acquisition. One such explanation surrounds the Beats by Dre headphones and the potential relationship with wearable technology. However, if Apple is looking to delve into high-tech headphones with Internet access, it could have easily developed the product internally without spending over $3 billion on Beats by Dre.
Another, more probable, theory relates to Beats by Dre’s recently launched live-streaming music service. The new service has been hailed as a unique way to curate, discover and experience music in the social/live-stream sphere. Apple has tried, unsuccessfully, to enter the live-streaming arena before, but perhaps the acquisition of Beats by Dre is just what it needs to come out on top this time around.
Subscription services are growing faster than any other area of the music industry with music-subscription revenue increasing by 50 percent to $1.1 billion in 2013. On the other hand, album sales from iTunes are down by 14.2 percent with individual downloads down by 12.5 percent. With Apple’s focus on hardware, software and the iTunes model’s general incompatibility with streaming, it seems logical that the company would acquire Beats by Dre in order to enter competition with the likes of Spotify or Rdio.
Although it is still difficult to see where and what this acquisition could lead to, we can draw from previous examples of major tech companies taking on slightly smaller organizations such as Facebook’s acquisition of WhatsApp or Instagram. Considering Facebook’s additions, the acquisition of Instagram seems mutually successful as Instagram’s user numbers increased by 20 million within a month of the transaction and Facebook regained a little cool factor among Instagram-obsessed teens. WhatsApp seems to be on a similarly successful trajectory following its acquisition by Facebook earlier this year.
Ideally, this big-ticket deal will benefit both companies as Apple will likely focus its attention on Beats by Dre’s streaming services. Beats by Dre can bring Apple some of the much needed cool factor associated with Dr. Dre to regain the attention of a younger target market while Apple can revamp the streaming service to compete with companies like Spotify.
As more explanations emerge, it still begs the question of what exactly can Beats by Dre do for Apple that Apple can’t do for itself? With such a radical business move one has to wonder what Apple is up to.
[Sources: Time, Readwrite, AppleInsider, Forbes, Washington Post]