The absolute worst kept secret in living memory has now been confirmed – namely that Apple is buying Beats for $3bn (well, actually $2.6bn with another $400m to be vested over time) and it expects it all to go through, pending regulatory approval, by Q4.
The initial rumours, reported in the FT, set the sale price at $3.2bn but beyond that were pretty much spot on. Dr Dre and Jimmy Iovine will now join Apple as part of the deal and Interscope was quick to announce that John Jannick would replaced Iovine as chairman and CEO of Interscope Geffen A&M.
How this is being spun by Apple is interesting, especially given that most of the rumours that followed the FT’s scoop were of the nature that Apple only wanted Beats for its headphones and that its streaming offering, Beats Music, was a busted flush, having poured tens of millions into marketing a service with just over 100k subscribers (many of whom were still on a free trial when the tabulations were done). TechCrunch reports that Iovine and Eddy Cue, Apple’s SVP of internet software and services, discussed the deal at the CODE Conference, saying that Beats actually has 250,000 subscribers after three months (and 5m visitors to its site). Cue added that iTunes has just passed 35bn music sales (up from 25bn last February), the subtext being that downloads are still a huge part of its business, even if they are starting to dip in the US.
In the official Apple statement on the deal, Cue described music as “an important part of Apple’s DNA” but his next comment deserves some unpicking. “The addition of Beats will make our music lineup even better, from free streaming with iTunes Radio to a world-class subscription service in Beats, and of course buying music from the iTunes Store as customers have loved to do for years,” he said. Apple decipherers will wonder about the significance of how he placed the three music offerings Apple now has in order of priority. iTunes downloads comes at the end, Beats sits in the middle but the one at the lead is iTunes Radio.
Cue also stated at the CODE Conference that iTunes Radio has 40m listeners in the US and Australia, although he did not specify how many of those were active as opposed to people who had tried it a few times but never came back. Does this mean Beats Music (or whatever it will be rebranded as when it is fully absorbed into Apple) is going to play second fiddle to iTunes Radio? Or will iTunes Radio serve as a bridging service between downloading and subscription streaming?
Apple now has a foot in three digital music camps – downloading, radio-style streaming and full on-demand streaming – and how it links them all together will be the interesting part. This could be Apple making a serious spread bet or it could be it regarding the movement of consumers from an ownership-based model to an access-based one as requiring a lot of handrails and a lot of resting spots.
Perhaps the most curious quote offered up in the press statements around the deal came from Iovine. “I’ve always known in my heart that Beats belonged with Apple,” he claimed. Which would lead one to wonder why he went through the pain of licensing negotiations and raising investment to kickstart Beats as a challenger to Apple’s future business.
Which leads into another issue – namely how Dre and Iovine are absorbed into Apple and its corporate culture. Beats has established its own identity with its own working practices and it is not going to be easy for it to slip into the Apple way of doing things. It is also going to be a sharp learning curve for Apple as it has never made an acquisition on this scale and certainly not with a company and brand as well known as Beats. Its previous acquisitions have been of smaller tech companies where staff and executives can be more easily Apple-ised. Iovine and Dre are not the sort of people you could accuse of being malleable.
Finally, what does it all mean for the subscription market and the players currently left standing? Given both Bloom.fm and Music Hub (excluding, for now, in Australia) became road kill in recent weeks, making the numbers add up here is incredibly tough. Spotify has just announced 10m subscribers which gives it a huge head start on Apple, even if it has the credit card details of 800m iTunes users that it can market its new shiny subscription toy to. Could this mean that Spotify will hold back on its much-speculated IPO until it becomes clearer just what Apple will do with Beats Music? Or will it spur it on to go to IPO while it is still the comfortable leader in the streaming space?
One thing is clear: we are now into a new era in streaming. Apple may have misfired with things like Ping but it is not throwing down $3bn to play around here. This is very quickly going to turn into a situation where the quality of the service will take a back seat to how deep its backers’ pockets are. This could mean a number of things – a possible drop in subscription pricing from the $10/£10/€10 a month default price and the opening of chequebooks to lock key catalogue into one service. Big acts (The Beatles, AC/DC etc.) still haven’t licensed to streaming and others like Coldplay are holding back new releases from such services for the initial cycle of their marketing. Can Apple, with its three-way digital music offerings and its riches of Solomon, be the one to coax the naysaying mega-acts across and even pay them handsomely to do so?
This deal, more than anything, could be the start of streaming music’s financial arms race.
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