Apple may soon be marching to a new beat as it closes in on its largest acquisition ever: the $3.2 billion purchase of Beats Electronics LLC.
Founded by music producer Jimmy Iovine and hip-hop celeb Dr. Dre, Beats is known for its premium Beats by Dre headphones and streaming music service, Beats Music, which launched in January. The headphones alone, which can cost consumers upwards of $300, have become a status (and fashion) symbol in the hip-hop community and beyond, and have posed a great challenge to headphone-makers like Skullcandy.
Apple, of course, produces its own earbuds for use with its iPhones and iPods, but recently partnered with Beats for the iPhone 5S release in November. The company has been under pressure from investors and consumers to bring innovative new products to market.
As the Wall Street Journal observes, Apple shook up the music business in 2003 with the launch of the iTunes music store, but now it's the disrupter that's being disrupted.
While brand visionary Steve Jobs preferred smaller deals, CEO Tim Cook is bullish on Apple's acquisitions strategy, boasting to analysts on a recent earnings call that the company had acquired 24 companies in the last 18 months. But none of them were powerhouse brands in their own right, as Beats has become in its short lifespan.
“We are expanding Apple’s products and services into new categories, and we are not going to underinvest in this business,” Cook said on the recent earnings call, according to the New York Times.
The Beats deal, which would be Apple's largest acquisition ever, was apparently confirmed by Dre and fellow music celebrity Tyrese Gibson in a video posted on Gibson's Facebook page (and still posted on YouTube). In the video, which has since been removed, Gibson mentions the $3.2 billion figure and Dre refers to himself as the "first billionaire in hip hop."
But while acquiring Beats would introduce Apple to hundreds of millions of new users, Apple is being forced out of the Jobs’ box of bold innovation from within. “The Beats acquisition would put Apple in the unusual position of managing a consumer brand not its own—and raising difficult questions about whether to keep the existing music service and, if so, on which platforms," The Verge notes. "How Beats will—or will not—integrate into Apple will be one of the most closely watched aspects of any merger agreement.”
Indeed, Apple is already a powerhouse brand on its own (and Interbrand's reigning #1 Best Global Brand) with a firm hold on the music industry, leading skeptics to wonder why it would acquire a "brand for a brand's sake," Wired reports. Piper Jaffray analyst Gene Munster told Fortune that, "we are not aware of any intellectual property within Beats that would drive the acquisition justification beyond the brand."
Creating a true competitor to Spotify in partnership with Beats Music is no doubt on Apple's whiteboard. According to the Wall Street Journal, the music industry has been "lobbying Apple for months to create its own subscription streaming service, using its brand power to familiarize consumers with music streaming—a concept that is still foreign to many people, especially in the U.S."
Besides the Beats headphones, which pull in annual sales greater than $1.5 billion, Apple will inherit Beats Music, the streaming and playlist curating service that has over 800 million accounts—a community and service that may be rolled into iTunes Radio.
Perhaps the most valuable part of the deal, though, is Dr. Dre himself. The iconic producer has some serious marketing savvy—currently a sensitive spot at Apple, which just lost its long-time PR guru, Katie Cotton—and recently hired a new SVP and head of global marketing from PepsiCo.
Dre notably brokered a product placement deal with American Idol from 2011 to 2013, which saw Iovine featured as a consultant and Beats by Dre headphones showcased weekly for millions to see. Beats is also packaged in Fiat and Chrysler in-car infotainment systems, a market that Apple is eyeing with its CarPlay offering.
So will Apple swoop in and swallow up the Beats brand, or will you be buying a Beats-branded iPhone or in-car entertainment system? Will Beats help Apple regain its lost mojo? Share your thoughts in the comments.
Image via Beats/Google+