Beats Acquisition Could Give Apple Needed Features and Younger Appeal

Apple is said be considering the largest acquisition in its history—$3.2 billion for Beats Electronics and its young streaming music service.

Apple revolutionized the digital music industry, if not arguably created it, with the iPod and iTunes. That industry has since taken on a life of its own, though, and to keep up, Apple is said to be considering a bit of outside help in the form of a $3.2 billion acquisition of Beats Electronics.

The Financial Times first reported May 8 that talks between the companies are underway.

Beats was founded by rapper and hip-hop producer Dr. Dre and music mogul Jimmy Iovine, and has produced headphones Apple sells in its stores and partnered closely with smartphone maker HTC, sharing its audio technology. In January, it launched Beats Music, a $9.99-a-month streaming music service for iOS, Android and Windows Phone devices. It also made an exclusive deal with AT&T, offering up to five family members with AT&T service unlimited music for a total of $14.99 a month.

In addition to access to 20 million songs, the service features technology that "combines the emotion only a human created playlist can give you with the best personalization technology can deliver," Beats Music CEO Ian Rogers said in a Jan. 11 statement, introducing the service.

An acquisition at the reported price would, by a considerable margin, be the most Apple has ever paid for a company—Apple founder Steve Jobs took pride in innovating from scratch, in-house.

"Beats, a fashion accessory/peripheral plus a music service Dre paid $10 million-$16 million for in 2012? What's worth the $3.2 billion again? Some algorithm for choosing tunes? The secret sauce that makes Beats' audio quality discernibly better?" asked Roger Kay, principal analyst with Endpoint Technologies.

"Apple certainly has the money," Kay added, "but there are so many more valuable things to spend it on. I don't get this, and nor does the market, which is busy punishing Apple stock today."

At Apple's Worldwide Developer Conference in San Francisco last June, Apple introduced its own streaming service, iTunes Radio, calling it "the best music player we have ever done." Competing with Spotify, Pandora, Rdio and others, however, it hasn't gained an Apple-style degree of traction—which Beats could help change, Ezra Gottheil, a senior analyst with Technology Business Research, told eWEEK.

"iTunes Radio is great for 'back list' songs, because it draws on an enormous database of purchased music," said Gottheil. "In terms of, 'If you like this, you will probably like that,' iTunes Radio is very good at predicting what the user will like among older songs, but it has little insight into new music, which is critical for any streaming service, and critical for Apple's image."

To that last point, Apple's user demographic tends to be a bit older because its pricing is steep. It's increasingly being viewed as a vendor of "well-supported, no-hassle devices for older and wealthier buyers," Gottheil continued. "Beats will help with this in terms of brand, image and a streaming service that is seen as very good at curating new music."

A final benefit of the deal, Gottheil added, is that it would stand as evidence of CEO Tim Cook feeling comfortable to do things differently than Steve Jobs did.

"I think that's good for Apple," said Gottheil.

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