Why Apple May Need Beats' Music Streaming More Than Trendy Headphones

Photographer: Glenn Chapman/AFP via Getty Images

Apple's CEO Tim Cook presents the new iPod Nano on Sept. 12, 2012 in San Francisco. Close

Apple's CEO Tim Cook presents the new iPod Nano on Sept. 12, 2012 in San Francisco.

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Photographer: Glenn Chapman/AFP via Getty Images

Apple's CEO Tim Cook presents the new iPod Nano on Sept. 12, 2012 in San Francisco.

Apple established itself as the center of digital music for most of the world over the course of a decade. The company has resisted all-access music streaming services under the assumption that people would rather own, not rent, their music.

This belief is turning out to be false for more people every year, as music-industry data show. After years of steady growth, digital-music downloads globally declined slightly last year, according to IFPI, the recording industry trade group. Downloads still dwarf streaming — 67 percent versus 27 percent worldwide last year — but tastes are changing. Revenue from streaming has more than tripled since 2010, surpassing $1 billion for the first time last year, IFPI data show.

Apple is in advanced talks with Beats Electronics to acquire the headphone maker and streaming-music service for $3.2 billion, people with knowledge of the matter told Bloomberg News. If Apple does complete the deal as expected, it would give the company access to a fledgling subscription-music app with big potential. Beats declined to comment, and Apple didn't respond to a request for comment.

Like the Beats by Dre headphones, Beats Music has a celebrity cast of supporters, including Trent Reznor of the rock band Nine Inch Nails. The app, which lets subscribers stream more than 20 million tracks, landed with a splashy Super Bowl commercial in February. (The Macintosh also debuted in a Super Bowl ad.)

Beats Music is just a few months old and only available in the U.S., where the tide is shifting from downloads, mainly through iTunes, to streaming. Twenty-three percent of wired Americans streamed music on subscription services, such as Spotify, during a six-month period last year, which was up from 19 percent in 2012, according to an IFPI report. Downloads dropped a percentage point from 2012 to 2013. In smaller music markets, the move has happened much quicker.

Let's be clear: Apple wouldn't pay billions for Beats Music alone. Because Beats is private, it doesn't have to disclose financial information, but it's safe to assume the audio-equipment business accounts for virtually all of its revenue. The cheapest headphones (not to be confused with earphones) that Beats sells are $170 a pop. An acquisition would also give Apple some experienced and sharp — and expensive — executives.

So if this was just about streaming, why not go for something cheaper? Rdio, a global streaming service created by the founders of Skype, would probably sell for a song. And the New York Times reported this week that AT&T is trying to offload Muve Music, a service targeted at lower-income Americans on Leap Wireless.

OK, that's not exactly Apple's target demographic. AT&T declined to comment, and Rdio didn't respond to a request for comment.

Beats would give Apple a sexy brand among affluent music consumers and a cash-cow headphones business. Bundling a free trial for Beats Music with a pair of expensive headphones or wireless speakers wouldn't be a bad way to get people hooked on streaming. In the end, an Apple-Beats deal could be about nothing but a stream thang, baby.

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