Apple Agrees to Buy Beats Electronics for $3 Billion

May 29 (Bloomberg) -- Bloomberg Contributing Editor David Kirkpatrick explores the reasons why Apple pursued Beats Electronics as it brings in headphones and streaming media in a $3 billion deal and what Dr. Dre and Jimmy Iovine brings to the table for Apple. He speaks on Bloomberg Television’s “Bloomberg Surveillance.”

Apple Inc. (AAPL) agreed to buy Beats Electronics LLC for $3 billion, its biggest-ever acquisition, nabbing a popular line of headphones and a nascent subscription music-streaming service as the iPhone maker seeks to rev up growth.

Beats founders Dr. Dre and music-industry executive Jimmy Iovine will join Apple, the companies said in a statement yesterday. The purchase price is $2.6 billion, with $400 million more that will vest over time. The acquisition is projected to close in the quarter that ends in September.

The deal signifies that Apple Chief Executive Officer Tim Cook is willing to use the company’s $150.6 billion in cash more aggressively, a departure from predecessor Steve Jobs’s playbook of acquiring smaller companies to bring in technology and talent. As sales of digital music downloads fall, buying Beats gives Apple a foothold in Internet-based streaming, where Google Inc.’s YouTube, Spotify Ltd. and Pandora Media Inc. (P) dominate.

“Music is such an important part of all of our lives and holds a special place within our hearts at Apple,” Cook said in the statement. “That’s why we have kept investing in music and are bringing together these extraordinary teams so we can continue to create the most innovative music products and services in the world.”

Photographer: David Ebener/AP Photo

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Photographer: David Ebener/AP Photo

Buying Growth

The deal indicates how the CEO, who is facing pressure to jump-start Apple’s revenue amid cooling iPhone and iPad sales, is shifting tack to acquire some growth. Even as Google and Facebook Inc. have spent billions on purchases, Apple previously avoided tie-ups of this size. Its biggest past deal was $400 million for NeXT in 1997, which brought Jobs back to Apple.

Maynard Um, an analyst at Wells Fargo Securities LLC, wrote in a note yesterday that Apple should focus its deals on new types of businesses.

“While we believe Apple should get some benefit of the doubt because of its historical success, a music-related acquisition still seems, to us, more defensive,” wrote Um. “Given the changing landscape and our view that Apple will have to eventually evolve its business model, we believe Apple should be acquiring more offensive assets to better position itself.”

Apple shares rose less than 1 percent to $629.41 as of 9:36 a.m. in New York

Iovine’s Overture

The deal had been anticipated, after news of Apple’s talks with Beats emerged earlier this month. Apple made the official announcement yesterday a few hours before its head of iTunes, Eddy Cue, and Iovine were scheduled to speak together at a technology conference. Cue will oversee the Beats Music team for Apple, while marketing chief Phil Schiller will run the Beats headphones group.

Photographer: Ty Wright/Bloomberg

Beats Electronics LLC Beats by Dr. Dre headphones are displayed for sale at a store in Reynoldsburg, Ohio. Close

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Photographer: Ty Wright/Bloomberg

Beats Electronics LLC Beats by Dr. Dre headphones are displayed for sale at a store in Reynoldsburg, Ohio.

Iovine said yesterday at the Code conference in Rancho Palos Verdes, California, that he was the one who initially approached Apple about a deal with Beats, with Cook and Cue involved in negotiations to complete the agreement. Cue added that he had wanted to work with Iovine for a long time.

“At the end of the day, it’s not about what Apple’s doing today or what Beats is doing today -- it’s about the things that we’re going to do together and those things are going to be much greater than anything we could do on our own,” Cue said.

Beats Music

A central part of the deal’s allure is the Beats Music service, which highlights how serious the Cupertino, California-based company is about its own music-subscription service. Jobs had long resisted such a move, insisting that people don’t want to rent their music.

Apple took a step in that direction last year, introducing iTunes Radio, an advertising-supported music-streaming service that competes with Pandora.

While Apple’s iTunes remains the world’s largest seller of music, it only offers downloads of single tracks and albums. Music-streaming services, where a customer pays for access to the songs instead of owning them in a digital library, have gained in popularity, said Mike McGuire, an analyst at Gartner Inc. Yet the services aren’t lucrative and present business challenges, even for Apple, he said.

“They haven’t moved to a subscription model, and there are a lot of good reasons they didn’t,” McGuire said. “The big one is there isn’t a lot of money to be made.”

Apple plans to keep Beats as a stand-alone brand and the music application that will run on devices based on Google’s Android software and Microsoft Corp.’s Windows operating system, as well as those made by Apple.

Not everyone is a fan of music-streaming services. Musical acts including Radiohead have criticized subscription services because they don’t compensate artists as well as the pay-per-track model. For instance, the latest album from the band The Black Keys is available on iTunes, though not Spotify.

New Service

Beats introduced its music-subscription service earlier this year. Like Spotify and other rivals, the company offers unlimited access to millions of songs in exchange for a monthly fee. Beats hired music critics, radio DJs and record-label veterans to create playlists and other curation tools to help customers navigate the overwhelming amount of music available -- a component Iovine said was missing from the experience.

“It needs feel. It needs culture,” Iovine said in an interview with Bloomberg Businessweek in 2012. “What Apple has in the downloading world is very, very good. But subscription has an enormous hole in it, and it’s not satisfying right now.”

Iovine said at the Code conference that Beats Music now has 250,000 subscribers after a few months. By contrast, Spotify has about 10 million.

Apple Pipeline

In addition to music, Cue hinted at the Code conference about Apple’s interest in television. He said the TV-viewing experience today is poor and that it’s a hard problem to solve because of all the different parties involved, including media and pay-TV companies. He declined to elaborate on the company’s plans beyond that its Apple TV product will continue to evolve.

Cue also said that products to be introduced later this year are the the best pipeline Apple has had in 25 years. The company is holding its annual developer conference next week in San Francisco.

In buying Santa Monica, California-based Beats, Apple also would get the company’s colorful, high-end headphones. Iovine and Dr. Dre, whose given name is Andre Young, started Beats in 2006 amid rising use of iPods and smartphones to listen to music on the go.

The pair quickly proved their marketing acumen. The headphones, priced at about $170 to $450, gained popularity as stylish accessories for the general public and not just audiophiles, fueled by partnerships with musicians, fashion designers and athletes like San Francisco 49ers quarterback Colin Kaepernick and NBA All-Star Lebron James, who helped pitch the products to a younger audience.

“They have done a hell of a job in branding,” McGuire said.

Fashion Finds

With Iovine and Dr. Dre, Cook continues to bring in people with fashion experience. Former Burberry Group Plc CEO Angela Ahrendts now runs the company’s retail operation, and former Yves Saint Laurent CEO Paul Deneve is working on “special projects” for Cook.

Apple and Beats have deep ties. Iovine, who is stepping down as an executive at Universal Music Group as part of the deal, was a friend of Jobs and an early music-industry advocate for Apple’s efforts with the iPod and iTunes.

The acquisition is a boon for Iovine, who has worked on projects as varied as Bruce Springsteen’s “Born to Run” and the movie “8 Mile,” and Dr. Dre, whose seminal rap album “The Chronic” helped make rap music popular with suburban teenagers in the 1990s.

Universal Music was an investor in Beats, along with private equity firm Carlyle Group LP. Universal Music said yesterday that John Janick, chief operating officer and president of Interscope Geffen A&M, would succeed Iovine as Interscope chairman.

“We wish Jimmy the very best and look forward to enhancing our partnerships with Apple and Beats for many years to come,” said Lucian Grainge, chairman and CEO of Universal Music, in a statement.

To contact the reporters on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net; Brian Womack in Rancho Palos Verdes at bwomack1@bloomberg.net

To contact the editors responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net Robert Fenner

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