What Apple-Beats Union May Mean for ITunes Users

Wearables. Cheaper streaming subscriptions. Remotely controlled home electronics.

These are the changes consumers are likely to see as Apple Inc. (AAPL) buys Beats Electronics for $3 billion, giving the world’s most valuable company a hip, upscale line of music products and a nascent streaming service to rejuvenate its iTunes business and sell existing customers even more products and services.

The key is Apple’s 800 million registered iTunes users. With credit cards on file at the Cupertino, California-based company, they are always just a click away from a purchase, whether it’s a beatbox portable speaker or a new generation of linked products for the home.

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That may have been part of what Apple executive Eddy Cue was referring to last week when he said in an interview that “We’ve got the best product pipeline that I’ve seen in my 25 years at Apple.”

WEARABLES:

At the Apple developer conference this week in San Francisco, the company announced new software for monitoring health and fitness called HealthKit. It lets users combine stats gathered by other companies’ devices in one place on iPhones and iPads.

Apple probably will incorporate Beats Music into software that links to non-Apple devices, such as wristbands, headbands and wireless speakers, analysts say.

Selling new devices with built-in access to iTunes Music and the Beats Music service would give Apple a leg up on rivals, said James McQuivey, an analyst at Forrester Research. (FORR)

That could pressure Samsung Electronics Co. (005930) to follow suit and roil companies like Sonos Inc., the leader in the $10 billion global wireless audio speaker market. Owners of speaker systems like those made by Sonos are 2.5 times more likely to pay for a digital music subscription, according to research from Futuresource. Apple is also expected to release a smart watch this year, the New York Times reported.

INTERNET OF THINGS:

As part of today’s product announcements, Apple said it created an application that offers tools to link up and manage so-called smart home devices, such as wireless thermostats and lighting.

Consumer electronics companies regularly create mobile applications that control products remotely, whether it’s a pay-TV service or home security system.

Apple’s iPads and iPhones could become the remote control for many consumer products. Its AppleTV device could output photos to TV screens, and Beats’ speakers could handle the sound -- an often overlooked category in digital homes.

LOWER STREAMING PRICES:

Apple, with about $151 billion in cash, could market the Beats Music service at a loss and pressure Spotify Ltd. and Pandora Media Inc., the leading music streaming and Internet radio companies. Both offer paid subscriptions and free advertising-supported services, with Spotify at $4.99 to $9.99 a month, and Pandora at $4.99. Beats Music is $9.99.

Apple knows how to compete in low-margin businesses like streaming, which has yet to demonstrate profitability. Early on, the company barely broke even on music purchases after subtracting infrastructure costs and other expenses from its 30 percent cut of sales, said McQuivey, the Forrester analyst. It more than made up for any loss by commanding premium margins on its hardware.

The first step is grabbing more market share in a streaming business expected to grow to $5 billion by 2017, according to research from Futuresource. Beats co-founder Jimmy Iovine said the service has signed 250,000 subscribers since the debut in February. That’s just a 5 percent conversion of the 5 million downloads he said has been made at Apple’s App Store. Beats Music is also on devices using Google Inc. (GOOG)’s Android software.

To contact the reporter on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net Rob Golum

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