May 12 (Bloomberg) -- When news spread last week that Apple Inc. was near an acquisition of Beats Electronics LLC for $3.2 billion, Beats co-founder Dr. Dre appeared in a video boasting of becoming the “first billionaire in hip hop.”
Apple executives, by contrast, were characteristically silent.
The differing reactions underline the seemingly odd cultural fit between the world’s most valuable company and a celebrity-fronted Santa Monica, California-based provider of headphones and online music. Beats executives are known to throw lavish parties and have musicians traipsing through at all hours, while Apple is an engineering haven for coders and designers.
Yet underneath those surface differences, the two companies are more aligned than it might appear, with deep ties to one another. Beats co-founder Jimmy Iovine, a longtime producer and executive, was friendly with Apple co-founder Steve Jobs and is a big supporter of the company’s efforts in music. Apple, meanwhile, has cultivated extensive relationships in the music business and its iTunes team is populated with former radio promoters, music writers and other industry veterans. The familiarity may help Apple more quickly reap the benefits of a deal once it’s completed.
“These aren’t strange bedfellows at all,” said Peter Csathy, chief executive officer of entertainment law firm Manatt Digital Media Ventures. “Steve Jobs really drove the relationship with the music industry. The executives at Apple and Beats know each other very well, and there’s a comfort level there.”
Any deal would deepen Apple’s ties to the music industry at a time when digital download sales are falling. Apple hasn’t changed its iTunes music service much since it was introduced more than a decade ago. Today, iTunes still provides downloads of singles for 99 cents, as well as downloads of albums, even as subscription music services including Spotify Ltd. flourish.
Apple became interested in doing a deal with Beats after executives were impressed by Beats Music, the online music streaming service unveiled earlier this year, which was rapidly converting users into paying subscribers, said a person with knowledge of the talks, who asked not to be identified because the discussions are private.
Beats is also well known for its high-end headphones business, which is profitable, and Apple plans to work with the company to improve the quality of design in future versions, this person said.
The negotiations between the two companies heated up recently, with Iovine and Dr. Dre seen around Apple’s Cupertino, California-based campus in the past week, said the person. A deal could bring Iovine into Apple’s fold reporting to CEO Tim Cook, said the person, who asked not to be identified because the discussions are private. Beats will probably remain an independent brand, the person said.
Any deal would still be controversial. Some analysts are puzzling over Apple’s strategy and the $3.2 billion price. Several of the company’s former executives, who asked not to identified so as not to alienate Apple, said the corporate cultures are still different and that a tie-up raises questions about the work that the iTunes group is doing.
Representatives from Apple and Beats declined to comment. Apple shares gained 1.2 percent to $592.83 today in New York. The stock is up 5.7 percent this year.
Much of what led Apple and Beats to each other started with Iovine, who helped produce work as varied as Bruce Springsteen’s “Born to Run” and the movie “8 Mile.” Iovine became an early advocate for Apple’s iTunes Store after getting a personal demo from Jobs before the service debuted in 2003.
At the time, the music business was being ravaged by illegal song downloads. Iovine instantly saw iTunes as the industry’s best way to create a legal way for downloading music, he said in an interview last year at the All Things Digital technology conference.
Iovine was one of “Apple’s first friends in the music business,” said Jason Hirschhorn, former president of MySpace who now runs The ReDEF Group, a content-curation service, and who spoke with Iovine as he was beginning to plan the Beats Music service.
Iovine helped recruit music labels and artists to support the iTunes Store at its start. He also had Apple’s iPod music players placed inside music videos by artists including 50 Cent, Eminem and Mary J. Blige.
“I have a background as a recording engineer, so I think I understand what kids want, and when I saw the simplicity of the iTunes system, I said, wow, this is going to work. This is what they want, no muss, no fuss,” Iovine said in a 2003 interview.
The one area where Iovine thought Apple’s service was weak was sound quality.
“Apple got everything right except that ear bud,” he said last year.
Dr. Dre, whose name is Andre Young and who was a member of the pioneering rap group N.W.A., agreed. As a producer of music including his own, such as the hit album “The Chronic,” he felt the sound fidelity wasn’t reaching listeners because of the poor quality of personal-computer speakers and iPod ear buds.
“I spend months on a song and it sounds terrible,” Iovine recalls Dr. Dre telling him, which he recounted at the D conference.
Iovine and Dr. Dre have said they ran into each other on vacation in the mid-2000s and began discussing doing speakers together to deal with the sound issues they both were passionate about. They started Beats in 2006 and introduced the first headphones in 2008, initially partnering with Monster Cable Products Inc. The duo tapped their network of musical artists and famous athletes to promote the gadgets as a stylish accessory for mainstream consumers, not just audio-quality fanatics.
Dr. Dre, who isn’t involved in much of the day-to-day operations of Beats, also is no stranger to Apple. As a successful rapper and producer, he’s gotten to know Apple executives such as iTunes head Eddy Cue.
Iovine once recalled how Jobs was one of the first people he visited to get his take on the Beats headphones before the product publicly debuted. On Iovine’s iPad, he keeps photos of celebrities wearing the devices, including Jobs donning a pair.
In 2012, Iovine said he would build a music-subscription service so people can pay $10 a month to get access to a library of millions of songs, as well as playlists curated by artists and taste makers. To run the service, he hired Ian Rogers, who got his start in the industry building the website for the Beastie Boys before going on to create Yahoo! Inc.’s music service and founding the company Topspin Media.
“Right now, subscription music online is culturally inadequate,” Iovine told Bloomberg Businessweek in 2012. “It needs feel. It needs culture. 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.”
With offices in Los Angeles and San Francisco, the Beats Music team is part Silicon Valley and part music industry. While programmers and designers build the service, artists such as Nine Inch Nails frontman Trent Reznor were tapped to make playlists for users. The approach has similarities to Apple, which curates what is featured on its iTunes Store and App Store.
With a deal with Apple to be announced as early as this week, Iovine could become a billionaire. He owns 25 percent of Beats, and with proceeds from the deal and millions of dollars collected from more than five decades producing artists such as U2 and Fleetwood Mac, he’ll have a net worth of $1 billion, according to the Bloomberg Billionaires Index.
“Jimmy is the best in the business at that and that’s why he continues to win,” said Steve Rifkind, a hip-hop music executive who started labels such as Loud Records.
Dr. Dre, meanwhile, is projected to collect $640 million if a deal is completed, according to data compiled by Bloomberg.
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