From Compton to Cupertino: Why purchasing Beats is a smart move for Apple

When they launched Beats Electronics some six years ago in 2008, I somehow doubt that Dr. Dre and Jimmy Iovine had any idea Apple might one day seek to purchase their little headphone venture to the tune of $3.2 billion. Yet, it appears that is exactly what is about to go down. I hope the two of them are kicking back with a bottle of Cristal right now, toasting to their success. But it’s really Apple that should be celebrating, because if this deal goes through, the United States’ most profitable company stands to solve a whole host of problems with what will be the biggest single purchase in its history. 

An upgrade for iTunes

Apple has a big problem: The growing popularity of streaming music services like Spotify have been cutting into iTunes music sales. At the end of 2013, 10 years after iTunes opened its storefront, the U.S. music industry suffered its first decline in digital music sales. According to Nielsen Soundscan, overall music sales declined by 6.3 percent, a decline that was tied directly to the increased popularity of streaming music services, which enjoyed a huge 32 percent surge over the prior year. In the first two months of 2014, that trend continued its steep spiral downward, with album sales down 13 percent and individual track sales down 11 percent.

With the purchase of Beats, Apple has put itself squarely in the middle of the streaming music service race.

Apple arrived late to the streaming-music party — nearly six years too late — and some say too late to survive. While Dre and Iovine were busy launching Beats in 2008, Spotify was launching in Sweden. Roughly two years later, Spotify had managed to gather over 10 million users. Apple, on the other hand,  just launched its streaming music service, iTunes Radio, some eight months ago. 

Things haven’t been going well for iTunes Radio. According to Billboard, Apple’s answer to Pandora and Spotify, which was designed to convert streamers into buyers, hasn’t been as effective as was hoped. Apple is clearly no longer the influential power-player it once was. Streaming music portals like Spotify, Pandora, YouTube, and,yes, Beats Music, have been gathering momentum and slowly edging Apple out of the game. One independent label said that iTunes’s share of its revenue has eroded from more than 70 percent in 2012 to about 50 percent today, Billboard reported.

With the purchase of Beats, Apple not only eliminates a competitor, it puts itself squarely in the middle of the streaming music service race. The acquisition may also buy Apple enough street cred to become an influential force in the music business again. Apple will have a lot of work to do, however, since Beats Music hasn’t exactly taken off. 

Can we finally say goodbye to the Earpods?

Apple has never made a good-sounding speaker or headphone. Its one effort at a speaker, the iPod Hi-Fi in 2006, was a Digital Trends’ pick for one of Apple’s biggest flops. Since then the company has been satisfied with selling other manufacturers’ speakers, headphones and other audio accessories through its Apple stores and website. 

Apple EarPods

Say what you will about the sound quality of Beats’ products, they are far better than the throw-away stuff that comes in any Apple box — good enough that Beats has managed to train its fans to spend big bucks on its wares. But don’t expect for Apple to simply stamp its logo on a pair of those iconic Beats headphones. The smart money is on Jonathan Ive working his design chops to refashion Beats headphones so that they come more tightly inline with Apple’s design standard, while maintaining their Beats caché

Process this

Both smartphone maker HTC and PC maker Hewlett Packard attempted to bolster sales by baking Beats processing and branding into their products. Ostensibly, the processing software was meant to improve sound quality in those products. Unfortunately for both companies, the move did little to help, and even less for sales. While HP’s laptops did offer superior sound with added bass response, it isn’t clear whether Beats processing had anything to do with the boost, which could just as well have been a byproduct of upgraded speakers and amplification. HTC’s implementation did even less, as the processing could initially be applied only to tracks stored on the phone, and amounted to little more than an equalizer. HTC later expanded Beats processing to cover streaming music, but users have reported it as a sort of resource hog, adding to battery drain. 

An element you can count on many analysts to overlook is the value of Beats’ “street cred.”

Stamping the Beats logo on HTC phones didn’t help sales either,which continued to decline. The only silver lining to the story is that HTC made money on the sale of its interest in Beats, banking $115 million in profits when all was said and done. This begs the question: Would Apple risk repeating those licensing mistakes? 

The answer is likely no. Apple has never made any effort to be at the cutting edge of sound-processing tech. While many smartphone makers offer devices with upgraded components capable of playing high-res audio files, Apple’s devices have remained more or less the same, generation after generation. It would surprise me to see a Beats logo or Beats processing on future iPhones. This leads us to yet another question: How valuable is the Beats brand to Apple? 

Boning up on street cred

An element you can count on many analysts to overlook is the value of Beats’ “street cred.” The brand has a loyal following among an audience that doesn’t necessarily embrace Apple. With Beats under its wing, Apple has an opportunity to reach that audience, potentially expanding its channels for new product distribution.

Of course, it could go the other way too. If Beats is no longer associated with hip-hop artists and producers like Dr. Dre, industry moguls like Jimmy Iovine, and celebrity athletes like Richard Sherman, and instead associated with starched-up, Silicon Valley snobs like Tim Cook and Jonathan Ive, this element of the acquisition could backfire horribly.

No matter how Apple chooses to leverage Beats, the results of its investment will either be a spectacular success story or a catastrophic failure. Apple may have some deep, deep pockets, but even a tech giant can’t afford to throw away $3 billion.

When we look back on this moment in tech history, we’ll either be talking about how Apple reinvigorated itself when confidence in the company was low, or how it royally screwed the pooch. Either way, Dre and Iovine will be laughing all the way to the bank.

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