If you think Apple is paying $3.2 billion for a headphone company, you’re be sorely mistaken. In fact Apple isn’t even interested in the fact that possible acquisition Beats do headphones.
Reportedly it costs about $11 for Beats to make a pair of their headphones. With a sticker price of over $300, you can see clearly they’re doing something right. But again, this isn’t why Apple is buying Beats.
No, there’s something Beats have which Apple thinks is far more valuable than fancy marketing around an OK at best pair of ‘premium’ headphones.
And right there is where Apple and Beats share common ground. They don’t necessarily make the best product in the market. But certainly are the best at marketing their product in the market.
Beats’ highly successful branding campaign is legendary. If it weren’t for Jimmy Iovine putting a pair of Beats in every Eminem, Pharell and Lady Gaga film clip, then the company might not be the success it is today.
Let’s just say it helps to have the chairman of one of the world’s biggest record labels as the co-founder of your headphones company.
However, it’s not the success of Beats hardware that Apple really likes. It’s just happens to be a nice little bonus to what Apple’s really after.
The Changing Landscape of Music
First we had the vinyl record. Then we had the cassette. Of course next we had the format killing CD. That is until the next format-destroying format came along, the MP3.
When vinyl was the dominant music format I’m sure many would have battled to see a better format to listen to music.
Likewise at the peak of the cassette the idea of something better would have been a stretch.
And even when CD’s filled the walls of HMV stores around the world a better format was impossible to predict.
Yet for the last two decades we’ve been enchanted with the MP3 format. However, like the formats before, one day we’ll talk about MP3 like we do the vinyl record.
Now of course that’s pretty hard to believe. And I’d forgive you for thinking MP3 will continue as the dominant format to listen music with. But already the writing is on the wall for MP3s.
And it’s all thanks to the rise of streaming music.
The ‘big two’ of music streaming are Pandora Media [NYSE:P] and Spotify Music. These are billion dollar companies that have already cornered this market.
Spotify is a private company and has been around since 2008. With Spotify you have an app on your phone, tablet or computer, which you can stream just about any music you so desire.
You can create your own playlists, listen to playlists from your social network, listen to radio, and discover suggested music you might never have come across before.
Pandora is also a music streaming service, but with a twist. With Pandora you select the kind of music you like and it builds you custom playlists based on your selections.
For example, you might like three specific songs, Magic by Coldplay, Sing by Ed Sheeran and Happy by Pharell Williams. Within each of those songs is a unique music blueprint. Pandora uses their system to then analyse those songs.
And then it finds other songs with similar music structure. Those become your unique, customised playlist. It’s very smart.
And by doing things this way Pandora helps you to discover music from artists you might never have come across before. But also continue to hear songs you like.
Both Pandora and Spotify are hugely successful companies. They’re two of the first movers in streaming music. As such they’ve both built huge user bases.
Spotify had approximately 24 million active users. Pandora has approximately 75.3 million active users. (An active user is one who has used the service in the last 30 days.)
I’m an active user of Spotify and until I moved to London was also an active user of Pandora (Pandora isn’t available in the UK for now).
And I must admit, since using both services, I’ve spent significantly less time on iTunes, or even listening to music (MP3’s) I’ve got stored on my iPad, mobile phone or iPod.
Apple Really Don’t Care About Headphones
95% of the time, I’ll listen to streaming music. And this is a trend not unique to just me. The user numbers in streaming music companies are growing, and growing fast. The Recording Industry Association of America reports in 2013 streaming music grew by 39%, while digital music downloads fell 1%.
Streaming music is growing so fast that in January this year Beats launched their own streaming music service, Beats Music.
Now one of the hard parts of launching a new streaming service is getting record companies, artists…hence content, onto the service. However, Beats Music has Dre and Iovine to push it along.
But initial reports of Beats Music users have told of weak numbers. Word has it their registered user numbers are in the low millions, and paying users in the hundreds of thousands.
However, throw Beats Music together with iTunes and all of a sudden Beats Music might become the third powerhouse of streaming music. Put it this way, as of June last year Apple had over 575 million iTunes accounts on its books.
Should Apple buy Beats my guess is it’s more for the streaming service than the headphones.
Sure it would end up that the speakers in the iPhone 6 are ‘By Beats’ and instead of the crumby Apple ear buds, you get a set of Beats by Dre. There’s no doubt that would add to the ‘cool factor’ that Apple so shamelessly flogs its products on.
But beyond the obvious initial hardware link-ups is the future of portable music. When you open iTunes, you might in fact be opening your Beats Music account.
There’s talk that Amazon is exploring a streaming music service. And we know Google pumps huge money into their Google Play service.
If Apple sit on their hands too long, they might miss the boat. But where you can’t innovate…buy. And that’s exactly what Apple has done with this deal.
In this deal Apple brings cash, resources, and a user base Beats Music could have only dreamed about. Beats bring a ‘whole lotta swagger’ and a brand that’s even more popular and cooler than Apple. It could in fact be the most perfect tie-up in tech history.
Sure, Iovine and Dre would have made a fist of it staying solo. But in Apple’s stable it’s almost a certainty Beats Music will be a success.
And considering that Pandora Media had a closing market cap on Friday of $4.65bn, Apple might have actually got itself a bargain.
Regards,
Sam Volkering+
Editor, Tech Insider
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