Last Wednesday, May 28, 2014, Apple (AAPL) announced its $3 billion acquisition of Beats Music. The deal was finalized after three weeks of intense media coverage, and after the negotiations were leaked to the press. Previously, I endorsed Apple’s decision to purchase Beats for several reasons, including its brand recognition value, headphone market share, and popular music streaming service. As the music industry advances, it is evident that Beats’ streaming service will be the most valuable asset obtained by Apple in its Beats acquisition.
For the last decade, Apple has controlled the music industry with its iTunes music platform. However, the iTunes business model, of paying for individual song downloads, is now outdated. Services such as Spotify and Pandora (P) have proven that the future of music is mobile streaming (either free and ad-based, or paid and subscription-based).
In an interview with the Boston Globe, technology analyst Mike McGuire explained, “We are already entering the post download era. Downloading was only around because there was no good streaming infrastructure.” Apple’s streaming infrastructure has now arrived; prepare for change.
Beats Music entered the streaming business after it acquired Mog for $14 million last year. However, in January, Beats launched its own streaming service and encouraged Mog subscribers to transfer their subscriptions. Eventually, the revolutionary headphone company announced the termination of Mog (in June), and its intent to move forward with an internal streaming service.
However, despite the popularity of Beats headphones, competitors like Spotify and Pandora retain the largest music streaming market share. Thus, Apple will rely on converting its 600 million iTunes customers to Beats Music subscribers. Lucky for Apple, these subscribers are mostly loyal to Apple and are eager for the company to join the streaming market. By purchasing Beats, Apple now has the necessary infrastructure to succeed in this new, competitive realm. Expect Beats Music to be directly integrated within iOS 8, and have an exquisite user interface designed for the iPhone 6.
Because of Apple’s incredible market presence, and its $161 billion stockpile of cash, Apple’s entrance into the streaming industry will be disastrous for competitors. Apple also won’t concern itself with immediate profits; instead, it will aggressively price and market Beats Music so as to gain market share. Currently, Spotify charges $4.99-$9.99/month and Pandora charges $4.99/month for their services, whereas Apple’s service will probably be free. Not until after Apple eliminates its competition will the company then gradually raise its prices (as they have done with iTunes).
Apple’s acquisition of Beats is a new step towards a new era for Apple, the post Steve Jobs era. The $3 billion purchase of Beats is easily the largest acquisition in the company’s history. Sony (SNE) Music CEO Doug Morris said it best when he uttered, “Apple suddenly has regained its cool.” Customers are loyal to the Beats and Apple brands, and with the newly acquired marketing prowess of Dr. Dre, anything is possible.