Apple agrees to buy Beats Audio

Well, one thing is for sure, it’s a good week for deals. On Wednesday, Apple agreed to buys Beats Audio for $3 billion. The firm is acquiring a brand as well as the music industry heft behind it.

Hannah Karp and Alistair Barr had this story for the Wall Street Journal:

Apple Inc. wants to regain the beat in its music business, which is under assault from a stream of upstarts.

The tech giant said on Wednesday it is buying Beats Electronics LLC for $3 billion to bolster a music business that has lost some of its mojo, as streaming-music services encroached on the downloads dominated by Apple’s iTunes service.

In Beats, Apple is getting a music-streaming service, high-end headphones and music-industry connections. Beats’ co-founders, rap star Dr. Dre and music mogul Jimmy Iovine, will join Apple.

The deal will make Apple “cool” again by uniting Mr. Iovine’s feel for “the culture of young people” with Apple’s “many millions of young peoples’ credit cards,” said Sony Music Entertainment Chief Executive Doug Morris, who, as the former chief executive of Universal Music, was Mr. Iovine’s boss when he carved out a sideline running Beats Electronics. “Apple was starting to lose their edge,” Mr. Morris said.

Apple didn’t immediately respond to a request for comment.

Apple will continue to use the Beats brand, a rare move for a company that has almost always focused on its Apple brand. It became one of the world’s largest technology companies by creating huge, new consumer electronics categories with the iPhone and iPad. But it hasn’t introduced a breakthrough product since co-founder Steve Jobs died in 2011.

The New York Times story by Brian X. Chen did add comments from Apple about the importance of the deal:

In an interview here at Apple’s headquarters, Timothy D. Cook, Apple’s chief executive, repeatedly emphasized the talent that Dr. Dre and Mr. Iovine would bring to Apple. He also praised the Beats music service, which creates playlists for subscribers.

“These guys are really unique,” Mr. Cook said. “It’s like finding the precise grain of sand on the beach. They’re rare and very hard to find.”

Apple is paying for the deal with $2.6 billion in cash — hardly a dent in the company’s huge cash pile of more than $150 billion — and $400 million in stock. The company expects the deal to be approved this year.

For Apple, the acquisition of Beats, expected for weeks, largely follows a familiar pattern. Apple has historically bought technology outfits that have resources and talent that it can blend into future devices and online services. Beats fits that criterion.

But the Beats deal is also different. Until now, Apple, the richest tech company in the world, has avoided billion-dollar takeovers in favor of smaller deals. The Beats deal is its largest ever.

Some were not so thrilled with the deal. CNNMoney’s story by Jose Pagilery pointed out that Beats isn’t exactly the market leader in the streaming space:

Still, many think Apple is wasting its time with Beats. The music streaming service has an estimated 500,000 customers, puny compared to Spotify’s 4 million subscribers. Pandora (P), which is valued by investors at $5.2 billion, has more than 250 million active accounts. Apple could buy 30 Pandoras right now.

But on Wednesday, CEO Tim Cook made his case. In a statement, he said the deal brings together “extraordinary teams so we can continue to create the most innovative music products and services in the world.”

Apple expects the deal to close in late summer or early fall.

Adam Satariano wrote for Bloomberg that the deal reveals the pressure that Apple is under to continue to grow:

The deal indicates how the CEO, who is facing pressure to jump-start Apple’s revenue amid cooling iPhone and iPad sales, is shifting tack to acquire growth. Even as Google and Facebook Inc. have spent billions on acquisitions, Apple previously avoided tie-ups of this size. Its biggest past purchase was the $400 million deal for NeXT in 1997, which brought Jobs back to Apple.

Maynard Um, an analyst at Wells Fargo Securities LLC, wrote in a note yesterday that Apple should focus its deals on more growth-oriented businesses.

“While we believe Apple should get some benefit of the doubt because of its historical success, a music-related acquisition still seems, to us, more defensive,” wrote Um. “Given the changing landscape and our view that Apple will have to eventually evolve its business model, we believe Apple should be acquiring more offensive assets to better position itself.”

The deal had been anticipated, after news of Apple’s talks with Beats emerged earlier this month. Apple made the official announcement yesterday a few hours before its head of iTunes, Eddy Cue, and Iovine were scheduled to speak at a technology conference. Cue will oversee the Beats Music team for Apple, while marketing chief Phil Schiller will run the Beats headphones group.

It’s a bold move for a company that has worked to diligently protect its brand. The terms of the deal, especially keeping the Beats name, is definitely beyond what Apple has typically done and its largest acquisition ever. Apple has ceded much ground on the streaming music front. It should be interesting to see if this works.