The Real Reason Why Apple is Buying Beats

It certainly would've sounded far fetched a week ago. Apple is making Dr. Dre the first billionaire in hip-hop (as evidenced in this video with Tyrese). The press is announcing the news in PR-speak that makes Beats headphones and streaming music service sound like the best thing since sliced bread but Apple's purchase of Beats Entertainment for $3.2 billion may of seemed confusing to some (including me).

What Beats has to offer

Beats technology isn't particularly compelling to a vertically integrated company like Apple who has developed hardware & software since its inception and acquired their first streaming music service, Lala, in December 2009. iPod and iTunes created the age of the online music store, and Beats Music is a new entry into the market, rumored to have only 200,000 subscribers.

Beats by Dre headphones have similar characteristics to Apple products, in that they have high margins and are regarded as cultural or stylistic symbols but Apple could've licensed Beats Audio like Hewlett Packard, HTC, and other manufacturers have done. Beats is said to have sales of $1.5 billion annually, which is great for Apple shareholders who need to see year over year growth. Historically, Apple hasn't make acquisitions for their bottom line though.

A similar acquisition: Nest Labs

Google acquired Nest Labs in January 2014 for $3.2 billion and the value wasn't based on their innovative Learning Thermostat. Nest Labs' value was derived from acqui-hiring Tony Fadell, the team behind him, and its future business potential.

If Google acquired Nest for iPod designer Tony Fadell's consumer product design prowess, what is Apple buying into with Beats?

Its executive leadership and experience.

Something Beyond Cool Products

The biggest criticism of Apple recently has been that Tim Cook is not Steve Jobs. Journalists and pundits remark that nothing exciting has been released since Steve's death. Although known for his negotiating skills in worldwide supply chain management, he is not known as a charismatic visionary that understands people and what they want. Apple Senior Vice President of Design Jonathan Ives is highly regarded for his groundbreaking hardware designs starting with the iMac, but does not like to be in the public spotlight. Apple is missing the type A personality who operates primarily on instinct and reputation.

Beats has two such individuals as co-founders, Universal Music Group chairman Jimmy Iovine and Andre Young aka Dr. Dre.

Jimmy Iovine

Starting out over 40 years ago, Jimmy Iovine is a highly regarded Hollywood insider and creative visionary. His musical savvy saw him work with John Lennon, Bruce Springsteen, and Stevie Nicks early in his career as a record producer. After forming Interscope Records in 1990, he has introduced artists like Dr. Dre, Nine Inch Nails, No Doubt, Lady Gaga, Eminem, and countless others into the cultural zeitgeist of pop culture.

Dr. Dre

Dr. Dre is one of the most successful record producers of all time, being at the right place at the right time in hip hop's inception and its rise to being the dominant sound of youth culture in America. His tenacious work ethic, string of hit records, and innate musical talent has made him a cultural icon for nearly 30 years.

The Perfect Partnership

Jimmy Iovine wouldn't have been able to make Beats be as successful as it is on his own. He would obviously be able to and need to leverage his A-list connections. Beats could've hired Dr. Dre or any artist (like they did with Lady Gaga and Eminem) as a spokesperson but made the brilliant decision to have him as a co-founder whose reputation would resonate amongst their targeted consumers. Apple is doing the same thing with this acquisition and instead of being regarded as outsiders in Silicon Valley, will be at the pulse of the entertainment industry.

The Real Question

Apple will be able to leverage a personality of Jobsian proportions with Jimmy Iovine leading music and entertainment initiatives. As a longtime industry insider and shrewd businessman, he will be able to form partnerships, licensing deals, and guide new products to market that will be desired by studio executives and consumers equally. Time will tell if this bet will pay off, but the real question to ask of this acquisition is "what is Apple working on next?"

Notes

This post was inspired by a comment I made last night on this post from Wired.

Further Reading