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Apple's Flirtation With Beats May Foretell Shift to Music Streaming

Apple's Flirtation With Beats May Foretell Shift to Music Streaming

By Ben Sisario, The New York Times | Updated: 10 May 2014 17:09 IST

Has streaming music's moment in the mainstream finally come? Or is it here already, and has Apple - once the great innovator of music technology - finally caught on?

Those are some of the questions echoing through the music industry after news emerged late Thursday that Apple was pursuing a $3.2 billion deal for Beats Electronics, the company behind Beats by Dre headphones and the new Beats Music subscription service.

The deal was quickly characterized as a potential landmark for Apple. If completed, it would be the company's biggest acquisition by far, and unusual in that Apple would be buying a company that already had a firmly established consumer brand.

But exactly what kind of landmark it means for Apple is unclear. Many analysts seemed perplexed by the move.

"We are struggling to see the rationale behind this move," Gene Munster, an analyst with the firm Piper Jaffray, wrote in a note to investors. "Beats would of course bring a world-class brand in music to Apple, but Apple already has a world-class brand and has never acquired a brand for a brand's sake."

Beats' hardware business - its headphones, speakers and other audio products - is one obvious attraction for Apple, whose own empire was likewise built on selling high-margin, high-status, high-technology products.

Formed in 2008 by the hip-hop star Dr. Dre and the music executive Jimmy Iovine, Beats now has annual sales of more than $1 billion, thanks to canny marketing that has included endorsements from music and sports stars.

Yet in the music world, the move seemed to suggest a different, or at least complementary rationale: Apple, which transformed the industry in 2003 with the iTunes store but has been hesitant to enter the streaming market, was finally taking the plunge.

Streaming by subscription, in which access to millions of songs are made available for a monthly fee, has been a fringe part of the business for more than a decade. But with the rise of smartphones and the aging of the download format, streaming has started to come into its own, and record labels and artists are preparing themselves for a future in which it will become the dominant listening mode.

If Apple makes a major marketing push for Beats' subscription model - or, even better, if Apple integrates Beats into its ecosystem of online services and physical products - it could mean a big lift for streaming.

Apple may be calculating that the timing for acquisition is right. Last year, the music industry's income from subscription services around the world exceeded $1 billion for the first time. And music download sales began to drop last year for the first time, reflecting broader patterns of media consumption that find people less willing to buy CDs, DVDs and individual downloads, and instead signing up for various kinds of streaming plans.

"We're moving to access rather than an ownership economy in media," said Richard Greenfield, a media analyst with BTIG in New York. "Netflix, Amazon Prime, Hulu - those are now the default destinations in the media world."

Alice Enders, of Enders Analysis in London, called the Beats deal "the clearest sign yet that Apple agrees that the era of music downloads is over."

Subscription services like Spotify, Rdio and Beats Music - introduced in January with a media blitz that included a Super Bowl commercial - have proved popular with young music fans and other digital aficionados. Yet their failure to penetrate the mainstream has worried music executives.

Last year there were 6.1 million subscribers to such services in the United States, according to the Recording Industry Association of America, yielding $628 million in revenue for the industry. Revenue for downloads, by contrast, was $2.8 billion. Apple's immersion in streaming would help shift that equation.

Neither Apple nor Beats has confirmed the acquisition talks, at least officially, though they were confirmed by people briefed on the discussions who spoke on the condition of anonymity. An online video that ricocheted through social media early Friday appeared to show Dr. Dre, 49, calling himself "the first billionaire in hip-hop."

One likely effect of the Beats deal would be pressuring other players in the market, particularly Spotify, which has been a subject of frequent speculation about an initial public offering. Spotify, or smaller subscription providers like Rdio and Rhapsody, may now find themselves acquisition targets by giants like Google, analysts say.

The effect on Pandora media, however, is unclear. Unlike Spotify and Beats, Pandora has remained focused on its Internet radio model, which, because of different licensing rules, has made it less dependent on record companies and music publishers. Pandora's stock closed at $22.62 on Thursday, up 1.9 percent, while Apple's was down 0.4 percent, at $585.54.

Still another possibility is that Apple may be pursuing the deal for the marketing and branding vision of Beats, and chiefly that of Iovine, 61, who in addition to being co-chairman of Beats has become one of the music industry's most consistently successful impresarios, guiding the careers of superstars like U2, Eminem and Lady Gaga.

As part of the Apple deal, Iovine is said to be taking a position at Apple, a move that some observers interpret as an acknowledgment by Apple that it has a need for the marketing vision and the brash attitude of Iovine. In a second research note Friday, Munster of Piper Jaffray said the Beats deal appeared to be a way for Apple to hire Iovine to "lead Apple's content strategy."

If Iovine leaves Universal, the music company will still have some consolation: It owns a 14 percent stake in Beats, which if the deal closes at $3.2 billion will be worth nearly $450 million.

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