The Internet has been a technological marvel that’s opened up a whole new world on the other side of one’s computer screen and eliminated many services that were once popular. US movie retail company BlockBuster closed many of its stores some months ago due to the online movie streaming business that has Netflix, Hulu, and even Amazon’s Video on Demand service beating brick-and-mortar retail stores for consumer dollars. Why would consumers continue to purchase physical discs when they can purchase movies online and save them to a cloud library without fear of a deteriorating movie over time?
The same can be said for the music business. There was a time when music was purchased in retail stores, when consumers would visit the local store in hopes of securing the next tape or CD. Apple’s iTunes program fared well back then despite the continuance of in-store programs, and iPhone users who already spent so much to acquire the latest-generation iPhone or iPad went all in with sales and acquired more music as well.
And then, something happened: music streaming entered the picture. Movies and music became instant online downloads, accessible to media-hungry consumers in a matter of seconds. The problem with traditional online downloads is that they often mandated that a customer purchase a song for ninety-nine cents or an album for $12. Customers may have wanted to listen to the song once, but they ended up purchasing the song forever.
Internet music companies such as Pandora and Spotify have been pioneers in a new way of doing Internet music: instead of requiring the purchase of a song or album, why not provide a free, ad-supported music service (with an ad-free service with a cost) that would allow consumers to have access to all the latest music in a number of genres? It is this mindset that has given music streaming a different face than it had just a decade ago. And this is the mindset that’s driven the two-and-a-half-week rumor about the nature behind the Beats Music acquisition by tech giant Apple, Inc.
Today, the Wall Street Journal reports that Apple has indeed acquired Beats Music for $3 billion, a cool $200 million less than the original price tag for the agreement. It turns out that Beats Music only has around 110,000 subscribers, and Apple apparently didn’t see the need to pay the additional $200 million. Rumors persisted as well that the recent Dr. Dre video with the hip hop artist in a druken stupor may have had something to do with the slowdown in the agreement, but it seems as though Apple and Beats were still negotiating through terms at the time. Apple will acquire not only Iovine and Dr. Dre, but also the Music subscription service as well as all Beats music accessories. Apple will pay $2.6 billion in cash for the company, but also provide an additional $400 million in equity to acquire both Jimmy Iovine and Dr. Dre in the agreement.
One question that’s come up in Beats Music acquisition discussions concerns the two co-founders of Beats Music, Jimmy Iovine and Dr. Dre: would these two become full-time employees at Apple or remain in their respective fields, commuting to Apple’s Cupertino office when necessary? The details are now in, and Jimmy Iovine will leave his current Chairman post at Vivendi SA’s Interscope Records to become a full-time employee at Apple, Inc. Dr. Dre will stick with hip hop music recording, and will likely be seen as a consultant who visits the office from time to time. As we said some days ago, Dr. Dre never intended to change his lifestyle to become a shirt-and-tie kind of guy. The shirt-and-tie business approach is excellent, but it’s not for everyone. We’ll see how Iovine adjusts to the world of Apple as an employee.
Did the Beats Music acquisition occur to improve Apple’s image or to improve Apple’s declining iTunes download business? The answer is complex. Tech analysts remain divided over the issue, but the answer may be found in both possibilities. It’s true that Apple’s iTunes business has been in decline for some time, but Beats Music has only been a public company since January (four months). Beats Music hasn’t had the time it needs to make the kind of impact that is expected of companies Apple acquires. iTunes Radio has 40 million active listeners, while Beats’ subscription service has only a few million at best. Acquiring Beats for a new customer base is likely not the reason behind the acquisition at all. What could be said about the acquisition is that it’s all about image – and Apple’s increase in marketing expenditures shows that, while Cupertino doesn’t think image is everything, image does count for something.