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Experts search for method to Apple's Beat madness

Gregg Keizer | May 12, 2014
Analysts today struggled to explain why Apple might acquire Beats Electronics, the headphone maker and music subscription service operator, for $3.2 billion.

Music subscription services, particularly Spotify, have eroded download sales as consumers increasingly switch to a rental model that gives them on-demand access to millions of tracks. Although Apple kicked off iTunes Radio last year, a free, ad-supported service that competes more directly with Pandora, it has received mixed reviews and gotten little traction among listeners.

Sinnreich believes that Apple thought it needed a subscription service faster than it could build one, and so went shopping. While it was unclear whether rights that Beats Music has acquired with record labels would transfer — Sinnreich assumed they would if Apple's willing to put up $3.2 billion, others said Apple would have to renegotiate streaming rights — Sinnreich pointed out that there is more to Beats Music than meets the eye.

Its human-curated playlists have been applauded by critics, but Sinnreich focused on the underlying technology that also recommends tunes as something Apple would want to bolster its own iTunes Radio. Perhaps that technology could also be applied to a Netflix-like movie- and TV-streaming service, Sinnreich said.

"And this goes hand-in-glove with the Shazam arrangement," said Sinnreich, referring to reports last month that Apple would integrate song identification technology created by Shazam into the next version of iOS. With the talent behind Beats under its control — renowned music producer Jimmy Iovine and rapper Dr. Dre — and the Beats Music algorithms, Apple would have even more opportunities to discover new artists and connect them directly to listeners, cutting out the recording label middlemen.

"That's a very compelling prospect for Apple," Sinnreich asserted, an advantage over digital music rivals and one worthy of spending billions to keep customers locked into the iPhone ecosystem. "Something has to change. Apple's fortunes can't reside on charging 30% more for hardware. It needs a much broader strategy that's about conquering new markets and creating new modes of consumer engagement."

Wait a minute: Both Singh and Sinnreich are off-base, said Dawson, who contended that it isn't an either-or proposition — headphones or subscription service — but that Beats is attractive to Apple because it could help with two of the Cupertino, Calif. company's struggling revenue streams.

"Two parts of Apple's business would benefit from adding Beats, accessories and iTunes content," Dawson said in an interview today. "Beats is now a significant business in headphones, which would add about 25% [more revenue] to Apple's accessories line. And Apple badly needs a streaming subscription music service to compete with Spotify, which has most of the action."

In a post to his research firm's website, Dawson elaborated on his premise, illustrating how both music download sales and accessories revenue are in decline and stagnant, respectively. Each of those components account for about 4% of Apple's total revenue, so while the $3.2 billion may seem excessive, if Beats can help Apple boost sales of 8% of the company, the money would be well spent.

 

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