On Wednesday Apple announced that it will acquire Beats Electronics for $3 billion. Beats is Apple’s 15th acquisition year-to-date and also Apple’s largest acquisition in its 38-year history.
Apple is purchasing Beats for a variety of reasons including talent, profitability, brand, and strategy.
On the surface, Apple is purchasing a shiny new headset company. However, most of the value in the acquisition comes from enlisting co-founders Jimmy Iovine and rapper Dr. Dre as full time employees.
Iovine and Dr. Dre were the reasons for Beats’ success. Iovine is a 40-year veteran in the music industry and Dr. Dre is well-known rap star and professional entertainer. Both hold heavy rapport with the artist community and have the rare ability to effectively monetize trends in the music industry.
These are talents that they will now bring to Apple. The Wall Street Journal explains that Iovine intends to step down from his post as chairman of Interscope Records and Dr. Dre will “do as much as it takes” to ensure Apple’s success.
What the two co-founders have done for the Beats product line is build up a strong brand. Forbes and Consumer Reports both cite that there are many other headphone makers out there, including Bose and Onkyo, who produce similar products that are superior in sound quality.
However, it is safe to assume that neither have gotten the “cool” factor right. The Beats website boasts that it “owned 51% of an estimated 1 billion dollar premium headphone market” in 2012.
From a strategic standpoint, the acquisition is a chance for Apple to remain competitive in the music space. The recent surge in music streaming competitors such as Pandora, Spotify, and Grooveshark has resulted in a stagnating demand for Itunes in the past few quarters.
It is unclear how Iovine and Dr. Dre will turn the ship around for Apple’s music service, but, if the ship does turn, one can speculate that their deep roots in the music industry will have something to do with it.