Apple In Talks To Buy Beats

The Financial Times has reported that Apple is in talks to buy Beats Electronics for $3.2 billion as early as next week (see report). As the article points out:
One motivation for the Beats deal may lie in shifts in music consumption. Subscription services are the biggest growth area for the music industry, with revenues increasing 50 per cent to $1.1bn in 2013, according to a recent report by the IFPI, the global music industry association.

But downloads fell 2 per cent to $3.93bn – the first annual decline since Apple launched its iTunes store in 2003. iTunes is still the world’s largest music download service.

How big is this potential deal? Let's look at some numbers.

In their recent financial report, Apple disclosed that they now have 800 million iTunes accounts most of which have a credit card tied to them. According to the Digital Music News, Beats Music has 525,000 paying subscribers as of March 2014. One basic question is how many iTunes account holders would become Beats Music subscribers? Even if only 5% buy in (40M), that would immediately dwarf Spotify's claimed 6 million paying subscribers.

Asymco's Horace Dediu estimates iTunes revenue for 2013 at $23.5 billion with growth of > 18% year over year (iTunes revenue is more than music including app sales). Dediu also points out that, """The iTunes 'empire' of content and services would be ranked as number 130 in the Fortune 500 ranking of companies (slightly below Alcoa and above Eli Lilly).."

In the larger context, global digital music revenues grew by 4.3% in 2013 to US$5.9 billion, according to the IFPI Digital Music Report 2014 (see report) led by growth in streaming services. Yes, iTunes total sales are larger than global digital music sales. Scary, no?

In our tiny end of the pond, LH Labs raised about $1.5M on their combined Kickstarter and Indiegogo campaigns and Pono's Kickstarer campaign topped out at $6M the result of 18,000+ supporters. I bring these examples up because the press, yours truly included, have used these numbers to point to the rising popularity of "better sound quality". Better than what? Better than iTunes and their lossy music download sales.

What does all of this add up to? Wild speculation aside, OK mostly, the recent rumors of Apple going 24-bit with their downloads (see article) fits nicely with a Beats buy, the ad copy nearly writing itself. How many people will continue to pay for lossy downloads when they can stream millions of choices in the same quality for the cost of about one album download per month? How does Apple differentiate its huge stockpile of Mastered for iTunes music downloads? By offering them in high res. And how do we enjoy these better quality versions? With a new pair of Beats headphones.

While CD-quality and HD downloads remain a rain drop in the sea of downloads, this potential deal between Apple and Beats could very well spur Apple's move to HD downloads. If this deal happens, its safe to say we'll see a sea change in the market and a move away from lossy downloads. I say its about damn time.

[Editor's Note: This just in:]

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COMMENTS
Azteca X's picture

"How many people will continue to pay for lossy downloads when they can stream millions of choices in the same quality for the cost of about one album download per month? How does Apple differentiate its huge stockpile of Mastered for iTunes music downloads? By offering them in high res. And how do we enjoy these better quality versions? With a new pair of Beats headphones."

Yes! Though the question becomes: will Apple influence Beats to make headphones that with a more "hi-fi" (balanced) sound signature a la Sennheiser, NAD, Audeze, Focal, Audio Technica, etc.? I hope so. I see no reason they can't keep the bass-heavy models they're known for while also offering something for the non-bass-head crowd. It's the status symbol that many are after - if they hear better sound while keeping the jewelry, it could be a big deal.

Bill Leebens's picture

Oh no he di'int!

Do they really want to revive the East Coast-West Coast war?

Sheesh.

Speakerphile's picture

Tyll,

Do you think Apple would continue to run Beats Headphones? Personally, I don't see them managins a portfolio of brands. I would bet they'll spin it off. I just don't see Apple as the kind of company that would good at something like that. I imagine the only reason they're buying the whole company is because Iovine won't split it up. Since the headphone unit has likely peaked, they probably figure now is the time to bundle the two in a big sale and cash out. Especially since the Beats Music venture hasn't exactly blown up.

Michael Lavorgna's picture
You want InnerFidelity ;-)

I can see Apple keeping Beats as a brand.

Speakerphile's picture

Sorry Michael, wrong site.

Michael Lavorgna's picture
Cheers.
Tyll Hertsens's picture

...the Beats brand is strong enough to keep it around as an alternative brand for headphones (not sure about the streaming service, I'll defer to Michael's thoughts there), but I think there's a lot more to the deal. when thought of in terms of the headphones and where Apple might want to go.

Speakerphile's picture

Either way, I see this as a positive for those competing with Beats in the headphone space.

Speakerphile's picture

I agree that the brand is strong enough to stay around, in general. I just don't think that Apple is interested in managing it. They're Apple, after all, and they have never split their resources into trying to drive a different brand alongside the infamous fruit. They are notorious for swallowing up companies for technology they can use and discarding the leftovers. I still think we see Beats headphones for sale after the acquisition. They can get whatever they want out of the Music side and sell the brand, along with the headphone unit and severely minimize they're overall cost of acquisition. There's also the possibility that they were sitting on some technology that nobody knows about, that is really driving the decision, but have a hard time believing that. Someone likely would have spilled the beans by now. Just my 2 cents.

-Thanks!

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