Apple’s US$3 Billion Bet on Headphones and Music Streaming

Apple Inc (Apple) officially announced an agreement to acquire Beats Music and Beats Electronics for a total of US$3 billion. Beat Music is the company that offers subscription-based streaming music service much like a smaller Spotify whereas Beats Electronics sells the wildly popular Beats headphones and other accessories.

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Source: Beats Electronics

Breaking Records

The agreed price of US$3 billion is the highest Apple has paid for acquiring companies. Typically, Apple acquires upcoming companies that offer new or innovative technologies. Siri (the voice recognition software found on iOS devices) was formerly a company that worked with Apple before being acquired by the Cupertino-based company. Similarly, Apple bought P. A. Semi (a fabless semiconductor company) which triggered Apple’s movement into designing its own chipsets that powers the company’s mobile devices. Mergers and acquisitions (M&As) offers a quick and easy way for companies to gain competitive advantages over its competitors.

Buying a Premium

Spotify announced on 21 May that it has 10 million paying subscribers on Spotify Premium and more than 40 million active users while Pandora reported 70 million active users. Beats Music, on the other hand, reported 250,000 subscribers after having launched for three months.

Apple iTunes’ revenue where its subscribers pay a fee to download a song is facing pressure as consumers increasingly switch to streaming services to listen to songs they like, rather than buying them. All in all, consumers will benefit one way or another with the increased competition. Rather than competing head on based on price, Apple would be looking to differentiate its streaming service from Spotify and Pandora.

Beat Electronics’ success with its Beats by Dre headsets showed that consumers are willing to pay a high premium for their perception of high quality sound.  Headphones and earphones from Beats tend to offer stronger bass, which appeals to most consumers’ taste in pop and dance music. In a way, the emergence of Beats helped its competitors like Sennheiser and Ultimate Ears as consumers accepted the high pricepoint of premium headphones and earphones.

Buying the Future

While sales of smartphones is forecast to grow by 15% from 2014 to 2015, exceeding 1.2 billion units, much of the growth is driven by emerging markets and on mid and entry level smartphones. Apple commands a premium over its competitors and even its budget iPhone (iPhone 5C) is priced way higher than other smartphones running on Android. Clearly, Apple is under pressure to maintain its growth on both hardware (iPhone and iPad) and software (iTunes).

Beats is an established brand name and enjoys a loyal following. Similarly, while its music streaming service is only three months young, Apple can easily upscale its service to cater to Apple’s 800 million iTunes accounts with credit cards attached. Apple can also negotiate better terms with the content industries. Beyond just portable computers and smartphones, the acquisition allows Apple to move into premium accessories, sub-branding (Beats Audio) and expand into music streaming services on other Apple products that are receiving less attention like Apple TV. While US$3 billion is a substantial investment, Apple is expected to recoup its outlay easily as it continues to strengthen its stranglehold on the complete ecosystem that offers an expanded and seamless experience of products, content and services.