With a subscriber base that might as well be zero, Dr. Dre’s streaming music app may have just run up, eaten everyone’s lunch and flipped the table over for good measure.
For years, digital music services like Spotify, Pandora, Rdio, Rhapsody have fought an uphill battle to lure subscribers into their mostly identical sonic catalogues and convert them into paid users before someone else does.
If Apple’s much-discussed and yet still-unconfirmed deal to buy Beats Electronics for $3.2 billion pans out—and an endearing if slightly explicit video featuring a drunk Tyrese, Dr. Dre and a happy dance suggests it will—a three-month-old service led by music industry hotshots may have just pulled off one hell of a trick.
Maybe the Beats team never intended to build up its own app at all. Maybe they bought MOG (the technology behind Beats) always planning to quickly sell the product they remixed it into—plus some of the Beats brand’s unquantifiable industry clout and youth market cool—to a heavyweight like Apple all along.
Why Is Beats Valuable?
When HTC bought into Beats Electronics in 2011, the company was valued at $600 million. In 2012, Beats (and HTC) paid a reported $14 million for MOG. In late 2013, before the launch of Beats Music, a round of investment pegged the value of Beats Electronics at something around $1 billion.
Four months later, if this $3.2 billion figure proves anywhere near accurate, the promise of a digital music venture between a production legend (Dre) and the co-founder of Interscope Records—now a big chunk of Universal Music Group, one of the music industry’s “big three” record labels—looks valuable indeed. Like we said from its launch: “If the co-founders of Skype can’t crack the nut, maybe it’s time to see if a trio that’s been living and breathing the recording industry for decades can.”
Beats Music is the only show in town that could pull off some clever version of profitability with a streaming music model because it’s working from inside the recording industry’s heavily fortified walls. The Beats guys didn’t just walk into this whole thing blind to the fact that the competition can’t scale and is being bled dry by royalties in the process.
Like we said last December, streaming music is a rigged game until someone as big as Facebook, Apple or Google throws their weight around. Only one of those names has revolutionized music once before.
Tim Cook Said It Best
The biggest reason for Apple to buy Beats (beyond “why the hell not”)? It’s a perfect fit. Tim Cook on Apple’s April 2014 earnings call admitted that Apple was “on the prowl”:
We look for companies that have great people and great technology and that fit culturally… What’s important to us is that strategically it makes sense and that it winds up adding value to our shareholders over the long haul. We are not in a race to spend the most or acquire the most. We’re in a race to make the worlds’ best product that really enrich people’s lives.
Sure Apple could build its own music streaming service to ride the rising wave on subscription based on-demand streaming music— but it didn’t. Ping was a false start, and iTunes Radio doesn’t do on-demand.
It’s true that the notion of Apple buying something as strongly branded as Beats is an odd move at first gloss. No, Apple doesn’t usually roll like this, preferring instead to make smaller, quieter acquisitions. But then again, the company’s post-Steve Jobs era is going to look different.
I’d be hard pressed to think of a brand that looks and feels as much like Apple circa 2005: bright, hip, young, fun—all perfectly summed up by the iconic ad campaign of colorful silhouettes rocking out to iTunes on iThings. Beats may have just won the streaming music scene (namely Apple’s iTunes user base, deep pockets, and industry heft) by selling a nostalgic Apple an updated image of the company it used to be.
Those music industry types win every time, don’t they?