Beats founders Dr. Dre and music-industry executive Jimmy Iovine will join Apple, the companies said in a statement today. The purchase price is $2.6 billion, with $400 million more that will vest over time. The acquisition is projected to close in the quarter that ends in September.

The deal signifies that Apple Chief Executive Officer Tim Cook is willing to use the company’s $150.6 billion in cash more aggressively, a departure from predecessor Steve Jobs’s playbook of acquiring smaller companies to bring in technology and talent. As sales of digital music downloads fall, buying Beats gives Apple a foothold in Internet-based streaming, where Google Inc.’s YouTube, Spotify Ltd. and Pandora Media Inc. (P) dominate.

“Music is such an important part of all of our lives and holds a special place within our hearts at Apple,” Cook said in the statement. “That’s why we have kept investing in music and are bringing together these extraordinary teams so we can continue to create the most innovative music products and services in the world.”

 

Sales Cooling

The deal indicates how the CEO, who is facing pressure to jump-start Apple’s revenue amid cooling iPhone and iPad sales, is shifting tack to acquire growth. Even as Google and Facebook Inc. have spent billions on acquisitions, Apple previously avoided tie-ups of this size. Its biggest past purchase was the $400 million deal for NeXT in 1997, which brought Jobs back to Apple.

The deal had been anticipated, after news of Apple’s talks with Beats emerged earlier this month. Apple made the official announcement today a few hours before its head of iTunes, Eddy Cue, and Iovine were scheduled to speak at a technology conference. Cue will oversee the Beats Music team for Apple, while marketing chief Phil Schiller will run the Beats headphones group.

Apple also will hold its annual developer conference next week in San Francisco, where it will unveil software updates.

Beats Music

A central part of the deal’s allure is the Beats Music service. While the purchase uses just a fraction of the cash and investments on Apple’s balance sheet, it shows that the Cupertino, California-based company is serious about introducing its own music-subscription service. Jobs had long resisted such a move, insisting that people don’t want to rent their music.

Beats Electronics LLC Beats by Dr. Dre headphones are displayed for sale at a store in... Read More

Apple took a step in that direction last year, introducing iTunes Radio, an advertising-supported music-streaming service that competes with Pandora.

While Apple’s iTunes remains the world’s largest seller of music, it only offers downloads of single tracks and albums. Music-streaming services, where a customer pays for access to the songs instead of owning them in a digital library, have gained in popularity, especially among younger listeners, said Mike McGuire, an analyst at Gartner Inc. Yet the services aren’t lucrative and present business challenges, even for Apple, he said.

“They haven’t moved to a subscription model, and there are a lot of good reasons they didn’t,” McGuire said. “The big one is there isn’t a lot of money to be made.”

Subscription Service

Apple plans to keep Beats as a stand-alone music application that will run on devices based on Google’s Android software and Microsoft Corp.’s Windows operating system, as well as those made by Apple.

Not everyone is a fan of music-streaming services. Musical acts including Radiohead have criticized subscription services because they don’t compensate artists as well as the pay-per-track model. For instance, the latest album from the band The Black Keys is available on iTunes, though not Spotify.

Beats introduced its music-subscription service earlier this year. Like Spotify and other rivals, the company offers unlimited access to millions of songs in exchange for a monthly fee. Beats hired music critics, radio DJs and record-label veterans to create playlists and other curation tools to help customers navigate the overwhelming amount of music available -- a component Iovine said was missing from the experience.

“It needs feel. It needs culture,” Iovine said in an interview with Bloomberg Businessweek in 2012. “What Apple has in the downloading world is very, very good. But subscription has an enormous hole in it, and it’s not satisfying right now.”

All-Star Marketing

In buying Santa Monica, California-based Beats, Apple also would get the company’s colorful, high-end headphones. Iovine and Dr. Dre, whose given name is Andre Young, started Beats in 2006 amid rising use of iPods and smartphones to listen to music on the go.

The pair quickly proved their marketing acumen. The headphones, priced at about $170 to $450, gained popularity as stylish accessories for the general public and not just audiophiles, fueled by partnerships with musicians, fashion designers and athletes like San Francisco 49ers quarterback Colin Kaepernick and NBA All-Star Lebron James, who helped pitch the products to a younger audience.

“They have done a hell of a job in branding,” McGuire said.

With Iovine and Dr. Dre, Cook continues to bring in people with fashion experience. Former Burberry Group Plc CEO Angela Ahrendts now runs the company’s retail operation, and former Yves Saint Laurent CEO Paul Deneve is working on “special projects” for Cook.

Longstanding Relationship

Apple and Beats have deep ties. Iovine, who is stepping down as an executive at Universal MusicGroup as part of the deal, was a friend of Jobs and an early music-industry advocate for Apple’s efforts with the iPod and iTunes.

“I’ve always known in my heart that Beats belonged with Apple,” Iovine said in the statement.

The acquisition is a boon for Iovine, who has worked on projects as varied as Bruce Springsteen’s “Born to Run” and the movie “8 Mile,” and Dr. Dre, whose seminal rap album “The Chronic” helped make rap music popular with suburban teenagers in the 1990s.

Universal Music was an investor in Beats, along with private equity firm Carlyle Group LP.

To contact the reporter on this story: Adam Satariano in San Francisco atasatariano1@bloomberg.net

To contact the editors responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net Jillian Ward, Reed Stevenson

http://www.bloomberg.com/news/2014-05-28/apple-agrees-to-buy-beats-electronics-for-3-billion.html

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