Apple Takes a Big Bite and Buys Beats for $3 Billion

Apple, Inc. announced on Wednesday that it would purchase Beats Electronics (“Beats”) for $3 billion, $2.6 billion of which will be cash and $400 million in stock. Beats founders, Jimmy Iovine and Dr. Dre will join Apple and help transform the company’s current offering of products and music services.

Beats was founded in 2006 and has since grown into one of the most respected music brands that offers recognizable headphones and speakers along with a “music service[] which creates playlists for subscribers.” Unlike its two main competitors, Pandora and Spotify, Beats introduced its “music-streaming service in January and has 250,000 paying subscribers so far, according to Apple.” Its subscription based music service is new to the market, but Apple’s CEO, Tim Cook, “praised the Beats music service, which creates playlists for subscribers” and commented on Mr. Iovine and Dr. Dre’s unique talents and understanding of music and culture.

With this deal, critics wonder why Apple didn’t just create its own subscription based music service. In 2002, when Steve Jobs tried to introduce the idea of an online music store for digital songs and albums to record companies, the music industry was hesitant and resisted jumping on board, but over a decade later, the music industry has changed markedly from the pre-iTunes era. Since iTunes opened in 2003, Apple has “sold 35 billion songs on iTunes and [] iTunes Radio had 40 million listeners.” But given this market dominance, critics believe that Apple’s purchase of Beats is a sign that Apple is losing its competitive edge to the likes of Pandora and Spotify.

In response to such comments, Mr. Cook explained that Apple could have easily created its own subscription service and product but Apple doesn’t have to “build everything” itself. The addition of Mr. Iovine, a key figure in the music industry, and Dr. Dre just made sense.

This deal marks the largest acquisition for Apple since its largest purchase to date was the acquisition of a computer company in 1996 called NeXT. Apple paid $400 million for the company and the acquisition brought Steve Jobs back to Apple.

With the $3 billion offering for Beats, investors in the music company, like the Carlyle Group LP, will receive double the money it invested. This deal will need to get regulatory approval, but if and when it’s finalized, Apple hopes to close the deal in its 4th quarter in September.

Apple is really excited about this deal because it hopes to offer “products you haven’t thought of yet” but products that will “take music to an even higher level than it is now.” Music consumers will have to wait for the unveiling of these new products but in the meantime, they can listen to their music on iTunes through their Beats headphones in anticipation.