Combined offering of headphones and streaming service makes deal nice for the price.
Beats headphones helped create a new premium category of product, but haven't always been considered best-in-class.
Still, over the years, the headphones have gotten a better rap. Headphones, however, may not be the driver behind Apple's reported purchase of the company for $3.2 billion. It could be the music service.
When it launched in January, Beats Music demand was so high that the company had to set up a virtual velvet rope to only allow users as space allowed. The service, which costs $10 monthly after an initial seven-day, added 1,000 a day during its first month.
While there's no figures released yet, it's safe to assume the service has continued steady growth, at least "probably in the 100,000 range," estimates ABI Research analyst Aapo Markkanen.
Regardless of size, the service probably looks pretty enticing to Apple, says Richard Doherty of The Envisioneering Group. "While the headphones and the margins paved the way for Beats to get its audience and financing, it's the streaming music service and the business model and the carrier relationships that could jumpstart Apple into true revenue."
When Beats Music launched, it had an ongoing special AT&T offering of $15 per month for five accounts within a family.
The iGiant has not seen its iTunes Radio service "move as fast as they hoped," he says. And successful hardware offerings beyond the actual devices themselves have eluded Apple, too, Doherty says. Do you remember an Apple boombox released in 2002 or 2003, he asks? No.
While Beats' headphone style and design "turned the industry on its head, no pun intended," he says, Apple has their own designers. "But the fact they went from zero to 'Omigod,' with streaming and carrier deals that Apple wasn't able to do, that's at least 50% or perhaps 90% of this interest."
When Beats launched its $300 Beats By Dr. Dre Studio headphone line in 2008, co-founders musician and producer Dr. Dre and record label chairman Jimmy Iovine started a new category of high-end headphones. Initially, audiophiles pooh-poohed the headphones' quality, bashing them for serving up style over substance.
That didn't stop the headphones from catching on in pop culture with famous musicians, celebrities and athletes seen wearing them in airports, studios and locker rooms. And had held its own as other headphone makers including SMS Audio, founded by rapper 50 Cent, and Soul, by rapper Ludacris, have emerged.
And eventually, critics gave another listen. While Beats products may not match up with those from AKG, Bose and Sennheiser, "Beats has remained consistently good at elevated prices, compared to many other well known suppliers, and have consistently better quality," Doherty says.
Even Consumer Reports got on board. "If design, aesthetics, and personal identification with a brand are important to you as a consumer, then Beats headphones may well be worth the extra money, provided you find their sonic signature compatible with the style of music you most enjoy," wrote James Willcox in an online review last year. "Most of Beats headphones we tested can deliver very good to excellent sound, so you'll have to determine whether the value of these other elements are commensurate with the price you're being asked to pay."
Beats now owns about half of the $1 billion-plus premium headphone market, which is expected to grow between 10% and 14% this year, says Ben Arnold of The NPD Group. Beats also owns about 9% of the $1 billion wireless speaker market.
Analysts have differing thoughts when sounded out about the Apple-Beats deal, which has yet to be officially confirmed -- but Dr. Dre seems to hint at in a YouTube video in which he calls himself "the first billionaire in hip hop."
"For Apple, I don't think this is a case of trying to recapture some type of buzz or cool factor," Arnold says. "Apple's brand identity doesn't need revitalizing, rather I think they see this as an opportunity to strengthen their brand among younger consumers who have become vital to the technology industry. For Beats, I think merger allows them access to a greater cross-section of technology consumers -- beyond young millennials into new, likely older consumer demos who are familiar and fond of Apple's brand."
Both the hardware and stream service would bolster Apple, says Wedbush Securities analyst Michael Pachter. "I think that Apple is primarily a hardware company, so I think the headset business has the bulk of the value," he says. "However, the music service is a good strategic fit with iTunes Radio, and that service has struggled to attract active listeners. The entire Beats company fits well with Apple's core hardware business and fledgling streaming business, so I see why they would have interest."
Still, Markkanen wonders about the move for Apple. Beats Music is built on the struggling, but respected MOG service, which Beats bought for $10-$15 million two years ago. "(It is) tiny in a business that's ultimately a scale business," he wrote in a blog post. "That is nothing that Apple, with its existing streaming technology, couldn't achieve solo in a few months' time for far less money, if it wanted. ... it does also invite attention to one rather critical question: What happened to the innovation?